The secret meaning of Japanese Candlesticks Part 2 By Vladimir Ribakov Creator of: www.vladimirforexsignals.com http://www.vladimirmarketsforecast.com/ www.forex-lst-syetem.com 2 nd edition, July 2013 P a g e 1
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Dear Trader, On the first part of this ebook we ve examined two very important patterns: 3 candlesticks engulfing and Marubozu. Both of these patterns are quite rare compared to other patterns we know. This is why they are so reliable. If used according to the rules, the success rate of these patterns is outstanding. Now, this is the perfect time to introduce two more reliable candlesticks patterns that can serve us in maximizing our profits. Are you ready? Let s start Equal Shadow Pattern The first pattern is the equal shadow pattern. Does it seem interesting? This pattern is also rare. When it appears it is important to use it smartly and at the right time. What is the equal shadow pattern? First, let s see how it looks like:. P a g e 5
As we can see on the above red candlestick (the one marked by the arrows), it has two shadows of the same size. That is, the upper shadow s size equals the lower shadow s size. Here is another interesting example: Here we can also see that the candle's upper and lower shadows are the same sized. Before we elaborate on this template's uses, let's understand its meaning. This rare pattern indicates which is the currently stronger market force. If a red candlestick with equal shadows appears, the bears are in power. If this is a green candlestick, the bulls are in power. Why does it indicate the current ruling direction of the market? The identical shadows are showing that the current market trend (bullish or bearish), is navigating the prices to its preferred direction. P a g e 6
Let's see how this navigation looks like when we see a green candlestick with equal shadows. Market starts moving from a certain price and the buyers decide that they want to overpower the market. They initiate a deliberate decrease in prices. This causes the lower shadow to form. After the price is attractive enough, they push the price up. When prices are high enough they calm down and keep the high prices stable. However, it causes a small fall in prices. This is how the upper shadow is formed. This fall in prices attracts other buyers to this specific currency pair, which causes the strong up move to continue. This is how it looks like: Exactly the same meaning applies to red candlesticks, but in a reversed way: the bears are in charge of the game. Now, after realizing identical candlesticks' meaning, let's try to understand how and when we should use them. There are several cases when this pattern shows itself; all of them are very reliable. This pattern should appear at a trend's end, or at the end of a technical correction. In these cases it indicates about its high credibility. Please note that this pattern might form on the first candlestick after a trend has ended or on the second candlestick after a trend has ended. P a g e 7
The same applies to the end of a technical correction. Let's review some examples to make this as clear as possible: As we can see on the above chart, a downtrend has ended, a Doji candlestick has been formed and then. A candlestick with equal shadows has appeared two candlesticks after the end of the downtrend. Here is another example: P a g e 8
There has been a strong move down, followed by a technical correction. A candlestick with identical shadows has appeared right after the correction. This time it has formed on the first candlestick after the correction. Please note that the pattern of a candlestick with identical shadows is valid for our purposes only if it appeared on the first or second candlestick after a trend or a correction have ended. Now, after we understood the meaning of this pattern, let's see how we it can serve us and how we should enter a trade: When should we enter? Right after a candlestick with equal shadows has been closed! After the close of this pattern, we should open a trade. We will place the stop loss below the low of this pattern for a long trade (green candle). For a short trade (if the candlestick is red) we will place the stop loss above the high of the pattern. A screenshot of a short sell trade: P a g e 9
When is the best time to close a trade? Our first take profit target is 1:1 ratio between stop loss and our profit target. For example, if I risk 100 pips, I will place my first take profit target at 100 pips. I will close 80% of the trade on first target, e.g. if I ve traded 1 lot, I will close 0.8 lot at first target. Second profit target is twice the stop loss size(from the entry point): In our example I ll close the remaining 20% of the trade 200 pips from the entry point, that is 100 pips after I ve closed the first part of the trade. This is very simple and profitable. A very important note: the body of the candlestick should be bigger than the equal shadow pattern. It means that a Doji candle will not qualify for this pattern. That s it my friends, we ve finished with the first pattern in this e-book. The Hatchet Pattern The next pattern we ll review is The Hatchet Pattern You should not be intimidated from this title; it will not kill you or your account You are probably familiar with the Hammer pattern. The Hatchet pattern represents the unusual and unique cases of the Hammer pattern. P a g e 10
