Candlestick Basics – The Language of Price Action

What Candlesticks Actually Show (Beyond the Textbook Definition)

The Textbook Says:

“A candlestick shows four price points: Open, High, Low, and Close (OHLC) for a specific time period.”

That’s technically true and practically useless.

Here’s what candlesticks REALLY show:

Candlesticks are a visual representation of the battle between buyers and sellers during a specific time period.

Every candle tells a story of that battle:

• Who started winning (the open)
• How far each side pushed (the highs and lows)
• Who ended up winning (the close)

Let me show you with a real example:

Anatomy of a Candlestick (Detailed Breakdown)

         ↑ Upper Wick/Shadow
         |
    ┌────┐
    │    │ ← Body (Real Body)
    │    │
    └────┘
         |
         ↓ Lower Wick/Shadow

Let’s build a candlestick in real-time to understand each component:

Monday, 9:00 AM – The Candle Opens

EUR/USD opens at 1.0850

    •  ← Price starts here (Open: 1.0850)

9:05 AM – Buyers Push Up

Buyers come in aggressively. Price rises to 1.0870.

    | ← High: 1.0870
    |
    •  ← Open: 1.0850

9:15 AM – Sellers Fight Back

Sellers enter. They push price down to 1.0840.

    | ← High: 1.0870
    |
    •  ← Open: 1.0850
    |
    | ← Low: 1.0840

9:30 AM – Battle Continues

Price fluctuates between buyers and sellers. Goes back up to 1.0865, down to 1.0845, up to 1.0868…

9:59 AM – Final Minute

As the 1-hour candle closes, price settles at 1.0860.

         | ← High: 1.0870
    ┌────┐
    │    │ ← Close: 1.0860
    │    │ ← Open: 1.0850  
    └────┘
         | ← Low: 1.0840

The Completed Candle Shows:

Open: 1.0850 (where the battle started)
High: 1.0870 (maximum buyer strength)
Low: 1.0840 (maximum seller strength)
Close: 1.0860 (who won the battle)

Reading the Story in This Candle

What happened during this hour?

1. Started at 1.0850 (neutral)
2. Buyers pushed to 1.0870 (+20 pips) – Buyers showing strength
3. Sellers pushed back to 1.0840 (-30 pips from high) – Sellers fought hard
4. But closed at 1.0860 (+10 pips from open) – Buyers won the hour

The Story:

Buyers started strong, pushing 20 pips up. Sellers countered aggressively, pushing back 30 pips. But buyers regained control and closed above the open.

This candle is slightly BULLISH.

Bullish vs Bearish Candles (With Real Psychology)

Bullish Candle (Buyers Won)

Close (1.0860) ─┐ ← Higher than open
                │
                │ GREEN/WHITE Body
                │
Open (1.0850) ──┘ ← Started here

What it means:

• Buyers were stronger than sellers
• Price ended higher than it started
• Momentum is upward
• More buying pressure than selling pressure

Platform Display:

• Usually colored GREEN or WHITE
• Body grows upward from open to close

Bearish Candle (Sellers Won)

Open (1.0850) ──┐ ← Started here
                │
                │ RED/BLACK Body
                │
Close (1.0840) ─┘ ← Lower than open

What it means:

• Sellers were stronger than buyers
• Price ended lower than it started
• Momentum is downward
• More selling pressure than buying pressure

Platform Display:

• Usually colored RED or BLACK
• Body grows downward from open to close

The Power of Candle Bodies (Size Matters)

Not all bullish candles are created equal. The SIZE of the body tells you HOW STRONG the buyers/sellers were.

