Posts Tagged ‘Japanese Candlesticks’

Everything you learn about trading is like a tool that is being added to your trader’s toolbox. Your tools will give you a better chance of making good trading decisions when you use the right tool at the right time.

Bollinger Bands.

  • Used to measure the market’s volatility.
  • They act like mini support and resistance levels.

Bollinger Bounce

  • A strategy that relies on the notion that price tends to always return to the middle of the Bollinger bands.
  • You buy when the price hits the lower Bollinger band.
  • You sell when the price hits the upper Bollinger band.
  • Best used in ranging markets.

Bollinger Squeeze

  • A strategy that is used to catch breakouts early.
  • When the Bollinger bands “squeeze”, it means that the market is very quiet, and a breakout is eminent. Once a breakout occurs, we enter a trade on whatever side the price makes its breakout.


  • Used to catch trends early and can also help us spot trend reversals.
  • It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which measures the distance between the 2 moving averages.
  • Contrary to what many people think, the moving average lines are NOT moving averages of the price. They are moving averages of other moving averages.
  • MACD’s downfall is its lag because it uses so many moving averages.
  • One way to use MACD is to wait for the fast line to “cross over” or “cross under” the slow line and enter the trade accordingly because it signals a new trend.

Parabolic SAR

  • This indicator is made to spot trend reversals, hence the name Parabolic Stop And Reversal (SAR).
  • This is the easiest indicator to interpret because it only gives bullish and bearish signals.
  • When the dots are above the candles, it is a sell signal.
  • When the dots are below the candles, it is a buy signal.
  • These are best used in trending markets that consist of long rallies and downturns.


  • Used to indicate overbought and oversold conditions.
  • When the moving average lines are above 80, it means that the market is overbought and we should look to sell.
  • When the moving average lines are below 20, it means that the market is oversold and we should look to buy

    Relative Strength Index (RSI)

    • Similar to the stochastic in that it indicates overbought and oversold conditions.
    • When RSI is above 70, it means that the market is overbought and we should look to sell.
    • When RSI is below 30, it means that the market is oversold and we should look to buy.
    • RSI can also be used to confirm trend formations. If you think a trend is forming, wait for RSI to go above or below 50 (depending on if you’re looking at an uptrend or downtrend) before you enter a trade.

    Average Directional Index (ADX)

    • The ADX measures how strong a trend is.
    • It fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings above 50 signaling a strong trend.
    • ADX can be used as confirmation whether the pair could possibly continue in its current trend or not.
    • ADX can also be used to determine when one should close a trade early. For instance, when ADX starts to slide below 50, it indicates that the current trend is losing steam.

    Ichimoku Kinko Hyo

    • Ichimoku Kinko Hyo (IKH) is an indicator that gauges future price momentum and determines future areas of support and resistance.
    • Ichimoku translates to “a glance”, kinko means “equilibrium”, while hyo is Japanese for “chart”. Putting that all together, the phrase ichimoku kinko hyo stands for “a glance at a chart in equilibrium.”
    • If the price is above the Senkou span, the top line serves as the first support level while the bottom line serves as the second support level. If the price is below the Senkou span, the bottom line forms the first resistance level while the top line is the second resistance level.
    • The Kijun Sen acts as an indicator of future price movement. If the price is higher than the blue line, it could continue to climb higher. If the price is below the blue line, it could keep dropping.
    • The Tenkan Sen is an indicator of the market trend. If the red line is moving up or down, it indicates that the market is trending. If it moves horizontally, it signals that the market is ranging.
    • The Chikou Span is the lagging line. If the Chikou line crosses the price in the bottom-up direction, that’s a buy signal. If the green line crosses the price from the top-down, that’s a sell signal.

    Each indicator has its imperfections. This is why traders combine many different indicators to “screen” each other. As you progress through your trading career, you will learn which indicators you like the best and can combine them in a way that fits your trading style.





One sweet way to use moving averages is to help you determine the trend.

The simplest way is to just plot a single moving average on the chart. When price action tends to stay above the moving average, it would signal that price is in a general uptrend.

If price action tends to stay below the moving average, then it would indicate that it is in a downtrend.

The problem with this is that it’s too simplistic.

Let’s say that USD/JPY has been in a downtrend, but a news report comes out causing it surge higher.

You see that the price is now above the moving average. You think to yourself:

“Hmmm… It looks like this pair is about to shift direction. Time to buy this sucker!”