Let s see a screenshot of the Hatchet pattern: This is similar to a regular Hammer pattern, but it is unique because it features only one shadow. This way it turns from hammer into a hatchet. There is also a reversed Hatchet pattern: We can see clearly that there is only one shadow. The Hammer pattern is considered as a nice pattern, but its exceptional pattern, such as the above hatchet, is highly reliable. Why? Let s first examine the Hammer Pattern. P a g e 11
As an example we ll analyze a green candlestick. It opens at a certain price, then the sellers step on the gas till price reaches far below the opening price. Then, the buyers enter the market and erase the price falls caused by the sellers. As if this is not enough, they even manage to secure their position by closing the trade above the opening price. The Hatchet pattern is so important because not only have the bulls managed to close the position above opening price, but the closing price is the highest point of this candle. It indicates that the buyers dominate this currency completely. The same goes for a red candlestick. The bears are in charge of the game, they own the market till the moment the candlestick is closed. This pattern is rare, but when it is formed, its credibility is almost 100%. The bigger the shadow, the more credible it is. Below is an example of an unreliable candle: The shadow is so small that it cannot lead us into any conclusions about the market. What direction does this candle leads us to? A green candlestick indicates about a strong uptrend. A red candle indicates about a strong downtrend. Another very important rule: This pattern should appear at the end of a trend or of a correction. If it appears at a trading range, it is meaningless!!! P a g e 12
Here are some examples of the Hatchet Pattern: After the downtrend has ended, a green Hatchet has been formed. It indicated us about a possible strong up trend. Here is another example: P a g e 13
Here we ve seen a red Hatchet that has been formed after an uptrend has ended. It indicates about forthcoming strong down move that will probably start descending at this level. After we understood this pattern, I d like to add a very important note: If a red Hatchet appears on a very strong resistance level, you can open a big sell short position. If a green Hatchet appears on a very steady support level, you can open a big long position. The odds of this pattern to fail are merely 1 to 10. Now let s determine how we should manage such a trade: Entry point: we will open a trade as soon as Hatchet candlestick is closed and a new candle has started forming. A sell short position will follow a red candlestick, as long as the pattern appeared after a strong uptrend, or if the pattern has been formed on a strong resistance level. We will enter a long position only if it Hatchet Pattern has been formed after a strong down move or if it has been formed on a strong support level. How do we manage a trade? If we open a sell short position after a red Hatchet, the stop loss should be placed 1 pip above the Hatchet s high. Take profit target should be 1:1 ratio between stop loss and take profit. If we open a long position, the stop loss should be set 1 pip below the Hatchet s low. Here the profit target should also be same sized to the stop loss. Please note: although the moves that follow Hatchet Pattern are usually much bigger than the take profit rates I set, I prefer to close 99% of P a g e 14
successful trades. This is why 1:1 ratio is my favorite. This is why if I set the stop loss to 50 pips, my profit target is 50 pips as well. Let s review a few examples: A. B. Before we finish this e-book there are a few things I would like to emphasize. The two patterns you ve just reviewed are truly amazing patterns. As I ve already said, I ve decided to act differently than my trading mentor, the genius person that made me realize that success in trading is hidden in Japanese Candlesticks wisdom. I ve discovered everything I know about these patterns, so please use them according to the rules. P a g e 15
You know exactly when and where you should use them and how to trade them. If one of the patterns appears where it shouldn t, please disregard this. Don t try to reinvent the wheel. If you do this, you will fail. If you follow the rules, your results will be amazing and your trading will enhance a new meaning. Please take advantage of the pips and money that market present you, but don t try to squeeze more than you should. If you follow these simple principles, I guarantee you fabulous success on your trading. I am sure you have learnt new things you have not known previously, this is perfectly normal. It took me ages to understand the uniqueness of these patterns. You will gain good profits as long as you stick with the rules. I wish all of you success in your trading and hope you will enjoy the Japanese Candlesticks secrets I ve just shared! Vladimir Ribakov www.vladimirforexsignals.com P a g e 16