Large-Bodied Bullish Candle

         | ← High: 1.0900
    ┌────┐
    │    │
    │    │
    │    │ ← Large body (50 pips)
    │    │
    │    │
    └────┘ ← Open: 1.0850
         | ← Low: 1.0845

What it shows:

• Open: 1.0850
• Close: 1.0900 (+50 pips)
• Small wicks (little resistance)
• STRONG buying pressure
• Buyers dominated the entire session
• High conviction move

Trading Signal: Strong bullish momentum, likely to continue

Small-Bodied Bullish Candle

         | ← High: 1.0870
    ┌────┐
    │    │ ← Tiny body (5 pips)
    └────┘
         | ← Low: 1.0840

What it shows:

• Open: 1.0850
• Close: 1.0855 (+5 pips only)
• Long wicks both sides
• Weak, indecisive battle
• Neither side could win decisively
• Lots of back-and-forth

Trading Signal: Indecision, low conviction, possible reversal coming

The Crucial Role of Wicks (Rejection Stories)

Wicks (also called shadows or tails) show price levels that were tested but REJECTED.

This is where the real trading intelligence lives.

Long Upper Wick (Rejection of Higher Prices)

         | ← High: 1.0900 (rejected!)
         |
         | ← Long upper wick
    ┌────┐
    │    │ ← Small body
    └────┘
         | ← Short lower wick

The Story:

What happened:

• Buyers pushed price from 1.0850 to 1.0900 (+50 pips)
• Looked like strong buying
• BUT sellers came in HARD at 1.0900
• Pushed price all the way back down
• Closed near the open at 1.0855

What it means:

• 1.0900 is RESISTANCE
• Sellers are defending that level aggressively
• Buyers tried and FAILED to break through
• Upper wick = Bearish rejection signal

Trading Implication:

• Don’t buy near 1.0900 (resistance proven)
• If price approaches 1.0900 again, expect rejection
• Possible sell opportunity at 1.0900

Real Example:

GBP/USD, March 15, 2024, daily candle:

• Opened at 1.2650
• Pushed to 1.2750 (intraday high, +100 pips)
• UK inflation data disappointed
• Sellers crushed it back down
• Closed at 1.2660 (+10 pips only)
• Massive 90-pip upper wick

Traders who saw this wick knew: 1.2750 is strong resistance, don’t buy there.

Next day, price tried 1.2750 again → Rejected again → Fell to 1.2580.

The wick predicted the move.

Long Lower Wick (Rejection of Lower Prices)

         | ← Short upper wick
    ┌────┐
    │    │ ← Small body
    └────┘
         |
         | ← Long lower wick
         |
         | ← Low: 1.0800 (rejected!)

The Story:

What happened:

• Sellers pushed price from 1.0850 down to 1.0800 (-50 pips)
• Looked like strong selling
• BUT buyers came in HARD at 1.0800
• Pushed price all the way back up
• Closed near the open at 1.0845

What it means:

• 1.0800 is SUPPORT
• Buyers are defending that level aggressively
• Sellers tried and FAILED to break through
• Lower wick = Bullish rejection signal

Trading Implication:

• Don’t sell near 1.0800 (support proven)
• If price approaches 1.0800 again, expect bounce
• Possible buy opportunity at 1.0800

Real Example:

EUR/USD, February 20, 2024, 4-hour candle:

• Opened at 1.0820
• Dropped to 1.0770 (intraday low, -50 pips)
• US economic data came in weak (Dollar weakness)
• Buyers jumped in aggressively at 1.0770
• Closed at 1.0825 (+5 pips above open)
• 55-pip lower wick

Traders who saw this wick knew: 1.0770 is strong support.

Next session, price tested 1.0770 again → Bounced → Rallied to 1.0880.

Again, the wick predicted it.

Doji Candles: The Ultimate Indecision Signal

What is a Doji?

A candle where open and close are virtually identical (or within 1-2 pips).

         | ← High
         |
    ─────  ← Open = Close (tiny or no body)
         |
         | ← Low

What it means:

Neither buyers nor sellers could win. The session ended exactly where it started despite all the fighting.

