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Thursday, April 19, 2012

The Dark-Cloud Cover Pattern

Dark-Cloud Cover

The Dark-cloud Cover pattern is a bearish trend reversal or top reversal pattern that appears in an uptrend and signals a potential weakness in the uptrend. It is a two-candlestick pattern and is the antithesis of the piercing pattern. As it is a bearish trend reversal pattern, the dark-cloud cover pattern is only valid if it appears in an uptrend. The first candlestick in this pattern must be a light candlestick with a large real body. The following candlestick should be a dark candlestick that opens above the high of the first candlestick but closes well into the real body of the first candlestick, signaling a change in sentiment. The pattern is more reliable if the second candlestick closes below the middle of the first candlestick, with the deeper the penetration of the second candlestick the more significant it becomes. It also becomes more significant if the two candlesticks that form the pattern are Marubozu candlesticks with no upper or lower shadows.

As with most trend reversal patterns, the dark-cloud cover pattern becomes more reliable depending on where it appears on the price chart in relation to trendlines, pivot point, and support and resistance lines, etc. A dark-cloud cover pattern at or near a trendline or a resistance line can be used as confirmation that the test of the trendline is more likely to fail. The high point of the dark-cloud cover pattern can also serve as a resistance line, and a possible location for a stop loss.

This article was taken from http://www.chart-formations.com/candlestick-patterns/dark-cloud-cover.aspx

Trading the Inside Bar Strategy in Forex

Inside Bar Forex Trading Entry

Inside bars are one of my favorite price action setups to trade with; they are a high-probability trading strategy that usually provides traders with a good risk reward ratio since they typically require smaller stop losses than other setups. I like to trade inside bars on the daily chart time frame in strong trending markets, as I have found over the years that inside bars are best in trending markets as breakout plays in the direction of the trend. Let’s discuss some facts about inside bar trading and go over some examples of how to trade them.

What is an inside bar?

An inside bar is a bar or series of bars which is/are completely contained within the range of the preceding bar, i.e., it has a higher low and lower high than the bar immediately before it (some traders use a more lenient definition of inside bars to include equal bars). On a smaller time frame a daily chart inside bar will look like a triangle.

Note in the daily chart example below we have two “coiling” inside bars (smaller and smaller inside bars) that are within the range of the preceding bar which we call the “mother bar”. The example below shows inside bars that led to a breakout play in an up-trending market.

What does an inside bar mean?

The inside bar forex trading strategy is a ‘flashing light’, a major signal to the trader that reversal or continuation is about to occur.

An inside bar indicates a time of indecision or consolidation. Inside bars typically occur as a market consolidates after making a large directional move, they can also occur at turning points in a market and at key decision points like major support/resistance levels.

They often provide a low-risk place to enter a trade or a logical exit point. Note in the image below we see an example of an inside bar that formed as a continuation signal and then one that formed as a turning point signal. While they can be used in both scenarios, inside bars as continuation signals are more reliable and easier for beginning traders to learn. Turning-point inside bar signals are better left for more advanced forex price action traders.

inside-bar-images

The best time use the inside bar signal

The most logical time to use an inside bar is when a strong trend is in progress or the market has clearly been moving in one direction and then decides to pause for a short time. If we play the break out, our stop loss can be defined by placing it below the half way point of the mother candle, or for the more conservative trader, below the mother bar itself. This would mean that the market must break a 3 bar low to take us out of the trade.

Inside bars can be used when trading a trend on the 240 minute charts or the daily Forex charts, but I personally prefer to trade inside bars on the daily charts and I recommend all beginning traders should stick to the daily charts until they have fully mastered and found consistent success with the inside bar setup on that time frame.

Note on the daily AUDUSD chart below, we can see two inside bar setups that occurred with the recent near-term market momentum. As they broke out they both led to large directional moves and provided for an excellent risk reward ratio.


This article was taken from http://www.learntotradethemarket.com/forex-trading-strategies/inside-bar-forex-strateg

Support and Resistance (S/R) Lines

Support and Resistance Lines

Support and Resistance lines are often confused with trend lines but they are horizontal lines drawn under the minor lows and above the highs respectively. They indicate where a previous rally met resistance that drove the price down and where a previous decline met support that pushed the price back up. These are two important levels in terms of trend identification since an uptrend will tend to break through previous resistance levels to make higher highs while a down trend will break through the previous support levels under the market to make lower lows. When the support line below the recent minor low in broken in an uptrend, it indicates that the uptend is weakening and may reverse soon. Similarly, when the recent resistance line in a down trend is broken, it indicates that the trend is weakening and that a trend reversal may occur. When a support or a resistance line is broken, it often swaps around to become a resistance or support line for future price movements.

How to Draw Support and Resistance Lines

Knowing where to draw the trend lines takes a little experience but improves dramatically if you can identify the minor peaks and minor troughs. Generally a minor peak is formed when the high of the bar or candlestick is higher that the high of the bars or candlesticks on either side. Larry Williams refined this method by requiring that the bar on the right cannot be an inside bar but must have a lower low. Otherwise that bar is not valid.

