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The following patterns are the most common, and powerful, indicators of a candlestick revteisä:

* Spinning lops.

* Evening and morning stars.

* Triple or double tops.

* Crown or head and shoulders patterns.

IJojis are powerful reversal indicating candlesticks and are formed when lho currency price opens and closes at the same level, implying indecision in 1hc currency's price. Dfljis become a mos! significant reversal signal when seen afler an extended rally of long-bodied candles.

Remember, a doji can only be a reversal pattern if there is a large move in place. II" nol, what exact ly is it reversing then? If ihey are in a range bound market, they are much less important. Don't read too much Into them without big moves behind lhem. See Figure 12.2.

Spinning 'Fops

Spinning Lops denote situations where the market is having difficulty coming to a consensus on a currency's value. They portray a market in which uncertainty and indecision prevail. Neither the buyers nor the sellers have

Candlestick Panerns

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a dear sense of which diredion the market will head. The forces of supply and demand are equally balanced.

Like Doji, they are particularly important at the end of a long nai. A spinning lop is aciearsignlhal the powerful trend Is naming oui of steam. See Figure 12.3.

As the old cliche goes: "When In doubt, stay out" The spinning Lop candles express dotibl and confusion on the part of the market. Until the situation is clear, forex traders should focus on looking for confirmation of a trend reversal:

• What do your indicators say? Is there MACD divergence1? Is RSI overbought or oversold?

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■ WliaL is the next candle? Ia it going againsL the trend after the spinning top'? Did it engulf the candle before the spinning Lop'? If so. we can see a morning or evening star.

• flow far is Lhe price reversal irom the nearest expononlia! moving average or reversal pivot poinL?

The bottom line: Do no1 place a trade just because you see a spurning top. Use it like a trend reversal warning. It's only a heads up.

If you are in a positive trade, especially with two or three long candles going in your direction, and then you see a spinning top, you should cither:

• Move your stop loss closer to protect the profit or MAI'.

It's a gootl idea 10 move your stop loss and let your profits run, ItuL money iu the bank is also a good idea What should you do? FoDow your Irading plan.

Pmiinliirp K\ILing

A word of advice: If you seem Lo mow your slops only 10 have price come back to knock you out and continue back in the direction you traded. don'L grow frustrated. FToctis on what made you move your stop prematurely in the first place. What spooked you?

L'nlil you can manage your sLops correctly, you need to practice. However. you also need 1o earn pips. So until you improve, you need to change your behavior. For a few trades, instead of moving your stop, just close the trade and take the profit. Even though you exited the trade, pretend that, you only nioved your slop and see what happens.

Many traders find that ihey move their stop at Is or 20 pips profit and get stopped out at breakeven over and over. Hie advantage of this tactic is that you still get practice moviivg stops, but you also get to keep the pips. I ley, two or throe Lrades like Lhis add up to good pips and you are learning, tool

Spinning tops form for one of two reasons:

1., The strong trend has just knocked out a tot of stop losses for people Lrading in the opposite direction. If this is the case, there is a good chance that they will reverse their position and put iu a new order going In the direction of the new trend. This would produce a pause in Lhe

Candlestick Patterns market. seen as a spinning lop. You may also see a short retracement lotho 61.8 percent Fibonacci. See Figure 12.-1.

The strong trend was likely loo fast, probably producing long candles. This #as good for some but likely surprised most. The lucky traders with floating profits start to feel like the good limes nia(y not last. A spinning top could be a sign of traders cashing out at the end of a ¡rend.

livening ami Homing Sliirs

The star pattern occurs during a sustained trend. On the first candle we see a long body. Everything looks normal and the trend appears to have full control of price. On ihe second candle: however, a siar candle orcurs. The star can be either green or red. A star candle has a small real body and often contains a large wick.

The stiu communicates that Ihe bulls and bears ar& involved in a Lug of war. yet neither side is winning. Altera sustained uptrend, those who want to take profits have come into balance with those eager to buy the currency.

A huge upper shadow indicates tliat the trend could not sitstaiii its prole into new ground. A potential reversal lias been signaled.

In the third period, a candle with a red body emerges. This candle retreats sulistanlially into the body of the ftrsl candle. The pattern is made

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Tactical planning more powerful if ¡here is a gap between ihe second and third period candles. The further this ihird candle retreats into the real body of 1ho first candle, the more powerful the reversal signal.

turning Sliir. Homing Sliir

Ttie morning star formation is the exact opposite. It occurs in a downtrend and starts with a large red candle. On the second c nndle, a star forms. The third candle completes the reversal by closing well into the body of the iirst candle. See figure 12.5.

Note thai this reversal patient is simply an established trend with mt unusually big candle at 1lte end, followed by a spinning top that is a sign of uncertainty, and then completed with a fairly large pull back candle in the opposite direction of the ¡rend. This pattern is often seen when traders arc taking profit, usually at support or resistance. Therefore, it's a great opportunity for a reversal of trend: a changing of the guard between the bulls and bears. Again, no trend: no reversiil.

