2
Introduction
I want to thank you and congratulate you for downloading my
book, Candlestick Profits. This book contains proven techniques
and strategies on how to trade candlestick charts successfully.
With techniques I manly mean the candlestick charting method.
Strategies are the patterns you trade in conjunction with your
trading plan.
Thanks again for downloading, I really hope you get the best out
of this book! - Johan Nordstrom
3
Copyright 2015 by Johan Nordstrom. All rights reserved.
This document is geared towards providing exact and reliable
information in regards to the topic and issue covered. This
information is for your personal use only. You cannot distribute,
copy, reproduce, or otherwise sell this product or information in
any form whatsoever, including but not limited to: electronic, or
mechanical, including photocopying, recording, or by any
informational storage or retrieval system without expressed
written, dated and signed permission from the publisher. All
copyrights are reserved.
4
Contents
Candlestick Charting................................................................ 6
The Power of Candlestick Charting .................................................. 6
Candlestick History ....................................................................... 7
How to Succeed with Candlestick Charting ....................................... 8
Candlestick Charting Help You Avoid Mistakes .................................. 8
Get An Advantage Over Other Traders ......................................10
Increase Your Edge ...................................................................... 11
Candlestick Construction .........................................................12
The Advantage Over Bar Charts ..................................................... 13
Tips for Emotion Free Charting ...................................................... 14
Winning Patterns ...................................................................16
Long Body Candle ........................................................................ 17
Doji and Small Body Candle .......................................................... 19
Hammer and Inverted Hammer ..................................................... 22
Learning the Patterns ................................................................... 25
Tips for Trading Candlesticks Successfully ....................................... 25
Winning Candlestick Techniques ...............................................27
Adopting to Volatility .................................................................... 27
Avoid Patterns Inside Trading Range .............................................. 27
Doji and Small Body Candle Breakouts ........................................... 28
Long Body Candle Support and Resistance ...................................... 29
Develop an Understanding of The Psychology .................................. 30
Determine The Strength of a Trend ................................................ 33
Candlestick Strategies ............................................................35
The Hammer Strategy .................................................................. 35
The Inverted Hammer Strategy ..................................................... 37
The 50% Support Strategy ........................................................... 39
The 50% Resistance Strategy........................................................ 41
The Break of Three Strategy ......................................................... 44
The Break of Three Short Strategy ................................................. 45
Combining Candlestick Patterns with Technical Analysis ..............48
Support and Resistance Levels ...................................................... 48
Supply and Demand Zones ........................................................... 49
Fibonacci Levels .......................................................................... 51
Trend Lines ................................................................................ 53
Indicators ................................................................................... 55
Conclusion ............................................................................59
5
Candlestick Charting
Candlestick charting has a valuable aspect. It is visually easy to
see patterns and overall trend in the charts. This is an essential
part for any technical trader to master. In todays trading
environment you need to have a clear plan and rules on how you
will trade profitably. Fortunately, the graphic picture that
candlestick charting express make it easy to take profitable
actions.
6
moment, the bears are in control. Having the insight of change in
sentiment and how traders react to price movements provides
the candlestick trader with a powerful advantage.
Candlestick History
The charting method was built over a four hundred-year period.
Rationality dictates that a charting method that has endured that
long must work. The first candlestick traders broke the trading
period down to how the price opened, what the high and low was
during the period, and how the price closed.
The patterns were analyzed trade after trade, and year after
year. Many patterns were evaluated and the results were
patterns that produced profits so pronounced that they have
remained in existence for centuries. This fact alone is the most
powerful testimony that candlestick charting works.
7
How to Succeed with Candlestick Charting
Even though candlestick patterns will give you an edge over
other traders, it is not a 100 percent winning method, so you will
need to follow some general trading principles if you want to
succeed:
Have a trading plan - the set of rules and strategies you will
follow to profit in trading.
Develop discipline - essential for helping you follow your
plan when you have had 3 or more losses in a row.
