The foundation of my method is to keep things simple. I am against over complicating trading. In my opinion, the simpler your method is, the more effective you will be. Making something extremely complicated is only going to waste time and add stress. That is why I try to keep my trading as simple as possible. Over complicating something that works very well is counterproductive. All I need are a few lines on my chart and I can make 100+ pips per week with ease.
Some methods you see are just a mess of indicators; so many that you can barely see the candles. This is not the way to trade. If you can be consistently profitable keeping it simple, with just a few lines, then that is obviously the better option. So as you read on, and find out that my method is just a few simple lines, do not run away. These simple lines have been making me a lot of money consistently for 4 years. That is more than can be said for 99% of the trading methods out there. Simplicity is a good thing, not a bad thing.
Some methods you see are just a mess of indicators; so many that you can barely see the candles. This is not the way to trade. If you can be consistently profitable keeping it simple, with just a few lines, then that is obviously the better option. So as you read on, and find out that my method is just a few simple lines, do not run away. These simple lines have been making me a lot of money consistently for 4 years. That is more than can be said for 99% of the trading methods out there. Simplicity is a good thing, not a bad thing.
The Basics
Pairs: GBP/JPY, if you have not discovered this amazing pair yet you are missing out.
Time frame: I use 4 hour charts, and only 4 hour charts.
Alarms: If your current trading platform does not have price alarms then you need to find a new one. Since I trade 4 hour charts, price alarms are essential. You need to set alarms and be prepared to trade when the price reaches a certain level.
The Tools I Use
I use a combination of candlestick patterns, support and resistance lines, and price action. As you can see, I have not mentioned any indicators because I do not use them. My trading is all about following the actual price and not indicators. In the next few pages I am going to explain candles, S/R lines, and price action in detail, and then I will explain how to use them all together.
Candlestick Patterns
People underestimate the power of being able to read candlestick patterns. Candlesticks tell you exactly what’s going on with the market. A bullish candle tells you that the bulls are currently in control. A bearish candle tells you the bears are currently in control. A doji candle tells you that the bears and bulls are fighting, but neither one is winning.
So, when you get a doji forming after a series of strong bullish candles what does that tell you? The bulls were in control of the market, but now the doji shows that the bears are fighting back. The bears and bulls are opposing forces and they are always trying to pull the price in their direction. Sometimes the bulls have more power and it goes up, other times the bears have more power and the price goes down. So every time you look at a candle you should think of it as a struggle between the bulls and the bears.
People underestimate the power of being able to read candlestick patterns. Candlesticks tell you exactly what’s going on with the market. A bullish candle tells you that the bulls are currently in control. A bearish candle tells you the bears are currently in control. A doji candle tells you that the bears and bulls are fighting, but neither one is winning.
So, when you get a doji forming after a series of strong bullish candles what does that tell you? The bulls were in control of the market, but now the doji shows that the bears are fighting back. The bears and bulls are opposing forces and they are always trying to pull the price in their direction. Sometimes the bulls have more power and it goes up, other times the bears have more power and the price goes down. So every time you look at a candle you should think of it as a struggle between the bulls and the bears.
Long Wicked Candle Patterns (LWP’s)
Long wicked patterns are, in my opinion, the strongest type of reversal pattern. They are not simply doji’s, hammers, or shooting stars. LWP’s are the combination of several different factors that make for a very strong reversal sign. Let’s dissect the two most important parts of a LWP.
Preceding trend
The preceding trend is the most important part of the long wicked pattern. If there is no preceding trend it is not a LWP. Identifying a preceding trend is not hard, but it is also not a science. I can’t tell you “a trend is exactly 100 pips,” because a trend is dependent on current market conditions and, obviously, the pair you are trading. I know it is a little hard when you do not have an exact rule to follow, but with just a little practice you will be able to spot trends with ease. I describe a preceding trend as a series of 4 or more candles moving strongly in the same direction. The preceding trend is important because it shows that either the bulls or the bears are currently in power. In the picture below the preceding trend is shown in the red box.
The preceding trend is the most important part of the long wicked pattern. If there is no preceding trend it is not a LWP. Identifying a preceding trend is not hard, but it is also not a science. I can’t tell you “a trend is exactly 100 pips,” because a trend is dependent on current market conditions and, obviously, the pair you are trading. I know it is a little hard when you do not have an exact rule to follow, but with just a little practice you will be able to spot trends with ease. I describe a preceding trend as a series of 4 or more candles moving strongly in the same direction. The preceding trend is important because it shows that either the bulls or the bears are currently in power. In the picture below the preceding trend is shown in the red box.
Reversal pattern
The actual reversal pattern is what screams out to us, “the bulls/bears are losing power!”, and tells us the price might be turning around. The long wicked pattern is also very simple to identify:
The actual reversal pattern is what screams out to us, “the bulls/bears are losing power!”, and tells us the price might be turning around. The long wicked pattern is also very simple to identify:
1. The wick must be longer than the body of the candle.
2. The wick must be pointing in the same direction as the preceding trend.
The reversal pattern alone is not a LWP. It is the combination of the preceding trend, and the reversal pattern that make an LWP. In the picture below the reversal pattern is shown in the red box.
If we put these two features together what does it mean? Previously I said that each candle represents a struggle between the bulls and the bears. So if you think about it, a bearish trend LWP (the above picture) means that the bears were much stronger than the bulls and they were able to push the price down in a bearish trend for a while. Then, all of a sudden the bulls stepped in and pushed the candle back up forming a reversal pattern. So obviously we are seeing that the bears no longer have more power than the bulls and the bulls are fighting back. Another important feature to take note of in the reversal pattern is the body. If the body is opposite to the preceding trend that makes it a stronger LWP. Again, using a bearish trend LWP as an example, if the body of the reversal candle is bullish it indicates that the bulls have more power. If the body is bearish, it is still an LWP, just weaker. Regardless, it is still tradable, just exercise a little more caution (using your brain) since it suggests that the bears are still fighting back.
It is stronger simply because the reversal candle itself closes bullish, and it indicates that the bulls have a lot of power. The weaker LWP shows that the bulls reversed the trend, but the candle itself still closed bearish. This indicates that the bears are fighting back. So remember, a LWP is not just the reversal candle. It is the preceding trend plus the reversal candle. Without a preceding trend, it is not an LWP. It is just a reversal candle.
Grouping Patterns (GP’s)
A GP is a large grouping of reversal type candle patterns in a trend. Again GP’s have two main features so let’s dissect a GP, and talk a little about each feature.
GP Preceding Trend
There isn’t too much to say here. The preceding trend is nearly the same as that of a LWP’s preceding trend. The main difference with GP’s is that I look for a larger trend. I still trade them based off of smaller trends, but they are definitely more powerful when they form in very large and long running trends.
Reversal Candle Grouping: There must be at the very least, five reversal candles before I would consider it a GP. Five candles is the minimum. I would much rather see six or more. Generally speaking, the more reversal candles the stronger the GP.
The grouping itself must not favor any direction. It must basically form a straight line. Now this does not mean it must be perfectly straight, it can move slightly up and then come slightly back down. It is just important that it does not have an obvious bias for any direction. The strength of a GP is dependent on the amount of candles in the grouping and the preceding trend. If you have a very strong preceding trend that consists of many candles and the grouping itself has 6 or more candles you can consider it a strong GP. You can also judge strength based on other factors like where it forms, but I will explain that a little later.
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