So you do just that. You buy a billion units cause you’re confident that USD/JPY is going to rise.

 Bammm! You got faked out! As it turns out, traders just reacted to the news but the trend continued and price kept heading lower!

What some traders do – and what we suggest you do as well – is that they plot a couple of moving averages on their charts instead of just one. This gives them a clearer signal of whether the pair is trending up or down depending on the order of the moving averages. Let us explain.

In an uptrend, the “faster” moving average should be above the “slower” moving average and for a downtrend, vice versa. For example, let’s say we have two MAs: the 10-period MA and the 20-period MA. On your chart, it would look like this:

Above is a daily chart of USD/JPY. Throughout the uptrend, the 10 SMA is above the 20 SMA. As you can see, you can use moving averages to help show whether a pair is trending up or down. Combining this with your knowledge on trend lines, this can help you decide whether to go long or short a currency.

You can also try putting more than two moving averages on your chart. Just as long as lines are in order (fastest to slowest in an uptrend, slowest to fastest in an downtrend), then you can tell whether the pair is in an uptrend or in a downtrend.




If you’ve been paying attention in class, you’d know by now that you can combine the Fibonacci tool with support and resistance levels and trend lines to create a simple but super awesome trading strategy.

But we ain’t done yet! In this lesson, we’re going to teach you how to combine the Fibonacci tool with your knowledge of Japanese candlestick patterns that you learned in Grade 2.

In combining the Fibonacci tool with candlestick patterns, we are actually looking for exhaustive candlesticks. If you can tell when buying or selling pressure is exhausted, it can give you a clue of when price may continue trending.

We here at like to call them “Fibonacci Candlesticks,” or “Fib Sticks” for short. Pretty catchy, eh? Let’s take a look at an example to make this clearer.

Below is a 1-hour chart of EUR/USD.

The pair seems to have been in a downtrend the past week, but the move seems to have paused for a bit. Will there be a chance to get in on this downtrend? You know what this means. It’s time to take the Fibonacci tool and get to work!

As you can see from the chart, we’ve set our Swing High at 1.3364 on March 3, with the Swing Low at 1.2523 on March 6.

Since it’s a Friday, you decided to just chill out, take an early day off, and decide when you wanna enter once you see the charts after the weekend

Whoa! By the time you popped open your charts, you see that EUR/USD has shot up quite a bit from its Friday closing price.

While the 50.0% Fib level held for a bit, buyers eventually took the pair higher. You decide to wait and see whether the 61.8% Fib level holds. After all, the last candle was pretty bullish! Who knows, price just might keep shooting up!

Well, will you look at that? A long legged doji has formed right smack on the 61.8% Fib level. If you paid attention in Grade 2, you’d know that this is an “exhaustive candle.” Has buying pressure died down? Is resistance at the Fib level holding? It’s possible. Other traders were probably eyeing that Fib level as well.

Is it time to short? You can never know for sure (which is why risk management is so important), but the probability of a reversal looks pretty darn good!

If you had shorted right after that doji had formed, you could have made some serious profits. Right after the doji, price stalled for a bit before heading straight down. Take a look at all those red candles!

It seems that buyers were indeed pretty tired, which allowed sellers to jump back in and take control. Eventually, price went all the way back down to the Swing Low. That was a move of about 500 pips! That could’ve been your trade of the year!

Looking for “Fib Sticks” can be really useful, as they can signal whether a Fib level will hold.

If it seems that price is stalling on a Fib level, chances are that other traders may have put some orders at those levels. This would act as more confirmation that there is indeed some resistance or support at that price.

Another nice thing about Fib Sticks is that you don’t need to place limit orders at the Fib levels. You may have some concerns whether the support or resistance will hold since we are looking at a “zone” and not necessarily specific levels.

This is where you can use your knowledge of candlestick formations.

You could wait for a Fib Stick to form right below or above a Fib level to give you more confirmation on whether you should put in an order.

If a Fib stick does form, you can just enter a trade at market price since you now have more confirmation that level could be holding.



Another good tool to combine with the Fibonacci tool is trend line analysis. After all, Fibonacci levels work best when the market is trending, so this makes a lot of sense!

Remember that whenever a pair is in a downtrend or uptrend, traders use Fibonacci retracement levels as a way to get in on the trend. So why not look for levels where Fib levels line up right smack with the trend?