Journal and track your trades - important for finding
mistakes and develop to become a better trader.
Eliminate emotions - important for stopping fear and greed
to ruin your trading. Emotion free trading allows you to
make rational decisions and you will not have to wish that
the trade you just opened will work.
Do not follow tips - traders who succeed are independent
and follow their own analysis.
Before you open a trade - decide on the entry level, stop
loss level, and target level.
8
Allowed fear to scare you out at the bottom or greed to pull
you in at the top?
Sold out of your profitable positions too early because you
are afraid they will pull back and turn into losses?
Hung on to your losing positions as they ratchet down, each
little up-tick giving you hope, but finally selling out at the
bottom because the pain is too great?
9
Get An Advantage Over Other
Traders
An edge is defined as an advantage over other people. So you
understand that having an edge when trading is important.
Trading is a zero sum game, those with an edge win, and those
without one lose. It is all about probabilities. Candlestick charts
will provide you with a powerful edge that will help you profit.
10
How many winning trades in relation to losing trades you
have.
How big winning trades is in relation to losing trades.
11
Candlestick Construction
Candlestick charting is so powerful it can be used in all time
frames and in stocks, futures, forex and every other market that
have an open, close, high and low. If we look at a daily time
frame, one candle (session) represents that days trading range.
Above you can see how the candlestick is constructed and looks
compared to a bar chart. The horizontal lines represent the open
and the close. The painted section is the candle body. The candle
body is green if the close is higher than the open. If the close is
lower than the open, the candle body is read. The lines above
and below the candle body are called tails. The top of the upper
tail is the sessions high and the bottom of the lower tail is the
sessions low of the day.
12
The Advantage Over Bar Charts
The different colors of the candle bodies provide rapid visual
interpretations. A declining series of red candles is clearly
interrupted when a green candle appears which attracts the
attention of your eye immediately. This is something that would
not happen when viewing bar charts.
13
Upgrade on Emotion Free Charting
The color does not have to be red and green. Red and green
coloring can actually be bad for some people because colors can
be associated with negative emotions. Example; a series of big
red candles form, a trader with negative feeling associated to red
can get scared and avoid taking a trade. It can also be a series of
green candles forming, a trader can feel overconfident that it is
going to continue up when in fact it is right at a resistance level
and ready to reverse.
14
15
Winning Patterns
In this chapter you will learn the winning bullish and bearish
candlestick patterns to maximize profits. Candlestick patterns are
mainly reversal signals, but that does not mean you only have to
trade them for trend reversals. You can also trade candlestick
patterns in pullbacks (or trend pauses).
The reason why trend reversals are hard to trade is since trends
often takes time to stop and reverse. Think of a trend like a car
driving on a road, it takes time for the car to stop (trend stop)
and turn (trend reverse) if the speed is high (if the trend is
strong).
Candlestick patterns can be used for both entry and exit signals,
most other trading techniques only give you the entry signal, not
the exit signal that often is the more important since you want to
ride the trend as long as possible without giving up to much
profit when the turning point comes.
16
Long Body Candle
A long body candle with no or short tail indicates strong buying
or selling. The longer the body is, the more powerful the buying
or selling activity. A small body candle with no or short tail
implies very little buying or selling activity.
17
reversal is confirmed (learn more in the strategy
chapter; The 50% Support Strategy)
In a neutral trend/consolidation:
The bulls are ready to take control given that the close
of the candle is above the last high of the
consolidation
Note: this the preferred candle pattern to confirm
breakouts (learn more in the strategy chapter; The
Break of Three Strategy)
18
continue in the bearish direction (learn more in the
strategy chapter; The 50% Resistance Strategy)
Succeeding a bearish trend:
The trend is intact and bears are in control
Note: if a long body candle appears late in a trend it
can be a blow out (last push before an retrace or
reversal)
In a neutral trend/consolidation:
The bears are ready to take control given that the
close of the candle is above the last high
Note: this the preferred candle pattern to confirm
breakouts (learn more in the strategy chapter; The
Break of Three Short Strategy)
19
A session where the open and close has almost the same price is
called a small body candle and have the same logic as a doji.