Psychology:

• Intense battle
• Equal strength on both sides
• Nobody could take control
• Indecision and uncertainty

Types of Doji Patterns:

1. Long-Legged Doji (High Volatility Indecision)

         | ← Very high
         |
    ─────  ← Open = Close
         |
         | ← Very low

Story:

• Massive price swings during session
• Buyers pushed hard → Sellers pushed hard
• Ended exactly where it started
• Extreme indecision after volatile battle

Trading Signal:

• Possible reversal coming
• Trend exhaustion
• Wait for next candle confirmation

2. Dragonfly Doji (Bullish Reversal)

    ─────  ← Open = Close = High
         |
         |
         | ← Long lower wick

Story:

• Sellers dominated early, pushing price way down
• But buyers came back STRONG
• Pushed price all the way back to the open
• Sellers tried and failed to close lower

Trading Signal:

• Bullish reversal, especially at support
• Sellers exhausted, buyers taking control
• Look for buy opportunities

Real Example:

USD/JPY at 148.00 support level:

• Opened at 148.00
• Dropped to 147.20 (sellers pushing hard)
• Buyers defended 147.20 aggressively
• Closed back at 148.00
• 80-pip lower wick, no body = Dragonfly Doji

Next candle: Bullish 60-pip rally to 148.60

3. Gravestone Doji (Bearish Reversal)

         | ← Long upper wick
         |
    ─────  ← Open = Close = Low

Story:

• Buyers dominated early, pushing price way up
• But sellers came back STRONG
• Pushed price all the way back down to the open
• Buyers tried and failed to close higher

Trading Signal:

• Bearish reversal, especially at resistance
• Buyers exhausted, sellers taking control
• Look for sell opportunities

Real Example:

GBP/USD at 1.2800 resistance:

• Opened at 1.2800
• Rallied to 1.2870 (buyers pushing hard)
• Sellers defended 1.2870 aggressively
• Closed back at 1.2800
• 70-pip upper wick, no body = Gravestone Doji

Next candle: Bearish 80-pip drop to 1.2720

Spinning Tops: Small Bodies, Long Wicks

         | ← Long upper wick
    ┌────┐
    │    │ ← Very small body
    └────┘
         | ← Long lower wick

What it shows:

• Both buyers and sellers pushed hard
• But neither could maintain control
• Small body = minimal net gain/loss
• Indecision, low conviction

When it matters:

• After strong trend → Possible reversal
• At support/resistance → Indecision at key level
• During consolidation → Continuation of indecision

Trading Strategy:

• Don’t trade spinning tops alone
• Wait for directional candle confirmation
• Use as “caution” signal

Marubozu: No Wicks, Pure Conviction

Bullish Marubozu

    ┌────┐
    │    │
    │    │ ← Large body
    │    │ ← No wicks (or tiny)
    │    │
    └────┘

What it shows:

• Opened at the low
• Closed at the high
• Buyers controlled entire session
• Never let sellers gain any ground
• Pure buying pressure

Trading Signal:

• Extremely strong bullish momentum
• Trend likely to continue
• Ideal for trend-following entries

Bearish Marubozu

    ┌────┐
    │    │
    │    │ ← Large body
    │    │ ← No wicks (or tiny)
    │    │
    └────┘

What it shows:

• Opened at the high
• Closed at the low
• Sellers controlled entire session
• Never let buyers gain any ground
• Pure selling pressure

Trading Signal:

• Extremely strong bearish momentum
• Downtrend likely to continue
• Ideal for shorting opportunities

Reading Candles in Context (Critical Concept)

Individual candles mean little. Candles in CONTEXT mean everything.

Example 1: Same Candle, Different Meanings

Bullish engulfing candle at different locations:

At Support Level:

Support 1.0800 ──────────────
         ↓
    [Small red]
    [LARGE GREEN] ← Bullish engulfing

Meaning: Strong reversal signal, BUY

At Resistance Level:

                [LARGE GREEN] ← Bullish engulfing
                   ↑
Resistance 1.0900 ──────────────

Meaning: Likely to fail at resistance, DON’T BUY (or even SELL)

Same pattern, opposite meanings based on WHERE it appears.

