Japanese Candlesticks
Candlestick patterns are one of the most common price action techniques. There are
literally hundreds of different candlestick patterns we can find online. Do we need to know
all of them? Of course not. We have picked the most common and important ones we
should know. They are easily spotted on Japanese candlestick charts.
Table of Contents
 What are Japanese candlesticks?
 The benefits of using candlestick patterns while trading price action
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Long day bullish
Long day bearish
Short day bullish
Short day bearish
Bullish marubozu
Bearish marubozu
Bullish closing marubozu
Bearish closing marubozu
Bullish opening marubozu
Bearish opening marubozu
The spinning top
The doji candlestick pattern
Long-legged Doji
Gravestone Doji
Dragonfly Doji
Bullish engulfing
Bearish engulfing
What are Japanese candlesticks?
Japanese candlesticks belong to the most popular methods of technical analysis.
Searching for specific candlestick patterns was first used in the 18th century in Japan at the
rice exchange. These were the very beginnings of technical trading.
The benefits of using candlestick patterns while trading price action
Among the greatest advantages of candlestick patterns are their simplicity and
informational value. After a brief familiarization, the trader can quickly analyze market
developments and determine what is happening in the market. Are buyers stronger than
sellers, or vice versa? Can we expect the trend to cease, or on the contrary, could it gain in
strength again? In fact, candlestick patterns can reveal the psychology of traders. Various
candlestick shapes can suggest whether buyers or sellers are stronger. A typical example
can be seen in the graph below.
Long day bullish
Starting with the easiest one, long day bullish candlestick. Long day bullish candlestick
consists of just one candle with a long body and short wicks. This candlestick usually shows
strength and it can be used as a “breakout” candle at the beginning of a trend. Traders don’t
use long day bullish candlestick as entry or exit signals but more as a confluence with their
ideas.
Long day bearish
Long day bearish candlestick is represented by a big sell candle body and small wicks. It
signals a weakness in the market and the fact we should start looking for the possible start
of a downtrend. Long day candlesticks are simple. They can give us clues about what might
happen next, but as we mentioned before, they should not be used as entry and exit signals
alone.
Short day bullish
The short bullish day candlestick is an easy to spot pattern. It consists of one candlestick.
Short day candlestick is defined by its length. How short must the candle be? This is not
100% defined, so we should always use our discretion and review past trading periods to
have a comparison. Short day candlestick is not used as an entry/exit signal. The short day
candlestick pattern signals the fact that the price stayed in the range during a trading
period and we can expect an expansion soon. They can be found in the larger patterns
providing relevance.
Short day bearish
This is the opposite of a short bullish day candlestick. Same as his bullish colleague, this
candle is common but not so worthy on its own. We should always wait to spot it in a larger
context and think about what are buyers or sellers trying to achieve in current market
conditions.
Bullish marubozu
A very simple and powerful candlestick pattern is called marubozu. Spotting marubozu
candlestick is one of the easiest things we can do. It signals a real long body without an
upper or lower wick. Bullish marubozu candlestick shows us one pretty obvious thing, the
buyers stepping in the market.
There are two situations where we can make a trading decision with a bullish marubozu
candlestick:
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If we spot bullish marubozu in an uptrend, trend continuation is likely.
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If a bullish marubozu occurs in the downtrend, a reversal is likely to happen.
Bearish marubozu
Bearish marubozu has the same two uses as bullish one, they are just reversed.
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If bearish marubozu happens in a downtrend, the trend is likely to continue.
 If bearish marubozu occurs in the uptrend, reversal is likely to happen.
The smart thing to do after we see a marubozu candle is to wait for further confirmation in
term of another candlestick patterns, support and resistance or indicators.
Bullish closing marubozu
There is only one small difference from a bullish marubozu: a lower wick. This candlestick
suggests that we had some sellers trying to step in after the candle opened but buyers were
much stronger and closed higher. If a bullish closing marubozu appears in an uptrend, it
gives us a signal of continuation. Another great location of bullish closing marubozu is at a
key support area where we can expect the price to rise higher.
Bearish closing marubozu
Bearish closing marubozu is a bearish candlestick pattern which is signalled with a small
upper wick and a big bearish body. There are 2 locations where we should be watching for
bearish closing marubozu. In a downtrend, this signals that trend is likely to continue and
at a key resistance level where we can expect a new move down to begin.
Bullish opening marubozu
Even though bullish opening marubozu has a small upside wick, it is a very bullish signal in
the market. It shows the fact that buyers took control straight from the open and even
though they met some sellers at the top, the bullish bias prevails.
Bearish opening marubozu
Bearish opening marubozu signals strong conviction from sellers in the market. Although
there is a small lower wick, we can notice a price rally right after the candle opens. Bearish
opening marubozu in a downtrend signals continuation; in an uptrend, it can signal a
possible trend reversal.
The spinning top
The spinning top candlestick pattern is a neutral candlestick. By neutral, we mean the fact
that it doesn’t matter that much if the candlestick closes bullish or bearish, the important
factor is the candlestick closing location. The spinning top candlestick pattern has a single
candle with a small body and long wicks. It signals indecision in the market, the general
rule of thumb is that if we see the spinning top candlestick at the resistance level, it’s a
short reversal signal. Vice versa, spotting the spinning top candlestick at the support area
signals a long reversal.
The doji candlestick pattern
Similar to the spinning top candlestick, doji is an indecision candlestick pattern. We can
recognize a doji candle with a very small body with an open and close that are virtually
equal. A doji is often found at the tops and bottoms of trends, so it is considered as a sign of
possible reversal of the movement. That being said, more complex doji patterns can also be
used in trend continuation. Although doji is an indecision candlestick pattern, there are
three different variations that are going to help us make more educated trading decisions,
there are long-legged doji, gravestone doji, and dragonfly doji.
Long-legged Doji
A long-legged doji is very similar to the spinning top candlestick. Compared to regular doji,
it is a much more dramatic candle with long upper and lower wicks. Long-legged doji is the
same as the spinning top candlestick, it signals indecision in the market and a possible
reversal in play.