Here’s a 1-hour chart of AUD/JPY. As you can see, price has been respecting a short term rising trend line over the past couple of days.


You think to yourself, “Hmm, that’s a sweet uptrend right there. I wanna buy AUD/JPY, even if it’s just for a short term trade. I think I’ll buy once the pair hits the trend line again.”

Before you do that though, why don’t you reach for your forex tool box and get that Fibonacci tool out? Let’s see if we can get a more exact entry price.

Here we plotted the Fibonacci retracement levels by using the Swing low at 82.61 and the Swing High at 83.84.

Notice how the 50.0% and 61.8% Fib levels are intersected by the rising trend line.

Could these levels serve as potential support levels? There’s only one way to find out!

Guess what? The 61.8% Fib level held, as price bounced there before heading back up. If you had set some orders at that level, you would have had a perfect entry!

A couple of hours after touching the trend line, price zoomed up like Astroboy on Red Bull, bursting through the Swing High.

Aren’t you glad you’ve got this in your forex toolbox now?

As you can see, it does pay to make use of the Fibonacci tool, even if you’re planning to enter on a retest of the trend line. The combination of both a diagonal and a horizontal support or resistance level could mean that other traders are eying those levels as well.

Take note though, as with other drawing tools, drawing trend lines can also get pretty subjective.

You don’t know exactly how other traders are drawing them, but you can count on one thing – that there’s a trend!

If you see that a trend is developing, you should be looking for ways to go long to give you a better chance of a profitable trade. You can use the Fibonacci tool to help you find potential entry points.



Back in Grade 1, we said that support and resistance levels eventually break. Well, seeing as how Fibonacci levels are used to find support and resistance levels, this also applies to Fibonacci!

Now, let’s go through an example when the Fibonacci retracement tool fails.

Below is a 4-hour chart of GBP/USD.

Here, you see that the pair has been in downtrend, so you decided to take out your Fibonacci tool to help you spot a good entry point. You use the Swing High at 1.5383, with a swing low at 1.4799.

You see that the pair has been stalling at the 50.0% level for the past couple of candles.

You say to yourself, “Oh man, that 50.0% Fib level! It’s holding baby! Time to short this sucka!”

You short at market and start day dreaming that you’ll be driving down Rodeo Drive in your new Maserati with Scarlett Johansson (or if you’re a lady trader, Robert Pattinson) in the passenger seat…

Now, if you really did put an order at that level, not only would your dreams go up in smoke, but your account would take a serious hit if you didn’t manage your risk properly!

Take a look at what happened.

It turns out that that Swing Low was the bottom of the downtrend and market began to rally above the Swing High point.

What’s the lesson here?

While Fibonacci levels give you a higher probability of success, like other technical tools, they don’t always work. You don’t know if price will reverse to the 38.2% level before resuming the trend.

Sometimes it may hit 50.0% or the 61.8% levels before turning around. Heck, sometimes price will just ignore Mr. Fibonacci and blow past all the levels just like how Lebron James bullies his way through the lane with sheer force.

Remember, the market will not always resume its uptrend after finding temporary support or resistance, but instead continue to go past the recent Swing High or Low.

Another common problem in using the Fibonacci tool is determining which Swing Low and Swing High to use.

People look at charts differently, look at different time frames, and have their own fundamental biases. It is likely that Stephen from Pipbuktu and the girl from Pipanema have different ideas of where the Swing High and Swing Low points should be.

The bottom line is that there is no absolute right way to do it, especially when the trend on the chart isn’t so clear. Sometimes it becomes a guessing game.

That’s why you need to hone your skills and combine the Fibonacci tool with other tools in your forex toolbox to help give you a higher probability of success.

In the next lesson, we’ll show you how to use the Fibonacci tool in combination with other forms of support and resistance levels and candlesticks.



The first thing you should know about the Fibonacci tool is that it works best when the market is trending.

The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending up, and to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending down.

In order to find these retracement levels, you have to find the recent significant Swing Highs and Swings Lows. Then, for downtrends, click on the Swing High and drag the cursor to the most recent Swing Low.

For uptrends, do the opposite. Click on the Swing Low and drag the cursor to the most recent Swing High.

Got that? Now, let’s take a look at some examples on how to apply Fibonacci retracements levels in the markets.