Example 2: Doji Context Matters

Doji After Strong Uptrend:

      /
     /  ← Strong uptrend
    /
   /
  ─  ← Doji appears

Meaning: Possible trend exhaustion, buyers losing steam, watch for reversal

Doji in Middle of Range:

      ↕
      ─  ← Doji
      ↕

Meaning: Just more indecision in a ranging market, ignore it

Lesson: Never trade a candle pattern in isolation. Always consider:

• Where is it appearing? (support, resistance, middle of nowhere)
• What came before it? (trend, range, consolidation)
• What’s the bigger timeframe showing?

Part 2: Support and Resistance – The Framework of Price Movement

If candlesticks are the language of price action, support and resistance are the sentence structure—the framework that gives that language meaning.

What Support and Resistance REALLY Are

The Textbook Definition:

“Support is a price level where buying pressure prevents further decline. Resistance is a price level where selling pressure prevents further rise.”

Again, technically true, practically useless without understanding WHY.

The Psychology Behind Support and Resistance

Support and resistance exist because of human psychology and memory.

Let me prove this with a real scenario:

The Story of 1.0800

January 15, 2024 – EUR/USD drops to 1.0800

Trader A: "I'll buy at 1.0800, this looks like a good price"
→ Buys 0.20 lots

Trader B: "Me too, 1.0800 seems solid"
→ Buys 0.15 lots

Trader C: "I want in at this level"
→ Buys 0.10 lots

[Hundreds of other traders also buy at 1.0800]

Price bounces from 1.0800 → Rallies to 1.0900

Everyone who bought at 1.0800 made money. They remember this level.

January 29, 2024 – EUR/USD drops again toward 1.0800

Current price: 1.0820, falling toward 1.0800

Trader A thinks: "1.0800 worked last time, I'll buy again"
Trader B thinks: "1.0800 was great support before, buying again"
Trader C thinks: "That level worked perfectly, I'm buying"
[Hundreds remember 1.0800 as a winning level]

What happens?

As price approaches 1.0800:

• Trader A places buy order at 1.0805
• Trader B places buy order at 1.0802
• Trader C places buy order at 1.0800
• Hundreds more place buy orders near 1.0800

Price hits 1.0803 and BOUNCES

Why? Because collective memory created a cluster of buy orders at that level.

That’s support.

Now let’s see what creates RESISTANCE:

February 10, 2024 – EUR/USD rallies to 1.0900

Trader D: "Ugh, I bought at 1.0950 last month, been underwater ever since"
Trader E: "Same, I bought at 1.0945, would love to break even"
Trader F: "I'm long from 1.0940, finally almost break-even!"
[Hundreds of traders stuck in losing positions above 1.0900]

As price approaches 1.0900:

Trader D thinks: "If it hits 1.0950, I'm getting out at break-even"
Trader E thinks: "Please hit 1.0945 so I can exit this nightmare"
Trader F thinks: "1.0940 and I'm DONE with this trade"
[Hundreds planning to sell and exit near their entry prices]

What happens?

Price hits 1.0920 and suddenly:

• Trader F sells (exits at 1.0940)
• Trader E sells (exits at 1.0945)
• Others sell (taking profits from lower levels)
• NEW sellers see rejection and pile in

Price drops back to 1.0870

That’s resistance.

The Three Types of Support/Resistance

1. Horizontal Support/Resistance (Most Common)

Resistance ───1.0900──────────
                ↕
                ↕ Trading range
                ↕
Support ──────1.0800──────────

Horizontal levels where price has reversed multiple times.