Gravestone Doji
Gravestone Doji is a bearish candlestick pattern. It shows us the fact that buyers tried to
step in, but sellers strongly overcame them and pushed the price back to open. In an
uptrend, gravestone doji indicates that the market is ready to turn around. In a downtrend,
we can use a gravestone doji as our continuation signal.
Dragonfly Doji
Dragonfly doji is a bullish candlestick pattern. It shows us the fact that sellers tried to step
in, but buyers strongly overcame them and pushed the price back to open. In a downtrend,
dragonfly doji indicates that the market is ready to turn around. In an uptrend, we can use
dragonfly doji as our continuation signal.
Bullish engulfing
A bullish engulfing is the first 2 candlestick patterns we have. It forms with a small red
candle on the left and a big green candle on the right. The big green candle on the right has
to completely overlap/engulf the candle on the left.
Bearish engulfing
Bearish engulfing forms with a small green candle on the left and a big red candle on the
right. The big red candle on the right has to completely overlap/engulf the candle on the
left.
Types of Trading Chart
Watching the market fluctuations and volatility in real-time is an essential skill to acquire.
There are several ways to display data on the chart, from a simple candlestick chart to
Renko or Heikin Ashi. What are the specifics of these charts and how do they differ? You
will find out in this lesson.
Table of Contents
 Types of trading charts – candlestick chart, Renko, Heikin Ashi
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Candlestick charts
Bar charts
Renko
Heikin Ashi
Conclusion
Types of trading charts – candlestick chart,
Renko, Heikin Ashi
The ways of displaying data on our price chart are pretty much endless. This is why we will
hardly find two traders that do and watch exactly the same things in their trading. Although
most traders are using candlestick charts which we covered in the previous video, there is
more depth in those as well. Besides candlestick charts, we will also have a look at different
graphical representations of price charts such as bar charts, Renko or Heikin Ashi charts.
Candlestick charts
We have covered Japanese candlesticks in the previous lesson, so we will do just a quick
recap now. They are the most popular methods of charting and viewing technical
analysis. The anatomy of a candlestick consists of the body and the wick. If the candle
closes above the open, we have a bullish candlestick. If the candle closes below the open,
we look at a bearish candlestick. Wicks represent the highest and lowest points where the
market traded.
As we can see in the image below, we have two candlestick charts next to each other in our
FTMO cTrader platform.
Although they look the same, there is one significant difference between them. The chart on
the left is based on time and the chart on the right is not. The chart periodicity is the main
function we can control when setting up our candlestick chart. The time periodicity is the
most popular and common amongst traders. Most trading platforms will allow us to set up
charts based on minutes, hours, days, weeks, and seconds. The most popular charts used by
traders are 1-minute, 5-minute, 15M, 30M, 60M, 4-hour, daily, weekly and monthly
charts. Although we can set up our chart with any setting we want, using those popular
timeframes works simply because many traders are also watching them. If we use
something like a 40-minute or 3-hour chart, the candlestick patterns on our chart might
have a lower weight as no other traders see them. The non-time-based charts are less
common, but they still can give traders valuable information. Our traders can use tick and
range charts in our FTMO cTrader platform, these two are also the most popular non-timebased charts. In the tick chart, one tick represents one transaction. In other words, one tick
is made when the market fluctuates by the minimal price increment.
If we take a look at EURUSD, which is quoted in five decimal places. One tick would equal
0.00001 or 1 pipette. In the range bar, every bar will end once the range between its high
and low equals the chosen range. This means that every bar will have the same bar range
and close either at high or low. Using a range of tick charts can eliminate noise and display
trends in a much clearer picture as we will get rid of time periods when markets are not
moving and staying range-bound. This can be clearly seen when we compare this DAX fourhour chart with the 100 range chart in cTrader. We can notice that both uptrend and
downtrend were much cleaner on the range chart once we eliminated the time factor and
put our focus on price rotations.
Bar charts
The only difference between the candlestick and the bar chart is the visual representation.
Bar charts, often called OHLC charts, are represented as vertical bars with two notches that
represent the open and close of the bar. Compared to Japanese candlesticks, bar charts
might be a little less clean for new traders when it comes to candlestick patterns. On the
other hand, they might present a little cleaner picture when it comes to marking out
support and resistance.
Renko
Renko is similar to the range and tick charts. It eliminates the time factor from trading and
changes the visuals of our chart completely. We won’t see candlesticks anymore, but we
will be looking at bricks instead. The name Renko came from the Japanese renga, which
stands for brick.
The Renko chart prints a new brick when the market moves more than the brick size away
from the previous brick. Let’s say we define that one brick signifies a movement of 5
pips. So, until the market moves these 5 pips in one direction (from the close of the last
brick), no more bricks will be drawn. Renko charts are not only great for filtering out noise
but also for marking out support and resistance areas.
Heikin Ashi
Heikin Ashi is another chart representation that comes from Japan. It means “average bar”
and although this is not something we need to know, here we can have a look at how the
Heikin Ashi candle is calculated. The Heikin Ashi is constructed the same way as the
candlestick chart but has a different calculation method. We can set up a Heikin Ashi chart
as we want, on the specified time, range or tick.
Heikin Ashi filters out the movements and makes a much easier approach to trend
following. The downside of it is that we might miss some valuable information as it might
smooth out the chart a little too much. But it is a great tool for both entries and trade
management.
Conclusion
To conclude this chapter, the best thing we can do is to play with different charts and
settings and find what suits us the best, that is always the smartest approach. Regular timebased candlestick charts will always be the most popular as they are used by traders
worldwide. But tick charts, range charts, Renko or Heikin Ashi, can be utilized in our
strategy and bring a lot of use to our personal trading.
Market Environment – Ranges vs
Trends
Hello traders, in this lesson, we will have a look at different types of trading environments.
Table of Contents
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Market environments – range vs trend
o Trends
o Ranges
Market environments – range vs trend
Recognizing these early on and adjusting our trading strategy to them is one of the most
important things to do. Trading ranges and trends require almost diametrically different
approaches. But before we go into that, let’s cover some basics and demonstrate how they
look.