This is a candle that signals indecision between bulls and bears.
The length of the tails will give you good information about the
volatility. Longer tails imply greater volatility which means
greater profits if you know how to trade them correctly. The color
has little importance on whether it is a bullish or bearish pattern,
a green candle is somewhat more bullish than a doji and a red
candle is somewhat more bearish than a doji.
20
The doji and small body candle signals:
Succeeding a bullish trend:
That the trend could reverse or just pausing, neither
bears or bulls are in control
Succeeding a bearish trend:
That the trend could reverse or just pausing, neither
bears or bulls are in control
21
In a neutral trend/consolidation:
Nothing specific since it is in range (see more in the
techniques chapter Avoid Patterns Inside Trading
Range)
Note: if formed at the high or low that have not been
tested it can create a hammer and a strategy setup
(learn more in the strategy chapter; The Hammer
Strategy and The Inverted Hammer Strategy)
Note: if several dojis or small body candles forming at
the high or low of the range were high or low already
have been tested it could be charging for a breakout
(learn more in the strategy chapter; The Break of
Three Strategy)
The length of the tails will give you good information about the
volatility. Longer tails imply greater volatility which means
greater profits if you know how to trade them correctly.
22
The hammer signals:
Succeeding a bullish trend:
Bears had control but bulls recovered during the end
of the session and are now back in control (during the
session this candle was a long body candle)
Note: this can be an indication that bulls are losing
strength
Succeeding a bearish trend:
Bulls surprised bears who thought they were in control
(during the session this candle was a long body
candle), possible trend reversal (learn more in the
strategy chapter; The Hammer Strategy)
In a neutral trend/consolidation:
Nothing specific since it is in range (see more in the
techniques chapter Avoid Patterns Inside Trading
Range)
23
The inverted hammer signals:
Succeeding a bullish trend:
Bears surprised bulls who thought they were in control
(during the session this candle was a long body
candle), possible trend reversal (learn more in the
strategy chapter; The Inverted Hammer Strategy)
Succeeding a bearish trend:
Bulls had control but bears recovered during the end
of the session and are now back in control (during the
session this candle was a long body candle)
Note: this can be an indication that bears are losing
strength
In a neutral trend/consolidation:
24
Nothing specific since it is in range (see more in the
techniques chapter Avoid Patterns Inside Trading
Range)
25
2. Formulate the conditions meet when the pattern occur and
write them down (IF = THEN).
3. Take screenshots and copy into your trading plan.
4. Trade your trading plan with discipline.
5. Journal your trades and actions and write down your
thoughts and feelings before and after the trade.
6. Analyze your trades and actions; use your strength and
improve on your weaknesses and mistakes.
7. Make improvements to your trading plan adjusting it to
your strengths.
26
Winning Candlestick Techniques
Adopting to Volatility
You probably know that falling markets are more volatile than
rising markets in most cases. Price often shows higher
recognition at first test to resistance in rising markets than
support at first test in falling markets. It is just like a car driving
downhill, it will have a longer breaking distance than a car
driving uphill. You can use this knowledge in trading by adopting
your trading strategy to take advantage of this.
27
where they occur at support and resistance levels and avoid
patterns inside a trading range.
28
Long Body Candle Support and Resistance
A long body candle is a sign of strength and therefore these
candles will have hidden support and resistance levels. The level
you want to be trade is at the 50% level of the candle body.
29
Develop an Understanding of The Psychology
Understanding the psychology behind candles is much more
important than remembering the name since these patterns not
always look exactly the same every time. Developing an
understanding of the price moves and how candles is formed will
give you information into what the market psychology is, and you
will easily spot changes in the sentiment of the market. The
technique below about determining strength is one way to
understand the psychology.
30
A hammer and inverted hammer have tails. The hammer has a
long lower tail and short or no upper tail; this means there has
been a bulls rejection during the session. Bears forced price
lower but bulls quickly came in and drove prices back up to end
the session.
