Alright, let’s dig deep today and get into the specifics on Price Action and how it WILL benefit your trading…
Price Action Analysis (PAA) is an important concept in trading, whether you’re a Day Trader, Swing Trader, or Position Trader. PAA is an in-depth Price Bar / Candlestick study (knowledge) that will help give you an “EDGE” over other Traders because most traders do not understand or take the time to learn what these trading principles mean.
Price Action Analysis is what we like to call “Plain Vanilla Trading” - you do NOT need to use any indicators/oscillators when determining where the market is most likely going to go next or at what levels the market is most likely going to test.
The three primary Time Frames that we suggest using this type of Price Bar / Candlestick Analysis on are the…
As you’ve read in the previous lessons, Price Action is an important concept in trading, whether you’re a Day Trader, Swing Trader, or Position Trader. PAA is an in-depth Price-Bar or Candlestick (trader’s choice) knowledge that will help give you an “EDGE…”
…An “EDGE” over Other Traders, since most other traders do not take the time to learn what these trading principles mean, they don’t understand the impact PAA has on market price movement.
So, while many other traders wait for another indicator confirmation, you will be able to see the REALITY of what is going on, and more importantly, what is likely to happen NEXT!
You will often hear experienced traders agree on one thing: “That a market is a market!” The Powerful Price Action Patterns taught in this series are based on the fact that markets are markets, and that LOW RISK, HIGH REWARD potential is available every day simply by deciphering strength or weakness through Price Action Analysis.
Since accurate Price Action Analysis clarifies market REALITY you will find that with a little practice you will want to take down some of the mind cluttering overlays often found on some struggling traders charts (i.e. remember the ‘spaghetti’ analysis paralysis charts).
Major Price Action Analysis Categories
Single Price Bar or (1) Candlestick price patterns
Double Price Bar or (2) Candlesticks price patterns
Price Bar / Candlestick Analysis
Price Bar / Candlestick Analysis means to interpret what the OPEN, HIGH, LOW, andCLOSE did on a particular Price Bar / Candlestick and compare that criteria to the previous Price Bar / Candlestick in order to make intelligent conclusions about the market.
NOTE: Chart Illustrations and Diagrams are shown in both Price Bars and Candlesticks so as to appeal to different trader’s personal preference of charts.
Price Bar/Candlestick Analysis also provides the Trader precise insight as to where the market is most likely going to trade next or at least what areas the market will most likely test. It will help you tremendously in zeroing in on what the market has done recently and what it’s most likely going to do next – with a HIGH PROBABILITY.
First… is the market TRENDING or trading SIDEWAYS?
Second… look at the current Price Bar/Candlestick,
Third… analyze the previous Price Bar/Candlestick.
Now we are going to move on to 3 Types of Candlesticks YOU need to know...
Today we’re going to get into the analysis of each price bar/candlestick so you can begin reading the market like a daily newspaper...
The 9 Price Bars/Candlesticks that YOU need to know are:
Each Vertical (Price) Bar/Candlestick taught here says something about the market and, when you know the meaning behind each one of them, you will be able to determine what the market is most likely going to do on the following Price Bar/Candlestick.
These nine price bars are very reliable and predictable, offering high probability and low risk trading opportunities, when trading at logical SUPPORT in a defined UPTREND and/or at logical RESISTANCE in a defined DOWNTREND!
Bullish Vertical Bar (BUVB)/Candlestick:
The Bullish Vertical Bar (BUVB)/Candlestick is when the CLOSE closes ABOVE the OPEN and in the TOP QUARTER of the Price Bar / Candlestick’s RANGE.
The Bullish Candlestick will make a HIGHER HIGH and a HIGHER LOW than the Previous Bar/Candlestick, while CLOSING in the TOP QUARTER of the Price Bar’s/ Candlestick’s RANGE. This price action suggests the BULLS won and the likelihood of the market continuing up on the following candlestick is probable.
2. The Bearish Candlestick is when the CLOSE closes BELOW the OPEN and in the BOTTOM QUARTER of the Candlestick’s RANGE.
The Bearish Candlestick will make a LOWER HIGH and a LOWER LOW than the Previous Candlestick, while CLOSING in the BOTTOM QUARTER of the Candlestick’s RANGE. This price action suggests the BEARS won and the likelihood of the market continuing down on the following candlestick is probable.3. The Neutral Vertical Bar/Doji or Spinning Top is when the CLOSE of a Candlestick is EQUAL or within a few price increments of the OPEN of the same Candlestick AND the OPEN and CLOSE are near the MIDRANGE (50%) of the Candlestick.
When a Doji or Spinning Top becomes an Inside Vertical Bar/Harami (discussed in next email) coupled with being a Weak-Range Candlestick (also discussed in next email), it makes the Doji or Spinning Top most neutral. This type of Price Action denotes uncertainty in the market and may indicate a reversal and/or are found near a reversal in the market. Dojis or Spinning Tops may also indicate that a Trending Market may be stalling just before resuming in the direction of the original TREND.
NVBs / Dojis & Spinning Tops at BOTTOMS, TOPS, & CONTINUATIONs
Next let's discuss 3 Candlestick patterns, they are:
1) Outside Vertical Bar (OVB) or Engulfing Pattern
2) Inside Vertical Bar (IVB) or Harami Pattern
3) Expanded Range Candlestick
1. The Engulfing Pattern is when the HIGH is Higher than the Previous Candlestick's HIGH and the LOW is Lower than the Previous Candlestick's LOW.