Trends
Simply put, the trend is when the price is going either up or down. To give this more
technical explanation, an uptrend is represented by higher highs and higher lows. If we
look at the chart that shows higher highs and higher lows, we can see that lows and highs
are made by a pattern of three candlesticks next to each other.
These are called swing highs and swing lows.
A swing low is made when the price makes a low on the second candle, and the first and
third candles are not exceeding that low. The same goes for swing high, which is made
when the price makes high on the second candle, and the first and third candles are not
exceeding that high. So as we can see in this example of an uptrend, when the price slows
down and creates a pullback lower, a swing low is made, and the price moves higher.
Lower lows and lower highs represent a downtrend.
In a downtrend, we look for short-term rallies that create swing highs, which usually offer
an opportunity to sell.
When are trends changing?
If we are in an uptrend and the last swing low that lets to a highest high is broken, we can
consider a trend change or at least a pause.
The same goes for the downtrend, if the last swing high, which lets the lowest low, is
broken, we can look for buying opportunities or at least a slowing down. Although these
examples look very straightforward, things are more complicated in real markets. Swing
highs and lows are often violated, yet the price continues in its direction. There are several
reasons why this might happen, and it is something that we will cover in future videos. In a
trending market, we can use different indicators to help us stay in the trends. The most
popular ones are moving averages, Ichimoku cloud, and MACD, and they are used for
building different trend following strategies.
Ranges
In ranging markets, price is bouncing between specific highs and lows. The high is acting as
resistance and the low is acting as support.
Ranging markets are also called sideways or bracketing markets. When we are in the
ranging markets, we are not looking to capture moves but rather use mean-reverting
strategies. Mean-reverting strategies work on the assumption that the underlying asset will
eventually return to the mean once it deviates from it.
Our mean can be anything, from moving average, volume-weighted average price, or price
level. From this mean, we calculate standard deviations. Once the price reaches those
standard deviations, we can bet on a return to the mean. The problem with mean-reverting
strategies is that the market can start trending, and we will get caught on the wrong side of
the market. One of the most popular mean-reverting indicators is Bollinger Bands, RSI or
stochastic. So is it better to follow trends or mean-reverting? That is up to you and our
personal preference. In general, markets are more ranging than trending, but a lot of
money can be made in huge trends.
Support and Resistance
In this lesson, we will look at one of the most popular trading strategies that are part of
many trading systems used by traders worldwide.
Table of Contents
 Support and resistance
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Horizontal support and resistance
Diagonal support and resistance
Dynamic Support and Resistance
Support and resistance
So what is support and resistance trading?
If you ever saw support or resistance drawn on the chart, most traders use straight or
diagonal lines to do so. But this might not be the best representation, as support and
resistance do not represent exact price points but zones. Why do they work? Simply
because they are visible to a lot of traders and trading algorithms. So, when the market
reaches those zones, there will be a lot of participation.
This is why higher time frames support and resistance zones, like those at four-hour, daily
or weekly, will play more significance to price movement than one-minute or five-minute
SR zones. We can think about resistance as a ceiling above the price and support as a floor
below the price. Both of these hold the price until they are broken. The common
misconception that you might read before is that support and resistance zones are stronger
with the number of touches they have.
This is not true, and it is due to the fact that traders place pending orders at those levels
and with more and more touches, these pending orders get consumed, so the market has an
easier and easier path to break through eventually.
Horizontal support and resistance
Marking out horizontal support and resistance is the most popular price action trading
strategy, which can be used in both ranging and trending environments. When we are
looking to trade support and resistance, there are two situations we might find ourselves
in. The first is trading them from the same side, in other words, we are buying support and
selling resistance. In this case, we don’t want to trade zones that have too many
touches. We have to bear in mind that if the price revisits the zone for a second or third
time, there will be a lot of resting orders, above resistance and below support, from traders
who are either already in the trade with their stop-loss placed above or below. But also
breakout traders that anticipate levels to break. Because of that, markets often tend to
probe these areas, causing both traders to stop out from their positions and trapping the
breakout traders. We should always be mindful of this when we are placing our orders.
The second type of horizontal support and resistance trade is when we are trading the
inverse of a level. This means that we are going long on prior resistance and going short on
prior support. With these trades, the more touches the level had before it flipped, the more
significant it is. So, in other words, if we are going long on a level that was previously a
resistance with four touches, it will be much more significant than a level with two
touches. When we are marking the support and resistance on our chart, we should always
start with the bigger picture on higher time frames like weekly or daily and then progress
to shorter-term time frames. Other price points that can act as significant support and
resistance levels are round numbers, pivot points, and opening prices of a new weekly,
monthly or yearly candle.
Diagonal support and resistance
Diagonal support and resistance, also known as trend lines, are commonly used among
traders. Compared to horizontal levels, they can be more subjective as they can be drawn
by connecting two or more price swings. When we are drawing trend lines, we should
always focus on the most apparent levels that show a clean path of ongoing trends. Like the
horizontal support and resistance areas, these can be traded from the same side and
inverse once they break. The more touches the trendline has, the weaker it becomes and is
more likely to break. We can also use trendlines during pullbacks in trends as a guide when
pullback might be over, and we can continue the trend.
Dynamic Support and Resistance
The last support and resistance levels we can plot on our chart is a dynamic one. These
come from different indicators, with the most popular ones being different types of moving
averages. The most common ones are fifty, one hundred, and two hundred moving
averages that are plotted on daily and weekly time frames. Many traders and investors
watch these, so we can assume that prices will react to them once they are tested. Other
dynamic support and resistance indicators are the volume-weighted average price,
Bollinger Bands or Ichimoku cloud.
Supply and Demand Trading
Hello traders, in this lesson, we will look at supply and demand trading strategy and how
we can benefit from it.
Table of Contents
 Supply and demand trading
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Limit orders and market orders.
How to identify supply and demand zones
What makes a good supply and demand zone
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How to trade supply and demand zones
Supply and demand trading
The supply and demand trading strategy is a type of price action trading strategy similar to
horizontal support and resistance. It comes from supply and demand dynamics that we can
find in the financial markets and anywhere in the world.