This is a daily chart of AUD/USD.

Here we plotted the Fibonacci retracement Levels by clicking on the Swing Low at .6955 on April 20 and dragging the cursor to the Swing High at .8264 on June 3. Tada! The software magically shows you the retracement levels.

As you can see from the chart, the retracement levels were .7955 (23.6%), .7764 (38.2%), .7609 (50.0%), .7454 (61.8%), and .7263 (76.4%).

Now, the expectation is that if AUD/USD retraces from the recent high, it will find support at one of those Fibonacci levels because traders will be placing buy orders at these levels as price pulls back.

Now, let’s look at what happened after the Swing High occurred.

Price pulled back right through the 23.6% level and continued to shoot down over the next couple of weeks. It even tested the 38.2% level but was unable to close below it.

Later on, around July 14, the market resumed its upward move and eventually broke through the swing high. Clearly, buying at the 38.2% Fibonacci level would have been a profitable long term trade!


Now, let’s see how we would use the Fibonacci retracement tool during a downtrend. Below is a 4-hour chart of EUR/USD.

As you can see, we found our Swing High at 1.4195 on January 26 and our Swing Low at 1.3854 a few days later on February 2. The retracement levels are 1.3933 (23.6%), 1.3983 (38.2%), 1.4023 (50.0%), 1.4064 (61.8%) and 1.4114 (76.4%).

The expectation for a downtrend is that if price retraces from this low, it will encounter resistance at one of the Fibonacci levels because traders will be ready with sell orders there.

Let’s take a look at what happened next.

Yowza, isn’t that a thing of beauty?! T

he market did try to rally, stalled below the 38.2% level for a bit before testing the 50.0% level. If you had some orders either at the 38.2% or 50.0% levels, you would’ve made some mad pips on that trade.

In these two examples, we see that price found some temporary support or resistance at Fibonacci retracement levels. Because of all the people who use the Fibonacci tool, those levels become self-fulfilling support and resistance levels.

One thing you should take note of is that price won’t always bounce from these levels. They should be looked at as areas of interest, or as Cyclopip likes to call them, “KILL ZONES!” We’ll teach you more about that later on.

For now, there’s something you should always remember about using the Fibonacci tool and it’s that they are not always simple to use! If they were that simple, traders would always place their orders at Fib levels and the markets would trend forever.

In the next lesson, we’ll show you what can happen when Fibonacci levels fail.



We will be using Fibonacci ratios a lot in our trading so you better learn it and love it like your mother’s home cooking. Fibonacci is a huge subject and there are many different Fibonacci studies with weird-sounding names but we’re going to stick to two: retracement and extension.

Let us first start by introducing you to the Fib man himself…Leonardo Fibonacci.

No, Leonardo Fibonacci isn’t some famous chef. Actually, he was a famous Italian mathematician, also known as a super duper uber ultra geek.

He had an “Aha!” moment when he discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe.

The ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…

This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.

After the first few numbers in the sequence, if you measure the ratio of any number to the succeeding higher number, you get .618. For example, 34 divided by 55 equals .618.

If you measure the ratio between alternate numbers you get .382. For example, 34 divided by 89 = 0.382 and that’s as far as into the explanation as we’ll go.

These ratios are called the “golden mean”. Okay that’s enough mumbo jumbo. With all those numbers, you could put an elephant to sleep. We’ll just cut to the chase; these are the ratios you HAVE to know:

Fibonacci Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci Extension Levels
0, 0.382, 0.618, 1.000, 1.382, 1.618

You won’t really need to know how to calculate all of this. Your charting software will do all the work for you. Besides, we’ve got a nice Fibonacci calculator that can magically calculate those levels for you. However, it’s always good to be familiar with the basic theory behind the indicator so you’ll have the knowledge to impress your date.

Traders use the Fibonacci retracement levels as potential support and resistance areas. Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become a self-fulfilling prophecy.

Traders use the Fibonacci extension levels as profit taking levels. Again, since so many traders are watching these levels to place buy and sell orders to take profits, this tool tends to work more often than not due to self-fulfilling expectations.

Most charting software includes both Fibonacci retracement levels and extension level tools. In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.

A Swing High is a candlestick with at least two lower highs on both the left and right of itself.

A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.

You got all that? Don’t worry, we’ll explain retracements, extensions, and most importantly, how to grab some pips using the Fib tool in the following sections.