31
The inverted hammer has a long upper tail and short lower tail;
this means there is a bears rejection during the session. Bulls
force price higher but bears quickly came in and drove prices
down to end the session.
A doji and the small body candle also have tails. Comparing the
small body candle and doji with the long body candle you can
understand that the bulls and bears have much more strength in
the long body candle.
The doji or small body candle has a long lower tail and long or
upper tail; this means there has been a bulls and bears rejection
during the session. Bears forced price lower but bulls quickly
came in and drove prices up then bears came in again and drove
prices down to the open price at the end the session.
32
Or bulls forced price higher but bears quickly came in and drove
prices down then bulls came in again and drove prices up to the
open price at the end the session.
33
The length of the candle bodies and the tails (price action that is
outside the body of the candle) of the candles can give you a
good indication of the health or strength of a trend. A bullish
trend with good health is rising with long body candles and there
is not any long tails above the candlestick bodies. A bearish trend
with good health is falling with long body candles and there is not
any long tails below the candlestick bodies.
34
Candlestick Strategies
Setup
In a downtrend (lower highs and lower lows)
A low has formed (first bottom)
At least two candles are formed with lows above bottom
A candle break below the first bottom but quickly recovers
and closes as a hammer candlestick
Entry
Buy limit order at the hammer close
Stop Loss
One tick below the hammer low
35
Target
3x the stop loss distance (1:3 risk reward)
Examples of Setups
36
The Inverted Hammer Strategy
The logic behind this strategy is the same as for The Hammer
Trade except the trade is in the other direction.
Setup
In an uptrend (higher highs and higher lows)
A high has formed (first high)
At least two candles are formed with highs below the high
A candle break above the first high but quickly fails and
closes as an inverted hammer candlestick
Entry
Sell limit order at the inverted hammer close
Stop Loss
One tick above the hammer high
Target
3x the stop loss distance (1:3 risk reward)
Examples of Setups
37
38
The 50% Support Strategy
Logic behind this strategy; the market direction is indicated by a
long body candle and the strategy uses this by taking a trade at
the 50% level of a long body candle (the median of bullish
orders).
Setup
A long body candle is formed with a range that is 2x the
average candle range and closes in its highest quarter
There is no unfilled 50% Strategy setups in the opposite
direction looking back 50 candles
Entry
Buy limit order at the 50% level of the long body candle
Stop Loss
One tick below the candle low
Trailing stop loss when a candle closes to new highs above
the high of the long body candle; move the stop loss to one
tick below the breakout candle
Target
5x the stop loss distance (1:5 risk reward)
Examples of Setups
39
40
The 50% Resistance Strategy
Logic behind this strategy; the market direction is indicated by a
long body candle and the strategy uses this by taking a trade at
the 50% level of a long body candle (the median of bearish
orders).
Setup
A long body candle is formed with a range that is 2x the
average candle range and closes in its lowest quarter
There is no unfilled 50% Strategy setups in the opposite
direction looking back 50 candles
Entry
Sell limit order at the 50% level of the long body candle
41
Stop Loss
One tick above the candle high
Trailing stop loss when a candle closes to new lows below
the low of the long body candle; move the stop loss to one
tick above break out
Target
5x the stop loss distance (1:5 risk reward)
Examples of Setups
42
43
The Break of Three Strategy
The logic behind the break of three setup correlated with The
Hammer Trade because it takes advantage of the strength of
the reaction that is the result from a failed Hammer Trade. It is
a breakout that occurs at the third test of a level that fails (as
long as the conditions are intact the strategy is valid for a
breakout on the fourth or fifth test of the level).