For example, Apple released a new iPhone, but this time it would be a special edition with
limited devices to sell. There will be a lot of buyers or demand who will drive prices
higher. On the other hand, if Apple released a new iPhone with unlimited pieces to sell and
got bad reviews, there would be an enormous supply to sell but no demand to buy. Because
of that, they will have to drive prices lower until they find buyers willing to buy. This is the
same in financial markets where prices rise once aggressive buyers overcome sellers; in
other words, demand overcomes supply. Or vice versa when aggressive sellers overcome
buyers or supply overcome demand. One of the common misconceptions many traders
assume is that when markets move quickly in one direction, it is because there are more
buyers than sellers.
This is not true since for every buyer there has to be a seller and vice versa. When the price
goes up or down, there is no supremacy on either side, but the amount of aggressivity or
willingness to buy or sell for higher or lower prices. If we look at this idea from a more
advanced perspective, traders can place two types of orders in the market.
Limit orders and market orders.
Let’s say we have an instrument that is priced at $100 and there are limit orders above and
below the price.
At 101 we have 5 limits orders to sell, at 102 we have 10 orders to sell. Below the price,
there is 5 to buy at 99 and 10 to buy at 98. For the market to move higher or lower there
has to be someone who will buy 5 contracts to move to 101 and 15 contracts to move the
price to 102. If aggressive buyers want to move prices higher, the limit sellers above the
price start to pull their orders from the order book, and the price will keep climbing
higher. When there is obvious aggressivity from either side, supply and demand zones are
created. If we want to understand why these zones give us trading opportunities, we have
to think about who moves the markets. We, as retail traders, do not move markets. The
institutions, banks, and large funds do move markets. Compared to us, these market
participants cannot just execute their orders wherever they want. They need enough
liquidity in the order books not to get significant slippage. That is why they use areas of
consolidation for entering the market. More often than not, they cannot execute all orders
at once, so when prices drive away from the consolidation zone, they still have unfilled
orders inside. That is why markets often react once zones are revisited.
How to identify supply and demand zones
If we want to identify supply and demand zones, we have to look at consolidations before
the large expansions. The demand zones are found in consolidations before a large move
up. The supply zones are found in consolidations before the large move down. The larger
and more aggressive the move, the more significant Supply or Demand zone is.
What makes a good supply and demand zone
Besides a large move from the zone, we look for a few other factors that give us confluence
for trades. Zones on higher time frames will always carry more value than those on lower
time frames.
The time market spends outside of the zone is also necessary; we don’t want to see the
market being crazy all over the place going back and forth.
What we prefer to see is a nice rounded retest into the zone.
How to trade supply and demand zones
There are two ways to trade supply and demand zones, first one is a set and forget
approach when we put a limit order at the top of the demand zone or bottom of the supply
zone. This gives us more freedom from looking at charts, but of course, we might get
quickly taken out when the price spikes through the zone.
The second approach is to wait for the initial reaction and enter with a market order. Our
stop loss should always go to the other side of the zone, and we can target the next supply
or demand zone or support and resistance area. Entering the market is entirely up to our
approach, and we should test what suits our trading style best.
Chart Patterns Trading
In this lesson, we will focus on technical patterns.
Table of Contents
 Chart Patterns Trading
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Head and shoulders pattern
Inverse head and shoulders pattern
Cup and handle patterns
Ascending triangle
Descending triangle
Falling wedge
Rising wedge
Double top pattern
Double bottom pattern
Flags
Bull flag
Bear flag
Chart Patterns Trading
Now that we have covered horizontal and diagonal support and resistance, we can look at
chart patterns as they are a combination of both. Chart patterns are one of the oldest parts
of technical analysis and price action trading. They were proven many times as a functional
way to help technical traders identify the next market direction. That being said, a trader
should not forget about the context and current market conditions while making decisions
in trading.
Head and shoulders pattern
The Head and shoulders pattern is believed to be one of the most reliable reversal patterns.
It starts after a long bullish trend when the price rises to the peak and pulls back. Shortly
after, the price rises again to a significantly higher peak but declines again. Finally, the price
goes up for the third time but only reaches a level of the first high. After that, it pulls back
and completes the pattern, which signals that an uptrend is ending and the price is about to
decline. The first and third peaks are the shoulders, and the second peak is the head. The
support level where the price bounces from is called a neckline and is often used as entrylevel on a break.
Inverse head and shoulders pattern
As with other patterns, there is also an inverse head and shoulders, which occurs after an
extended downtrend and indicates that price will go up.
We can notice on both charts that breaking off a neckline would give us a great trading
opportunity. In the second case, we could even use a neckline retest as a second entry.
Cup and handle patterns
A cup and handle pattern is a bullish continuation pattern. It consists of two parts – a
cup and a handle. Once a cup is completed, the handle is formed on the right side of it. If it
is followed by a breakout on a resistance line and traders consider it a signal for an
uptrend. The pattern can only be recognized on the long term charts because of the longer
time requirement of forming a pattern.
As we can see, identifying and trading a ‘cup and handle’ pattern is nothing complicated.
Once we enter the trade on a retest of resistance, we can place our stop loss below the low
of a handle and let the trade do its work.
Ascending triangle
Both ascending and descending triangles are one of the most popular patterns among
traders. To really help us understand this pattern, we should take a look at it from more of
a logical perspective. The ascending triangle is formed when the price is unable to break
a resistance but at the same time, it is forming higher lows.
As we may notice in the example above, the price is bouncing from resistance but is unable
to make a lower low on each bounce. This is giving us a bullish signal that a possible break
is about to happen.
Descending triangle
Inverse to the ascending triangle, the descending triangle is visible when the market is
bouncing from support but it is unable to make higher highs.
Falling wedge
A falling wedge is a bullish reversal pattern which happens most of the time when the price
is pushing lower but we can see divergence at one of our oscillators. This means that even if
the price is going lower, sellers are getting exhausted and we can expect a reversal to
happen soon.
Rising wedge
Reversal of falling wedge, the price is pushing higher, but we can find weakening clues in
our oscillator.