The Engulfing Pattern’s price action suggests one of two things:
some news event affected the market or
the market is beginning to TREND in the direction of the CLOSE of the Engulfing Pattern, unless the market is trading inside of a Trading Range.
It’s especially important to note where the Engulfing Pattern CLOSED and what extreme of the Previous Candlestick was exceeded first (the HIGH or LOW).
The BEARISH Engulfing Pattern is just the opposite of the bullish
Alright, let’s now discuss the Inside Vertical Bar (IVB) or Harami Candlestick Pattern
2. The Harami Pattern is the opposite of the Engulfing Pattern. The HIGH and LOW both must be INSIDE the Previous Bar’s/Candlestick’s RANGE; therefore, the HIGH must be Lower than the Candlestick’s HIGH and the LOW must be Higher than the Previous Candlestick’s LOW.
The Harami Pattern price action is similar to the Doji or Spinning Top Pattern, which warns of three potential patterns in the market:
when a market is near a major HIGH or a major LOW, this may suggest a Reversal,
a potential Continuation or Resumption of Trend if the market is trading at SUPPORT in an UPTREND or at RESISTANCE in a DOWNTREND, and
the Harami Pattern occurs roughly 10%15% of the time and suggests indecisionin the marketplace, whether a market is Trending or Non-Trending. Volatility usually increases within a few Candlesticks following a Harami Pattern.
The Harami Pattern represents indecision in the market; therefore, it is better safe than sorry to begin tightening up stops once this particular Price Bar / Candlestick Pattern is observed.
Bullish Engulfing Patterns & Harami Patterns at SUPPORT
Bearish Engulfing Patterns & Harami Patterns at RESISTANCE
Alright, on to the last candlestick for this section;
the Expanded Range Candlestick
3. The Expanded Range Candlestick is roughly 250% greater than the average range of the last ten or more Candlesticks.
There will be times the Expanded Range Candlestick will be…
The ERVB Candlestick usually denotes that either a TREND is beginning or that a Trading Range is just starting; regardless, the following Candlestick or two usually will be dull with little volatility before really starting to move again.
Since the Expanded Range Candlestick range is large in nature, it’s completely normal for a market to trade within the RANGE of the Expanded Range Candlestick for the next couple of Price Bars / Candlesticks.
Expanded Range Candlestick with/ LOW/HIGH defining SUPPORT / RESISTANCE
NOW 2 more Candlestick patterns you NEED to know...
2 more important candlesticks you need to know to help you become more profitable in your trading, and really help equip you to be the best trader you can be.
Weak Range Vertical Bar/Candlestick
Weak Inside Vertical Bar/Harami
1. Weak Range Vertical Bar (WRVB) / Candlestick:The Weak Range Vertical
Bar/Candlestick is the smallest range (HIGH minus LOW) of the average range of the last ten or more Candlesticks.
The Weak Range Candlestick typically will put a Trader in “breakout mode” because of the small size of the Candlestick’s RANGE. Weak Range Candlesticks typically will indicate one of two things:
Either way, a market generally will make an explosive move in either direction, and an increase in volatility is likely to occur.
Dojis & Spinning Tops at SUPPORT – Continuing TREND
Dojis & Spinning Tops at RESISTANCE – Continuing TREND
2. Weak Inside Harami:
The Weak Inside Harami is the smallest range (HIGH minus LOW) of the average range of the last ten or more Candlesticks with the HIGH and the LOW both INSIDE thePrevious Candlestick’s Range.
The Weak Inside Vertical Bar (WIVB) / Harami is a very powerful “breakout trade set-up” because of the small size of the Candlestick’s RANGE.
Weak Harami’s do not happen too frequently:
Weak Harami at SUPPORT
Weak Harami at RESISTANCE
Alright, let’s get right into the LAST candlestick you need to know to help you become more profitable in your trading, and really help equip you to be the best trader you can be.
Alright, let’s discuss the Reversal Candlestick:
There are two types of Reversal Vertical Bars (RVB) / Reversal Candlesticks:
A Reversal Candlestick should warn you that the market is trying to reverse – at least for the short term. The Candlestick following the Reversal Candlestick should have at least some follow-through in the direction of the CLOSE of the Bearish Dark Cloud Cover or Bullish Piercing Line.
BEARISH Reversal /Dark Cloud Cover
The Bearish Dark Cloud Cover is when a market makes higher HIGHs and higher LOWs than the previous Candlestick and CLOSES BELOW the OPEN of the same candlestick in the LOWER QUARTER of the RANGE. The Bearish Dark Cloud Cover should warn you that the market may be trying to reverse:
BULLISH Reversal /Piercing Line
The Bullish Piercing Line is when a market makes lower HIGHs and lower LOWs than the previous Candlestick and CLOSES ABOVE the OPEN of the same candlestick in the UPPER QUARTER of the RANGE. The Bullish Piercing Line should warn you that the market may be trying to reverse:
If a market is weak (strong to the downside) and a Bullish Piercing Line occurs while the market is testing a Major LOW followed by some follow-through to the upside, the market may be setting up for a potential double bottom. Thus, when a market is testing a Major LOW combined with a Reversal Candlestick, we like to call this a Key Reversal Candlestick.
Price Bars / Candlestick Patterns YOU Need To Know
This just paid for my trip to Maui. Am glad I took my laptop on vacation. I’m up over $2,500. Thanks for a great trade. -Chuck H.
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Have a great day and I hope today’s lesson helps…be sure to drop me a line.
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