Support and resistance lines can also be identified in areas of congestion where prices battled to close higher or lower. These areas can be identified by the length of time the price struggled at a level and/or the amount of volume that was traded at that level.

Finally, the support and resistance lines on charts with a larger time-frame are more significant than support and resistance lines on charts with a short timeframe. Thus, the support and resistance line on a weekly chart is more significant than the support and resistance line on a daily chart; and the support and resistance line on a daily chart is more significant than the support and resistance line on an hourly chart; etc. However, old support and resistance lines tend to lose significance with the passage of time.

Of course, the type of chart you use will also affect how the support and resistance levels are drawn:

  • On a line graph, which only plots closing prices; the support lines are drawn below the dips in the close price and the resistance lines are drawn at the top of the peaks.
  • On an OHLC bar chart it is better to draw the support and resistance lines so that the spikes are ignored. This means drawing the support lines at the open or close price, depending on which is lower, and drawing resistance line at the open or close price, depending on which is higher.
  • The same applies to candlestick charts where you should ignore the wicks or shadows and draw the support lines at the bottom of the real body of the candlestick that forms the low point, and the resistance line at the top of the real body of the candlestick the forms the peak.
  • Support and resistance lines on a Point and Figure chart is the easiest to draw as the support lines are simply at the top of the peaks and the resistances line are simply at the bottom of the dips.

This article was taken from http://www.chart-formations.com/chart-patterns/support-and-resistance.aspx

The Engulfing Pattern

Engulfing Patterns

The engulfing pattern is the inverse of the harami pattern with the exception that the candlesticks that make up the pattern cannot be the same color. It is similar to the outside reversal pattern. Like the harami pattern, the engulfing pattern consists of two candlesticks with the first candlestick being a relatively short candlestick with a short real body and the second being a large candlestick with a big real body that engulfs the real body of the first candlestick. The engulfing pattern can be either bearish or bullish, depending on its location on the price chart. In addition, the colors of the candlesticks are significant.

Firstly, the engulfing pattern is a trend reversal pattern and must therefore appear in an existing trend. The pattern is more reliable if it appears at or near a support or resistance line, or a trendline. Secondly, the colors of the candlesticks are important. In an uptrend, the first candlestick in the pattern must be light indicating that it closed higher than its open price. The second, larger candlestick must then be dark, indicating that its close was lower than its opening price. The small real body of the first candlestick indicates a degree of indecision and uncertainty about the uptrend. Then large body of the second candlestick indicates that supply has exceeded demand and that the onset of a down trend is very possible. Conversely, in a down trend, the first candlestick in the pattern must be dark in color indicating that it closed lower than its open price. The second, larger candlestick must then be light, indicating that it closed higher than its opening price. The small real body of the first candlestick indicates a degree of indecision and uncertainty in the down trend and the large body of the second candlestick indicates that demand has exceeded supply and that the onset of an uptrend is very possible. Thirdly, the length of the first candlestick's real body is significant as a smaller real body implies greater indecision and uncertainty. Fourthly, volumes on the second candlestick should be higher than on the first.

This article was taken from http://www.chart-formations.com/candlestick-patterns/engulfing.aspx

The Harami Pattern

Harami

The harami pattern is the opposite of the engulfing pattern, except that the candlesticks in the harami can be the same color, and is quite similar to the inside day pattern in OHLC charts. Like the engulfing pattern, the harami pattern consists of two candlesticks with the first candlestick being a large candlestick and the second being a relatively small candlestick. The name is derived from the Japanese word for pregnant, with the first candlestick seen as the "mother" with a large real body that completely enclosing or embodies the smaller second candlestick, creating the appearance of a pregnant mother. The second candlestick may appear to be a spinning top or a doji. When the second candlestick is a doji, the pattern is called a harami cross.

The color of the second candlestick is not important. More often than not the second candlestick will be the opposite color of the first candlestick> However, the location of the harami within an existing trend and the direction of that trend is important. The harami is a trend reversal pattern and must therefore appear in an existing trend but it should be seen in the context of the chart. Thus, if the harami appears at or near a support or resistance line, or a trend line, it becomes more significant. When the harami appears in an uptrend it is a bearish signal when it appears in a down trend it is a bullish signal. The appearance of the harami, and the short real body of the second candlestick, is a signal that indecision and uncertainty following a sudden surge in movement of the trend is causing the trend to lose momentum. In an uptrend, it means that buyers have failed to follow up on the surge of activity and close the second candlestick at or near the high of the previous candlestick. And in a down trend, it means that sellers have failed to close the second candlestick near the low of the previous candlestick. In both cases this weakness indicates that a trend reversal may be imminent.

This article was taken from http://www.chart-formations.com/candlestick-patterns/harami.aspx