How to identify:

1. Look for price levels that caused reversals previously
2. Mark them with horizontal lines
3. The more times price bounced, the stronger the level

Example:

EUR/USD daily chart:

• Nov 10: Dropped to 1.0800, bounced
• Nov 24: Dropped to 1.0805, bounced
• Dec 8: Dropped to 1.0798, bounced
• Dec 20: Dropped to 1.0802, bounced

1.0800 is now STRONG SUPPORT (4 successful tests)

2. Dynamic Support/Resistance (Moving Averages, Trend Lines)

Moving Averages as Dynamic Levels:

Price ─────────
         ↘
          50-day MA ─────
              ↗

Common moving averages used:

• 20-period (short-term)
• 50-period (medium-term)
• 200-period (long-term)

How they work:

In uptrends, moving averages act as SUPPORT:

• Price pulls back to 50 MA
• Bounces and continues up
• MA acts as “dynamic support”

Real Example:

GBP/USD daily chart, Q4 2023:

• Strong uptrend from 1.2000 to 1.2800
• Every pullback touched 50-day MA
• Bounced every single time (7 touches)
• 50-day MA = Perfect dynamic support during that trend

Trend Lines as Dynamic Levels:

       /
      / ← Uptrend line (support)
     /
    /
   /

How to draw:

• Connect two or more swing lows (uptrend)
• Connect two or more swing highs (downtrend)
• The line extends into the future

Trading Strategy:

• In uptrend: Buy when price touches trend line support
• In downtrend: Sell when price touches trend line resistance

3. Psychological Round Numbers

Humans love round numbers. Traders place orders at round numbers. This creates support/resistance.

Common psychological levels:

• .0000 (1.1000, 1.2000, 150.00)
• .5000 (1.0500, 1.2500)
• .2500 or .7500 (less common but still relevant)

Example:

USD/JPY testing 150.00:

• Not just a round number
• Huge psychological barrier
• Japanese government historically intervenes near 150
• Massive resistance at 150.00

What happened in 2024:

• Sept 28: Hit 150.05, rejected → fell 80 pips
• Oct 3: Hit 150.12, rejected → fell 120 pips
• Oct 11: Hit 150.32, BROKE THROUGH → rallied to 151.50

Three rejections then break = Classic resistance behavior

Support Becomes Resistance (And Vice Versa)

This is one of the most reliable concepts in technical analysis.

The Rule:

• When support breaks, it becomes resistance
• When resistance breaks, it becomes support

Why?

Scenario: 1.0800 Support Breaks

Before the break:

Trader A: Long from 1.0800, in profit
Trader B: Long from 1.0800, in profit
Trader C: Long from 1.0800, in profit

Price breaks below 1.0800:

Current price: 1.0750 (-50 pips)

Trader A: "I'm down $100, if it gets back to 1.0800 I'm OUT"
Trader B: "Lost $75, please come back to 1.0800 so I can exit"
Trader C: "Down $50, 1.0800 and I'm selling immediately"

Price rallies back toward 1.0800:

1.0780... 1.0785... 1.0790... 1.0795...

Traders A, B, C all have sell orders ready at 1.0800
+ NEW sellers seeing resistance test
= Massive sell orders clustered at 1.0800

Price hits 1.0798 → REJECTED → Falls back to 1.0720

Former SUPPORT is now RESISTANCE.

Visual Example:

        Resistance
Before: ─────1.0900─────────
              ↕
              ↕
        Support
        ─────1.0800─────────
              ↓
        BREAK ↓
              ↓
After:        ↑
        Resistance (former support!)
        ─────1.0800─────────
              ↕
              ↕
        New Support
        ─────1.0700─────────

How to Trade Support and Resistance

Strategy 1: Bounce Trading (Range-Bound Markets)

Setup:

Resistance ─────1.0900─────────
              ↕
           SELL here ↓
              ↕
              ↕
           BUY here ↑
              ↕
Support ────────1.0800─────────

Rules:

1. Identify clear support and resistance
2. Wait for price to reach the level
3. Look for rejection candle (long wick)
4. Enter in direction of bounce
5. Target the opposite level

Example Trade:

EUR/USD at support 1.0800:

• Price drops to 1.0800
• Forms bullish pin bar (long lower wick)
• Entry: 1.0805 (just above support)
• Stop: 1.0785 (20 pips below support)
• Target: 1.0880 (near resistance 1.0900)
• Risk: 20 pips
• Reward: 75 pips
• Risk-reward: 1:3.75 ✓

Strategy 2: Breakout Trading

Setup:

Resistance ─────1.0900─────────
              ↑
           WAIT ↑
              ↑
        BREAK ↑ 
              ↑
        BUY here (after confirmation)

Rules:

1. Identify strong resistance
2. Wait for clean break above (close above level)
3. Wait for retest of broken level (now support)
4. Enter on bounce from new support
5. Target next resistance level

Example Trade:

GBP/USD breaks 1.2800 resistance:

• Previous resistance: 1.2800 (tested 3 times)
• Day 1: Closes at 1.2820 (clean break) ✓
• Day 2: Pulls back to 1.2805 (retest)
• Forms bullish engulfing (rejection of lower prices)
• Entry: 1.2810
• Stop: 1.2780 (30 pips, below broken resistance)
• Target: 1.2920 (next resistance level)
• Risk: 30 pips
• Reward: 110 pips
• Risk-reward: 1:3.67 ✓

Strategy 3: False Breakout (Fakeout) Trading

What’s a false breakout?

Price breaks through support/resistance but quickly reverses back.

Why it happens:

• Stop-loss hunting by big players
• Weak breakout (not enough momentum)
• News event causes spike then reversal

How to trade it:

Resistance ─────1.0900─────────
              ↑ Spike above
            FAKE ← Price quickly returns
              ↓
           SELL here (fade the breakout)

Example:

EUR/USD false breakout above 1.0900:

• Price spikes to 1.0915 (breaks resistance)
• But closes at 1.0895 (back below resistance)
• Forms bearish engulfing or shooting star
• This is a FALSE BREAKOUT

Trade:

• Entry: Sell at 1.0895 (on close below resistance)
• Stop: 1.0920 (25 pips above false breakout high)
• Target: 1.0820 (support level)
• Risk: 25 pips
• Reward: 75 pips
• Risk-reward: 1:3 ✓

Warning: False breakouts are tricky. Need experience to identify in real-time.

Confluence: When Multiple Levels Align

Confluence = Multiple technical factors at the same price level

The more factors align, the stronger the level.

Example of Strong Confluence:

EUR/USD at 1.0800 has:

1. Horizontal support (bounced 3 times previously)
2. 200-day moving average (currently at 1.0805)
3. 61.8% Fibonacci retracement (1.0798)
4. Rising trend line support (touches 1.0802)
5. Psychological round number (1.0800)

5 factors = EXTREMELY STRONG SUPPORT

Trading Implication:

• High probability bounce location
• Excellent risk-reward for buy setup
• Tight stop possible (just below 1.0790)

• If this level breaks, huge move likely (lots of stops below)

Real Trade Example:

Date: March 2024
Pair: EUR/USD
Setup: Confluence at 1.0800

The Setup:

Price falling from 1.0950
Approaching 1.0800

Confluence Factors:
✓ Previous support (Feb 15, Feb 28)
✓ 200-day MA at 1.0805
✓ Fibonacci 61.8% at 1.0802
✓ Trend line from Jan lows
✓ Round number 1.0800

What Happened:

• Price dropped to 1.0803
• Formed dragonfly doji (long lower wick to 1.0795)
• Next candle: Bullish engulfing

Trade Execution:

• Entry: 1.0808 (above confluence zone)
• Stop: 1.0785 (23 pips, just below all confluence factors)
• Target: 1.0900 (previous resistance)
• Risk: 23 pips
• Reward: 92 pips
• Actual result: Hit target in 4 days
• Win: +$92 on 0.10 lots

Why it worked: 5 factors created such strong support that price couldn’t break through.