Double top pattern
The double top pattern is usually made as a topping formation at the end of the trends. It is
a bearish reversal pattern which is characterized by the peak which is shortly followed by
the second one at the same or very similar price point. Once the price breaks the support
made below the highs, the double top pattern is valid. We use the same term “neckline”
which is also used with the head and shoulders pattern. We can either enter the trade once
the neckline is broken or wait for the retest of the neckline.
Double bottom pattern
The opposite of the double top is the double bottom pattern which is made at the bottom of
the downtrend. The double bottom is characterized as two bottoms at an equal or similar
price level. Same as with the double top pattern, we can enter either at the break of the
“neckline” or its retest.
Flags
Flags are technical patterns which can be understood as a pause in the underlying trend.
Flags are spotted as consolidation after a fast trend in the market and they signal the
continuation after the breakout. As with all chart patterns, we have a bull and bear flag.
Bull flag
Bear flag
Fibonacci Trading
In this lesson, we will have a look at Fibonacci retracement numbers and the meaning
behind them.
Table of Contents
 Fibonacci retracements
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Fibonacci extension
Fibonacci retracements
The Fibonacci retracements are one of the most popular tools in technical analysis. They
came up from the Fibonacci sequence of numbers. These are 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55,
89, 144… If we divide two numbers next to each other from number three and above, we
will gain a certain ratio we can use from Fibonacci retracement levels. Fibonacci
retracement levels can then be used as horizontal support and resistance areas. And they
are created by using a Fibonacci retracement tool which is available with pretty much
every trading software and plotting it from key swing highs and swing lows. Once we plot
those, we will see 23.6, 38.2, .50, 61.8, and 100% retracement numbers.
Why do these numbers work?
There is no magic behind that; it is simply because dozens of traders watch them, so we
tend to see a reaction once the price reaches them. The most important ones are 38.2, 50
and 61.8% retracement levels. The 61.8% retracement is also called the golden ratio, and it
is the most important one. A 50% retracement is not technically a Fibonacci number, but it
is used because it works.
As we can see on this chart, this is a daily EURUSD chart where we plotted a Fibonacci
retracement tool on key swing highs and swing lows. Once the price starts its retracement,
we could find a buying opportunity between 61,8 and 50% retracement. Another way of
using Fibonacci numbers is with a Fibonacci extension.
Fibonacci extension
This Fibonacci extension can predict future support and resistance levels in trending
markets. This extension tool is pulled from major swing moves, and it is beneficial with
instruments in price discovery. In other words, instruments that are beyond their previous
all-time high.
If we take this NASDAQ chart, we can see that the Fibonacci extension was pulled from the
whole 2020 March crash. It could show us important levels of support and resistance in
play after NASDAQ broke its all-time high. In conclusion, Fibonacci retracement and
extension can be useful, but it is not the holy grail in trading. These levels oftentimes get
front-run or broken through, so practising good risk management is always the key.
Technical Indicators
Using technical indicators in trading is a never-ending discussion among traders. Some
would say they are useless, some can’t imagine trading without them. Understanding the
technical indicators is something every trader should master, regardless if he or she
decides to use them or not. We picked the top 11 technical indicators, which in our opinion
are the best and they can improve your trading significantly.
Table of Contents
 Technical Indicators
 MACD Indicator
o

How to trade with MACD Indicator?
MACD Divergence
What is divergence?
RSI Indicator (Relative Strenght Index)
o RSI Divergence
ADX Indicator
Ichimoku Cloud
o Kijun Sen (red line)
o Tenkan Sen (blue line)
o Chikou Span (green line)
o Ichimoku Cloud / Senkou Span
o Ichimoku Cloud Trading Strategy
o Kijun Sen
o Tenkan Sen
o TK Cross
o Chikou Span
o Cloud
On Balance Volume (OBV)
o OBV Trading Strategy
o OBV Divergence
Stochastic Oscillator
Parabolic SAR
Average True Range (ATR)
o How to trade using the ATR indicator?
Moving Average Crossover
o How to trade a moving average crossover?
Volume Weighted Average Price (VWAP)
How to use VWAP?
Bollinger Bands Indicator
o
o
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
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Technical Indicators
Technical indicators are mathematical calculations based on price or volume. They are
used mostly by technical traders, in other words, those who trade by using technical
analysis. Technical indicators provide traders with additional information on what market
conditions are right now and the potential direction of the next move. If you are an
experienced trader, you most likely know that hundreds of indicators are available on
trading platforms. You certainly don’t need to use all of them, rather, you should be able
only to add those which are working for you or fitting your trading plan to maximize profit
potential in your strategy or trading system.
MACD Indicator
MACD is the acronym for Moving Average Convergence Divergence, it’s a trend following
technical indicator that shows a difference between two lines, the MACD line and
the Signal line. The MACD line is calculated by subtracting a 26-day exponential moving
average from a 12-day exponential moving average. The signal line is a 9-day exponential
moving average of MACD itself. The histogram gets bigger as 2 lines diverge and disappear
when they cross each other.
How to trade with MACD Indicator?
When MACD crosses the Signal line, it is perceived as the start of a new trend.
Falling below the Signal line indicates the signal to sell and rising above it suggests that it
is time to buy.
MACD Divergence
MACD is also one of the preferred indicators to use in spotting a divergence in the market.
What is divergence?
We talk about MACD Divergence when the price of the traded instrument starts moving in
a direction that is different from MACD, a reversal of the current trend is likely to occur. We
can see divergence both on MACD Histogram and also the MACD line.
As you can notice on the chart below, the price of GBPUSD is going higher, but at the same
time, MACD is showing us lower. This is what we call MACD Divergence. Let’s have a look
at a few more trading examples.
Divergence can be spotted on any instrument and any timeframe. You can see how many
nice and working examples we have on the above AUDJPY 30-minute timeframe.