Setup
In an uptrend (higher highs and higher lows)
A new high is formed
A second high is formed close to the first high (the second
high is the breakout level)
Higher lows
Entry
Buy market order one tick above the breakout level
Stop Loss
One tick below the lowest candle between the second high
and the breakout
Target
2x the stop loss distance (1:2 risk reward), if you are bold
you can go with 3x the stop loss distance
Examples of Setups
44
The Break of Three Short Strategy
A breakout strategy that occurs at the third test of a level that
fails (as long as the conditions are intact the strategy is valid for
a breakout on the fourth or fifth test of the level).
45
Setup
In an downtrend (lower highs and lower lows)
A new low is formed
A second low is formed close to the first low (the second
low is the breakout level)
Lower highs
Entry
Sell market order one tick below the breakout level
Stop Loss
One tick above the highest candle before between the
second low and the breakout
Target
2x the stop loss distance (1:2 risk reward)
Examples of Setups
46
47
Combining Candlestick Patterns
with Technical Analysis
In this chapter we will look at some of the most popular technical
methods in combination with the candlestick patterns you just
learned. You will get an understanding on how you can use the
patterns with your current trading style. By combining
candlestick patterns with your favorite technical analysis method,
you will most likely improve your performance and profits.
48
Supply and Demand Zones
Trading supply and demand zones are zones price have made a
strong advance or decline from. The logic behind supply and
49
demand zones is that banks and hedge funds decide on specific
zones (prices) where they want to get their orders filled. Their
trading creates strong advance (from demand zone) or a strong
decline (supply zone). Usually their orders are so large they are
not able to get their orders filled so they leave pending orders in
the zone to buy or sell expecting that this price will come back to
this zone so their orders get filled.
50
Fibonacci Levels
Fibonacci levels are based on the numbers identified by Leonardo
Fibonacci, a mathematician in the thirteen-century. The Fibonacci
levels are calculated by dividing the vertical distance between
51
two points (a high and low) by the Fibonacci ratios. The ratios
play an important part in nature and are proven to play an
important part in trading too. Will look at the most important
levels 61.8% and 50% in these examples.
52
Trend Lines
Trend lines can be used to get a visual indication in what
direction the trend is heading. The lines can be used to find
support and resistance levels but they are not as powerful as
horizontal lines since there is a million ways to draw a sloping
trend line. A rising trend line is drawn from left to right
connecting rising bottoms. You need at least two bottoms where
the second is higher than the first to draw a rising trend line. A
falling trend line is drawn from left to right connecting falling
highs.
There are some generalities on trend lines. The longer the trend
line is valid the more significant it become, trend lines drawn
over several years is viewed to be more significant than a trend
53
line drawn over a few days since the second have a higher
probability of being broken.
54
Indicators
Disclaimer: I do not recommend using indicators if you can read
candlesticks (price) and levels. Indicators are calculated on price
and therefore, indicators will not increase your edge or give you
any more information what is already in the charts.
55
Momentum Indicators
If you like momentum indicators, you can use them in
combination with candlestick patterns. Momentum indicators
intended use is to identify when a move from overbought to
oversold areas or from oversold to overbought happens. The
definition of overbought according to momentum indicators;
when price rises above symmetry and becomes expensive
relative to the prevailing trend. Momentum indicators can also be
used to analyze the strength or speed of the trend.
56
70 is considered overbought when the trend is neutral, but if the
trend is up, a RSI value above 70 can be a confirmation that the
trend is still strong and that price will continue to higher prices. A
RSI value below 30 is considered oversold, if in neutral trend, but
if price is in a downtrend it can be considered to be a trend
confirmation. In the chart you can see that RSI gives an
overbought value when price is in the upper range of the neutral
trend channel and an oversold value when price is in the lower
range.
57
58
Conclusion
Thank you again for downloading this book!
I hope you learned much from this book about how you can
increase your edge in the market using candlestick charting and
that you understand the benefits of quickly determine if bulls or
bears are in control. Now you have an arsenal of powerful buy
and sell signals. I wish you good trading and profits!
Finally, if you enjoyed this book, then I would like to ask you for
a favor, would you be kind enough to leave me a review for this
book? Email me at johan@tradingwalk.com
Thank you!
- Johan Nordstrom
59