Triple or Double Tups l>ouble and triple tops are very common and veiy powerful candle formations. Vou see them on your charts because a Level of supporl/Tesislanee was hit by a trend. Trice then retreated, gathered new strength, and attempted to pierce the support/resistance level again. See Figure 13.6.

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Wouldn't you know ii, price failed yet again. This is a huge sigua] Lhai. a reversal ia likely, as tlie trend has just run out of steam.

While in the range produced by a triple Lop, pay close allentior to yoiu oscillators such as MACD or stochastic. You can do some short-term trades. then when the range is broker, you can return i o spot Lrades after price has reversed and a now momentum appears.

f ¿ron ii tu IIcjhI unit Shoulders PaUrnts

1 really like crown patterns. They work tire same as a triple lop candle formation, with ore dislinct difference, the center point, or head, is higher than the other two points or shoulders. I (ind them easier to spot because it reaiiy is a failed continuation pattern, thereby, a "reversal pattern'

Crowns are easy to spot because the right shoulder does not make a higher hiah {or lower low if it is a downtrend :■. The top of the first shoulder becomes the new resistance leve!. So when you see price reverse al this new resistance level, sit up and take notice. See Figure 12.7.

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When iL breaks through the old support level crealed from the first shoulder's Low, you will liave a new trend. Support lias become resistance and Lhe trend has reversed.

Don't gel hogged down in the details, however. An uptrend, for example, is a series of higher highs and higher lows. A crown pattern is simply showing you Lhal a lower high has been made and the uptrend is Likely to have reversed. That's all il is. Not too complicated when you think of it that way.

Again, if there is no previous trend in place, it's nol Likely a reversal pattern becatLse there is nolhing to reverse. Don't just trade lhe patterns, step hack and see lhe bigger picture.

! like crown patterns because tliey signal a new trend. I really love continuation patlems (as shown In Figure I2.fi'! because they keep the new trend going. This is when you let yota profits run. enter a trend late because you

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did not spot the previous trend reversal, or If you are an advanced trader, when you can add additional lots.

Not only that, they are clear signs of where support levels are and suggest fantastic places to pul or move slop losses. Price makes a new trend, retraces a bit, and then takes off again—continuation.

Look at these greal examples. Notice that Lhe continuation patterns and crown patterns work even on the weekly charts. Yes. they work (in all time frames, not just iutraday charts. This shows how powerful these candle formal ions are. Take a look at the weekly Chart in Figure 12. t).

Can you see the crown pattern I've outlined above? This is a clear reversal signal. The chart is no longer foiming Lower lows and lower highs. The trend has been broken jmd momentum is itow moving up. Now, let's watch what happens next In Figure 12.10.

You will see our crown at the bottom Left comer. Look what then happened over and over again: continuation patterns' Notice lhe vert strong trend of higher highs and higher lows. Ttiis trend continued for two years, and the end was signaled by another crown pattern. The reversal from a bull market to a bear market was obvious.

You should ride these continuation patterns until you see a reversal pattern. Remember, the trend is your friend. When you see a patuse in the

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trend, create trade plana 1hai wiH put you into the trend when iL shows signs of continuing.

Do not hot against tlic Hand. This means price must stop making new highs/lows, the fust signs of reversal, before even thinking of trailing against the trend. Once you have a lower high or higher low, then yon can plan for a reversal.

Candlesticks work grea! in a trending market. They are used in conjunction uith other fomrs of technical analysis. They also work best a1 levels previously identified as support or resistance. This is an important poim to remember, as candlesticks can help ,vou see if a trend is running out of steam or not. They can also keep you in a trending trade.

Inutgine if you were la a trend trade and you were profiting well. Mice! However, price is get Ling closer and clthser to resistance. What do you do: Take prut'Lt or let it run? Let's wait and see.

Price hits lire resislance. What happens? Was it riding the 5, 21, or 6£? The faster the speed of 1he market, the more confident you should be Llia.1 :1 will break resistance; however, yon are still likely to see hesitation or pullback.

So it's riding the 21. It's a pretty good market, but it could be exhaling. Now Look at the oS. How far is it front lire 21? Wide angie and separation between the two shows more streirglh than (lat and narrow. The more strength that appears in the 21/55, the more confident you should be that price will break through the resistance level.

Oh, so the speed of the market is ¡ooking like it is flattening? The dis-tiurce between the 21/Ü5 is diminishing.1 Your confidence of brcakntg above the resistance should wane.

Right at resistance, the next candle was a spinning top. No big deal; however, you were expeclirtg price to respect the resistance level. You are worried about a reversal a1 thia level. A spinning lop doesn't add to or subtract from your confidence.

The third candle at the resistance level is big and red. On i1s own, 51 would be a bearish engulfing candle. This means it is very red and very big compared to the other candles arorutd it. However, combined wilh the previous two candles, a reversal candlestick formation has formed: 1he evening star reversal pattern.

This is exactly the sort of evidence you were looking for: a reversal pattern at resistance while the market is slowing. You now haw enough in-formation to cash out of your bullish trade. You decide to lake your prolits and run.

Tactical plunking

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