RSI Indicator (Relative Strenght Index)
RSI stands for Relative Strength Index, it is a momentum oscillator, but it measures the
velocity and magnitude of price movements on a scale from 0 to 100. Generally, when the
RSI shows a reading at 70 and above, we can assume that the instrument is
being overbought, and the price should go to the downside. Readings at 30 and
below suggest that the instrument is oversold, and we should see the price going higher.
RSI can be used to confirm trends. If a downward trend is occurring, the instrument should
be found fluctuating between 10 and 50, if RSI breaks out of that level, it often corresponds
with the break of a price as well. The same goes for an uptrend, except the instrument
moves between 50 and 90.
RSI Divergence
If both RSI and price experience trends but in opposite directions, divergence can signal a
price reversal same as with divergence on MACD. One thing worth mentioning is that
during strong trends, divergence is likely to appear without breaking the trend.
ADX Indicator
Staying with the oscillators, we will talk a bit about the Average Directional Index also
known as ADX. Unlike to RSI and MACD, ADX doesn’t determine if the trend is bullish or
bearish, but it shows the strength of a current trend. Once you add the ADX indicator to
your chart, you will see it fluctuating between 0 and 100, whereas readings below
20 generally mean a weak trend, and if ADX is above 50, it means the trend is strong.
On the chart above, you can notice how the price was in consolidation at the same time
as ADX indicator was fluctuating around level 20; once the price started trending higher,
ADX broke 50 levels and gave the signal of a strong trend which indeed followed. From
this example, you can see that ADX is a useful indicator for determining if the market is
ranging or starting a new trend.
The stronger the trend, the higher the ADX indicator value, regardless of the
direction of the trend.
You can notice here on Dow Jones how ADX indicator started rising rapidly, confirming the
new downtrend’s strength. Before we look at another indicator, here is a 4-month trading
range in Bitcoin and a great example of how ADX would help you identify the current
trading environment.
Ichimoku Cloud
This is one of the more complex indicators, with a strong fanbase of traders who would
swear on this indicator. Frankly, many of them don’t need anything else besides the
Ichimoku Cloud for their trading. Ichimoku Cloud is a momentum indicator that
determines the direction of the trend but also calculates future levels of support and
resistance. This makes it unique because it is one of the few indicators which is not lagging
behind the price.
Does this seem like one big mess? No need to worry. Let us explain everything you see in
the chart above.
Kijun Sen (red line)
Also known as the baseline, which is calculated by averaging the lowest low and the highest
high for the last 26 periods.
Tenkan Sen (blue line)
Also known as the conversion line which is calculated by averaging the lowest low and the
highest high for the past 9 periods.
Chikou Span (green line)
Also known as the lagging line. This shows the closing price plotted 26 periods behind.
Ichimoku Cloud / Senkou Span
Every cloud is made of two lines which are used as borders for the cloud. The first line is
calculated as the average of Tenkan Sen and Kijun Sen and plotted 26 periods ahead. The
second line is calculated by averaging the lowest low and the highest high for the last 52
periods and plotted 26 periods ahead.
Ichimoku Cloud Trading Strategy
Let’s have a look at the above GBPCAD 4-hour chart and break down separate parts of
the Ichimoku Cloud.
Kijun Sen
We watch Kijun Sen as our indicator of the general direction of the price. You can think
about it similar to the moving average – if the price is above Kijun Sen it means bullish. If
the price is below, it means bearish.
Tenkan Sen
Similar to Kijun Sen, but Tenkan Sen is also indicating market conditions. If Tenkan Sen is
moving up or down, the market is trending. If Tenkan Sen is moving horizontally, it signals
that the market is ranging.
TK Cross
Crossover of Kijun and Tenkan Sen. This generally means there is a change of direction in
the market and when Tenkan is above Kijun Sen, we are in a bullish market. If the opposite
happens, we are in a bearish market.
Chikou Span
This one is simple. If Chikou Span is above the price – this is a bullish signal. If it is below,
that’s bearish.
Cloud
The cloud acts as support and resistance. If you take a look at the chart above, you can see
that the price is currently trading above the cloud. This means that if we are going lower,
we can use both cloud levels as support areas. From looking at the GBPCAD chart above,
you can see that we recently had a bullish TK Cross, Chikou Span is trading above the price
and we are above the cloud. This seems like a decent buying opportunity, right?
As you can see, the price indeed went up and we were able to catch this great long trade.
Also, pay attention to the bearish TK cross (orange) and the change of direction of the
trend.
On Balance Volume (OBV)
Made by Joe Granville in the 1960s, On Balance Volume (OBV) is a technical indicator which
helps traders make decisions about future price movement based on the previous trading
volume of the asset. OBV indicator is watching the volume of trades and also if the push of
the price is higher or lower. On Balance Volume is used in technical analysis to determine
buying or selling pressure in the market.
OBV Trading Strategy
On Balance Volume Trendline strategy is a simple way to use a trendline on OBV and
monitor the current price action. As you can see from the example below, the price of
EURUSD was in consolidation, which is something that can confuse a lot of traders. But if
you would add the OBV indicator to your chart, you can notice that OBV broke above the
down steep trendline, which signalled the end of consolidation and higher prices.
In another example, you can see how using the OBV indicator would help us get into the
bad trade on a trendline fakeout.
OBV Divergence
Another way how to use OBV is watching for divergence – same as with other oscillators
we described above.
Stochastic Oscillator
Another oscillator is called Stochastic. It comes from the Greek word stochastics, meaning
able to guess. The Stochastic oscillator can be used for any type of trading such as scalping,
day trading but also long-term swing trading. Same as RSI, Stochastic shows overbought
and oversold conditions, but it will also give you buy/sell signals for crosses which are
made from %K and %D lines.
You can see the pretty decent signals on a Daily AUDJPY but also on a 5-minute chart of
Gold.
Parabolic SAR
Trend following is definitely one of the most popular trading strategies traders all over the
world use. To be able to define trends in the financial markets, it is definitely a useful skill
to have. That’s why we have a variety of technical indicators to help us and Parabolic SAR is
one of them. Parabolic SAR (SAR means “stop and reverse”) is the indicator which is not
only showing a trend direction but also signals when it ends and reverses. You can see how
Parabolic SAR is displayed on the chart. Dots above the candles mean that we are in the
bearish trend and vice versa.
