In this post, we are going to discuss Candlestick Chart trading, and how to spot high probability trade scenarios to set up your day trading, swing trading of the stocks, FOREX, futures, etc. to the next level.

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Candlestick Chart Trading

Welcome to part two on Candlestick Chart trading the markets. Now, as you see here, we have brought up multiple bars; by the way part one, I will include the link to it in the description below this video, so you can go and check that out and we’re building upon part one right now. So now we’re going to get to this way of simplifying candlestick chart trading patterns without learning all the different 618 Japanese candlestick patterns. I don’t really know how many of there are, but 618 sounds good, since that’s a Fibonacci.

So what we’re going to do is we’re going to look at this very concept here to simplify the reading of candlestick chart trading patterns, and that is whether they validate or invalidate the price action of the bar or bars that precede them. Now, what do I mean by that? So as we talked about in the last video, the primary things that we’re looking at are, first of all, is the range of the bar from high to low. That’s going to determine whether it is a bearish or bullish bar, whether there’s a lot of action, whether there’s a lot of movement.

Market Movement

Essentially, what that really means is okay during that period of time; this is a five-minute chart, but it could be a daily, weekly, 60-minute, during that period of time there was a lot of movement from a low to a high or a high to a low. So that’s significant, as opposed to if we get a narrow range bar like we get here, where during that same period of time, there’s just not much movement, the market didn’t go anywhere. There wasn’t a lot of activity.

There wasn’t a lot of supply-demand imbalance. That would be a good way of looking at it and so the market just kind of stayed neutral, didn’t really go very far, again, a little bit of movement, it doesn’t really have any significance – a lot of movement does! So that’s the first thing from the height of the lope. The second thing we look at is the real body in comparison to the wick, and that has significance as well.

Mass Psychology

Now we’re considering this a deal or maybe a steal, like when you go to buy a car. Is it a good deal? Is it a bad deal or anything else? The market participants as a whole, the mass psychology is saying: ok, some price has been tested down here, maybe a few people sold, but not many people are not willing to sell anymore, and now the market comes in and starts buying.

This is called a rejection of value, very important concept in trading. Those prices have been rejected, and so the market moves up. So the way that we would read this as far as does the bar validate or invalidate the bar before it is this way, so this has a wide range bar from high to low, it engulfs the bar before it so there’s your classic engulfing pattern. If you want to look at it engulfing patterns – and this is a very bearish bar and that’s a very bullish bar, so the green bar here invalidates the bar before it.

Trade in Context of the Chart

I forget the exact terminology that he used. But pretty much all traders are very much aware of this, professional traders at least. So 100 percent, you cannot just trade these candlestick patterns in isolation. So what we’re looking for is, again, this part here is bearish, but guess what we’ve already been going down for quite a while.

The odds of it continuing to go down are less. Now, there’s never any certainties, but we’re always putting together a number of uncorrelated variables to establish a probability scenario for trading and one piece of evidence, one of those variables will be your candlestick patterns, your price action, but that’s just one variable, especially when you’re just looking at one or two our patterns like this, we need to take it in the context of the entire chart. So the more the markets been going down, you get sure you get a big bearish bar, but I’d rather take that big bearish bar up here, see? Now there we get the same thing, this red bar, which is a fairly wide range bar invalidates the green bar before it. Therefore sure, green bar bullish, green bar bullish, green bar bullish, red bar, comes in at a swing high, again, engulfs, wide range, closes near the low, this one close near the high, invalidates the bar before it.

Candlestick Patterns

And that’s the concept that we’re looking at here. Now, what about this one? This one is, we’ve got a doji bar, opens and closes at the exact same price and it’s not real wide range, but basically a small rejection of value to the top, open and close near the bottom, near the bottom third, near about a quarter actually, therefore, we would say that okay, comes in the middle of the impulse move, therefore, it just doesn’t change anything, it just keeps going down.

Now you could look at this one here and say: oh, but that’s kind of a bullish bar. Again, sort of, but what makes it less significant is that as we look at more of the context of the chart and how to put it all together. But again it’s a narrow range bar, this one’s medium range, we’ll say medium range and therefore not as strong of a signal. So this one here I would say, okay just doesn’t really change the picture since we’re already going down the general impulse move is down. It just kind of confirms the down move in the middle.

Candlestick Chart Analysis

Now one last question here: what about these two, this one’s a little bit of a tricky question, although I’ve given you the answer already, but it’s a good review. So does this green bar invalidate the red bar before it? And the answer is no. Why not? Well, again, go back to what I’ve already said – it’s a narrow range bar. Therefore, in my mind, any narrow range bar is just neutral. It’s not bullish, it’s not bearish, it’s just neutral. It doesn’t really change the sentiment of what the market has currently or previously been doing.

Now, I do this sometimes in live webinars, and I actually start with this one, and inevitably over 50% of the people will say that yeah, I start with this one and I play a little trick on them and I say: did that green bar invalidate the red bar before it, and over 50 % of the people say yes, but this is a mind game. This is a trick that your mind is playing on you, and it is the issue that we have. We could see the future right on this chart. We can see what happens next, and so it’s called future bias in a sense where, since you can see the future, we have this inclination where we think for some unknown reason that we should be able to nail every cycle high, nail every cycle low and that there’s a high probability way of determining every swing high and every swing low and, my friends, there is not.

There is no way to determine every swing high in every swing in the market.

High Probability Trades

Only look for the high probability trades and again they don’t occur as often as you probably think they do. In fact, I would say that this is one of the reasons why most beginning traders, or even intermediate traders, even educated amateurs, get tripped up all the time is because they just have false expectations, unrealistic expectations, and the truth is that most professional traders – we trade a lot less than you probably think we do. We take a lot fewer trades than most of you expect. That’s one of the things you got to do is get a grip on the reality of trading and that’s just the honest truth, and once you accept that, then that’s going to help you a lot. By the way, one reason that people don’t like that answer is because well they want to trade more and I get it. I want to trade more too, one of my biggest challenges.

The truth is that most professional traders – we trade a lot less than you probably think we do.

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