Average True Range (ATR)
Average True Range is probably one of the most popular indicators among retail traders.
ATR measures market volatility, which is a very important factor in trading. Every trader
should be aware of current market conditions and volatility. We don’t want the market to
be too volatile because in that case, it is hard to predict the next move. But on the other
hand, when the market stalls, we cannot benefit from that as well.
To represent real volatility in the market, we have to look at the previous data we have.
ATR indicator is measuring:
1. Distance between current high and current low.
2. Distance between previous close and current high.
3. Distance between previous close and current low.
After that, it takes an average price of past trading days which represents the volatility in
the market.
How to trade using the ATR indicator?
ATR can be used in several ways. One of the most popular is to use the ATR with stop-loss
placement. For example, if the ATR indicates 4.7 pips in EURUSD / H1 timeframe, you can
assume that the market should not exceed this value once you are entering a long trade –
example marked on the chart below.
As you can see, the market did not exceed hourly ATR and continued higher.
There are also several indicators on TradingView, like this one which calculates previous
values of ATR to be used as dynamic S/R and also entry/exit signals on the ATR level break.
Moving Average Crossover
Moving averages are technical indicators which probably every trader knows. First, let’s
cover what a moving average is: Moving average is a lagging indicator which is helping
traders to “smooth” out the price and reduce noise in trading. It is one of the most popular
trend-following indicators, which is commonly available.
The following are different MA types:

Simple Moving Average

Exponential Moving Average

Weighted Moving Average

Hull Moving Average

Smoothed Moving Average
All of these are calculated a little bit differently, but we are not covering it in this article.
Let’s have a look at how they are presented on the live chart.
How to trade a moving average crossover?
To be quite honest, trading a moving average crossover is easy as it gets. One of the most
popular crosses is 50 and 200 moving average crossover, called the golden cross
or the death cross.
A golden cross happens when 50 moving average crosses 200 moving average and is below
the 200 moving average. Death cross happens when 200 moving average crosses 50
moving average and is above the 50 moving average.
Volume Weighted Average Price (VWAP)
VWAP is heavily used amongst traders who trade according to Auction Market Theory and
use Volume profiles in the day trading. If you have no idea what we are talking about, make
sure to read our article about Market Profile trading here.
How to use VWAP?
The VWAP gives traders average price throughout the day based on price and volume. We
plot VWAP on a chart and use it on intraday timeframes such as 5 minutes with VWAP is
giving us dynamic S/R levels. The popular rule between a lot of traders who trade intraday
is that they only long when the price is above VWAP and short when below.
Bollinger Bands Indicator
John Bollinger, the father of Bollinger Bands, developed this technical indicator in the
1980s. Bollinger Bands are calculated by a moving average with the standard deviation
above and below the median line.
Bollinger Bands use the same principle as RSI and other oscillators with the
overbought/oversold arguments. When the price reaches the upper Bollinger Band, we can
assume that the market is overbought. We can assume that the market is oversold when we
reach the lower Bollinger Band. The median line can be used as “balance” and also the
target for your trades.
Divergence trading
In this lesson, we will cover divergence trading.
Table of Contents
 Divergence trading
o
o
o
What is divergence trading?
Regular divergence
Hidden divergence
Divergence trading
There is a popular saying in trading that all we have to do to be profitable is to buy low and
sell high. Unfortunately, in real trading, things are rarely easy like that. Although we will
hardly sell the absolute top or buy the absolute bottom, we can use divergences to spot
possible reversals very early and also use them to manage our existing positions.
What is divergence trading?
The divergence can be spotted by comparing price action with different oscillators. When
the market is going up, and the price is making a higher high or going down, the price
makes a lower low, the indicator should also make higher highs and lower lows. But when
there is a divergence, we can see that an uptrend price is making higher highs, and the
indicator is making lower lows. Same for a downtrend, the price is making lower lows, but
the indicator is making higher highs. It is up to us what indicator we decide to use.
The most popular ones are RSI, MACD or Stochastics.
Compared to indicators such as moving averages or Bollinger Bands which are lagging
indicators, divergences are considered a leading indicator. This means that we can catch
reversals near-absolute tops and bottoms and get great risk to reward setups.
Sounds great, right?
It is great, but like anything in trading, divergence trading is not some hidden secret to the
markets. We will often find out that divergences appear in strong trends, but the price is
still going in one direction. This is why divergences are best to use once the market slows
down after a strong directional move where we can spot a weakening momentum. There
are two types of divergence: Regular and hidden.
Regular divergence
Regular divergences are used for possible trend reversals. There is a bullish and bearish
regular divergence.
The bullish divergence can be spotted when the price makes lower lows, but the
oscillator makes higher lows. This can be a possible signal of a downtrend reversal. As we
can see in the example, a price makes lower lows that are not confirmed on the MACD
indicator; therefore, we can look for a trend reversal.
Opposite to that is a regular bearish divergence. When the price is making higher highs,
but the oscillator makes lower highs, we can spot the regular bearish divergence. This can
be a signal of a reversal in an uptrend. As we can see in the example, a new high in price is
not represented by a new high in the oscillator, in this case, the RSI.
After spotting a regular divergence, we don’t need to always jump right in the trade. More
often than not, the better choice is to wait for other confirmations like watching a price
action or technical indicators.
Hidden divergence
Compared to regular divergences, hidden divergence can signal possible trend reversals
and a trend continuation. As trend trading can oftentimes be easier than trying to catch
tops and bottoms, hidden divergence is a useful tool we can use. A hidden bullish
divergence can be found in an uptrend.
We can spot a hidden bullish divergence when the price makes a higher low and the
oscillator makes a lower low. Hidden bearish divergence is presented when the price
makes a lower high and the oscillator makes a higher high. Here is the recap of what we
learned in today’s lesson, as we can see on the table.
Regular divergences are useful for trend reversals, and hidden divergences can signal trend
continuation. It is always well advised to use other trading confluence tools rather than just
trading these divergences blindly. We can use anything from indicators or price action.
How to spot breakouts and fakeouts
In this lesson, we will cover how you can trade breakouts and fakeouts.
Trading breakouts and fakeouts
Breakout trading is a popular trading strategy followed by many traders and
trading algorithms. There are two ways you can spot a breakout, the first one is by using
price action, and the second is by using technical indicators that measure volatility.
What is volatility?
Volatility measures price fluctuations over certain time periods. When there is high
volatility, markets go back and forth very quickly; when there is low volatility, markets are
trading in tight ranges. During times of low volatility, we can expect breakouts to occur.
Bollinger Bands, Keltner or Donchain Channels are the most popular indicators to measure
volatility. They measure volatility based on different indicators such as moving averages or
Average true range. Another way of looking at volatility is by using price action. You can
use horizontal support and resistance or different chart patterns to spot a possible
breakout. Breakout trading can be considered an impatient approach as breakout traders
often use stop or market orders to chase rising volatility.
This can work, but very often, we can see false breaks above and below existing
ranges. These false breaks happen for one simple reason, above and below every easily
recognizable price range, you can find two types of orders. If we take a look at an example
of horizontal resistance, which was already tested in the past, above it, we can find stoploss orders from traders who are already short and also buy stop orders from traders that
are anticipating a breakout.
Because both of these essentially buy orders, they bring a large amount of liquidity, in other
words resting orders, to the market. Large market participants often use this liquidity and
absorb all the buy orders with their large sells. This will result in a false breakout above the
resistance and continuation down. Not becoming a victim of these false breakouts is not
that hard; all you need to do is not put your stop-loss to obvious places where there is a
high likelihood of other traders having their stop-loss. Another thing is trying to have a
little more patient approach rather than having a “fear of missing out”, and after you see a
breakout outside of any tight range, wait to see if new prices will be accepted or not.
Of course, there will be situations where you will miss out on the breakout, but more often
than not, waiting for the breakout and placing a limit order to an area where the breakout
occurred can be a smarter play.
Multiple timeframe analysis
It is often said that being well prepared for the trading day is a battle half won. This cannot
be far from the truth. We cannot jump to an empty chart, start trading right away and think
we can profit. We need to have a plan. A trading plan. In this lesson, we’ll look at how to
draw a simple trading plan directly on the chart and how we can implement it right away to
start trading.
Table of Contents
 Multiple timeframe analysis
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o
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Weekly chart
Daily chart
Execution chart
Multiple timeframe analysis
All traders are different, we will hardly find two traders with the same strategy and view
on the markets. Knowing that, we know we cannot satisfy everyone’s opinion but it’s ok. In
this article, we are going to break down the chart of GBPUSD which is a heavily traded pair
and we’ll use a simple price action with horizontal and diagonal support and resistance and
also a volume profile to easily spot areas of heavy distribution and path of least resistance.
All of our steps are going to be explained in depth so no worries, we are sure they are really
easy to follow. Because the preparation is best done when markets are calm, weekends are
best suited for the job.
Weekly chart
Since the majority of traders specialize in intra-day and intra-week trading, we are not
going to a higher timeframe than weekly. Of course, monthly, quarterly or yearly charts can
uncover some macro directional details but for intraweek and intraday trading you do not
need to pay too much attention to them.
When looking at the weekly chart, we should always ask ourselves questions such as:

Where is the market going?

What has been the general direction of the last few weeks?

What happened last week? Was the market trending or ranging?
As we can see in the above chart, the weekly timeframe functions as our broad navigation.
Before drawing any lines to the chart, we should take a look at the price movement alone.
After this observation, we can notice GBPUSD broke out from a 2-month long trading range
at the end of July. The price was ranging during the past two weeks, which signals that
some bigger move might be coming soon. After this, we can draw support and resistance
lines using price action. When marking out our weekly chart, there is no reason to go
thousands of pips above and below the market price, as there is a very little chance the
price is going to reach there during the following week.
We used purple colour to mark out our weekly levels. We simply marked out support and
resistance levels using price action. Because we are looking at Forex, where the volume is
calculated by the executed bid/ask movement, we put more emphasis on the price action
rather than volume. Trading indices or commodities, doing things another way around,
might be better for those assets.
Daily chart
Looking at a daily chart gives us a more detailed look at the actions of previous days.
We are going to examine the past trading week and ask questions such as:
1. What was the direction last week?
2. Was the market in range or trending? Should we look for a trend continuation or a mean
reversion?
3. Is the market over-extended?
4. If we could only use a daily chart for trading, which direction would we say the market will
go?
5. What are the macroeconomic events planned for next week and at what time and day they
are?
In responding to these questions, we can mark out our chart with lines.
We marked out daily levels with the blue line, and once again we marked out the most
recent levels where the price bounced from. We also boxed out the recent trading range
with shaded grey colour, for reference, we also shaded the areas from the past with a
similar price behaviour, as we can notice from the past examples. Every time GBPUSD was
in a very tight range like this one, we had a big expansion shortly after. This gives us a clue
that we can expect more of a trending movement next week.
Execution chart
This is completely up to us. Some traders like to enter their trades on H4, H2, H1 or
whatever time frame is suitable. For this example, we use H1 timeframe for marking out
levels and also entering and exiting potential trades. Our intraday/execution chart should
be revisited not only during the weekend but also in the morning before we start trading,
these levels change pretty often so there might be a need to adjust them accordingly.
We marked out our hourly levels in orange, and we also added arrows for better
visualisation of possible movements, this is not necessary, but it can help, especially in the
learning stage. We also added two possible scenarios for trades to unfold. One for a short
trade and one for a long. We are ready to tackle the market next week with this being
marked out. We must be mindful of our levels and macroeconomic releases coming into the
new trading day. Of course, we can use indicators or anything else to mark out our levels,
it’s completely up to us. The main takeaway from this article is to understand the bigger
picture of the market, what it’s trying to do and where it’s trying to go, and more
importantly, being prepared for every piece of movement. And as we can see, the market
did this right after the opening. Take a look at how it bounced and stopped in front of our
levels and how it followed our plan.