Part 3: Chart Patterns – Recurring Formations That Predict Movement

Candlesticks show individual battles. Support/resistance shows where battles occur. Chart patterns show how wars unfold.

These patterns repeat constantly because human psychology repeats constantly.

The Three Categories of Chart Patterns

1. Reversal Patterns – Trend is about to change direction
2. Continuation Patterns – Trend is pausing before continuing
3. Bilateral Patterns – Could break either direction

Let’s dive into the most reliable patterns with real trading examples.

Reversal Patterns: When Trends Change Direction

1. Head and Shoulders (Bearish Reversal)

The Most Reliable Bearish Reversal Pattern

Formation:

              Head (highest point)
               /\
              /  \
             /    \
    Left    /      \    Right
  Shoulder /        \ Shoulder
      /\  /          \  /\
     /  \/            \/  \
────/──────────────────────\─── Neckline
   ↓                          ↓
 Break                      Target

Psychology Behind It:

Left Shoulder:

• Uptrend continues
• Price makes new high
• Buyers still in control
• Minor pullback (profit-taking)

Head:

• Price rallies to even HIGHER high
• This looks bullish (new high!)
• But volume is often LOWER (warning sign)
• Pullback is deeper than before

Right Shoulder:

• Price rallies again
• But FAILS to reach head height
• Buyers losing steam
• Sellers gaining confidence
• This is the key: Lower high = trend weakness

Neckline Break:

• Price breaks below neckline (support connecting the two lows)
• Confirmed reversal
• Downtrend begins

Real Example:

GBP/USD, September-October 2024

Chart Formation:

Sept 5: Left Shoulder at 1.3200
Sept 15: Head at 1.3280 (new high)
Sept 20: Pullback to 1.3150 (neckline)
Sept 28: Right Shoulder at 1.3240 (lower than head)
Oct 3: Break of neckline at 1.3150

The Trade:

Entry Setup:

• Wait for close below neckline (1.3150)
• Enter on retest of broken neckline (now resistance)

Entry: Sell at 1.3155 (retest of neckline)
Stop: 1.3195 (40 pips, above right shoulder)
Target: 1.3020 (measured move: head to neckline distance = 130 pips)

Actual Result:

• Oct 5: Retested 1.3152 (perfect entry)
• Oct 6-12: Fell steadily
• Oct 15: Hit 1.3025 (target reached)
• Profit: 130 pips

Win rate on clean H&S patterns: ~65-70%

2. Inverse Head and Shoulders (Bullish Reversal)

Exact opposite of head and shoulders

      Break ↑                    Target ↑
           /\──────────────────────/\
          /  \                    /  \
         /    \  Right           /    \
        /      \ Shoulder       /      \
       /        \/\            /        \
      /          \ Left       /          \
     /            \ Shoulder /            \
    /              \/       /              \
───/────────────────────────────────────────
                Head (lowest point)

Forms at the END of downtrends

Psychology:

Left Shoulder:

• Downtrend continues
• Price makes new low
• Sellers still dominant
• Minor bounce (short covering)

Head:

• Price drops to even LOWER low
• This looks very bearish
• But volume often LOWER (weakness)
• Bounce is stronger than before

Right Shoulder:

• Price drops again
• But FAILS to reach head depth
• Higher low = reversal signal
• Sellers losing power
• Buyers stepping in

Neckline Break:

• Price breaks ABOVE neckline
• Confirmed reversal to uptrend

Trading Strategy (Same as H&S, but inverted):

Entry: Buy on close above neckline
Stop: Below right shoulder
Target: Measured move (head to neckline distance projected up)

3. Double Top (Bearish Reversal)

Simpler than H&S, but still reliable

    Peak 1         Peak 2
      /\            /\
     /  \          /  \
    /    \        /    \
   /      \      /      \
  /        \    /        \
─/──────────\──/──────────\─── Neckline (support)
              \/
            Valley

Psychology:

Peak 1:

• Uptrend hits resistance
• Sellers defend level
• Price pulls back

Valley:

• Buyers try to push up again
• Forms temporary support

Peak 2:

• Price rallies back to same resistance
• Fails again at same level
• This is crucial: Can’t break through twice = strong resistance

Neckline Break:

• Support at valley breaks
• Downtrend confirmed

Real Example:

EUR/USD, January 2024

Formation:

Jan 8: Peak 1 at 1.1050
Jan 12: Valley at 1.0950 (100-pip pullback)
Jan 18: Peak 2 at 1.1045 (almost identical to Peak 1)
Jan 22: Neckline break at 1.0950

Why It Worked:

Two attempts to break 1.1050, both failed → Strong resistance confirmed

The Trade:

Entry: Sell at 1.0945 (break of neckline)
Stop: 1.0995 (50 pips, above peaks)
Target: 1.0850 (measured move: 100 pips, distance from peak to valley)

Result:

• Jan 23-26: Steady decline
• Jan 29: Hit 1.0855
• Profit: 90 pips

Key Recognition Points:

• Two peaks at approximately same level
• Failed to make new high on second attempt
• Clean neckline (valley support)
• Break of neckline confirms pattern

4. Double Bottom (Bullish Reversal)

Opposite of double top

─────────────────────────────── Neckline (resistance)
  \        /\        /
   \      /  \      /
    \    /    \    /
     \  /      \  /
      \/        \/
   Bottom 1  Bottom 2

Psychology:

Bottom 1:

• Downtrend hits support
• Buyers defend level
• Price bounces

Peak (middle):

• Sellers try to push down again
• Forms temporary resistance

Bottom 2:

• Price falls back to same support
• Holds again at same level
• Key: Can’t break through twice = strong support

Neckline Break:

• Resistance at peak breaks
• Uptrend confirmed

Trading Same as Double Top (inverted):

Entry: Buy on break above neckline
Stop: Below bottoms
Target: Measured move upward

5. Triple Top/Bottom (Rare but Powerful)

Same concept as double top/bottom, but price tests the level THREE times before breaking.

Even more reliable because:

• Three failed attempts = very strong resistance/support
• More traders notice it
• Breakout has more conviction

Win rate: 70-75% (higher than double tops/bottoms)

Continuation Patterns: Pauses in Trends

6. Bullish Flag (Continuation)

Forms during strong uptrends

    ↑
    |
    |  Flagpole (strong rally)
    |
    |
    ╱  ← Flag (consolidation)
   ╱   sloping down slightly
  ╱
 ↑ ← Breakout continues upward

Psychology:

Flagpole:

• Strong, fast rally (50-100+ pips in hours/days)
• Buying frenzy
• High momentum

Flag Formation:

• Profit-taking creates pause
• Price drifts down slightly or sideways
• Looks like mini downtrend
• But volume drops (not real selling)
• This is consolidation, not reversal

Breakout:

• Price breaks above flag resistance
• Trend continues
• Often moves distance equal to flagpole height

Real Example:

AUD/USD, February 2024

Setup:

Feb 5-8: Rally from 0.6500 to 0.6600 (Flagpole = 100 pips)
Feb 9-14: Consolidation 0.6580-0.6595 (Flag formation)
Feb 15: Break above 0.6595

The Trade:

Entry: Buy at 0.6598 (break above flag)
Stop: 0.6575 (23 pips, below flag support)
Target: 0.6698 (100 pips, flagpole height projected)

Result:

• Feb 15-20: Steady climb
• Feb 22: Hit 0.6705
• Profit: 107 pips

Recognition Tips:

• Flag should form quickly (1-3 days on daily chart)
• Volume should decline during flag
• Flag slopes against the trend (down in uptrend)
• Breakout on increased volume

7. Bearish Flag (Continuation)

Opposite of bullish flag

  ↓ ← Breakout continues downward
   ╲
    ╲  ← Flag (consolidation)
     ╲  sloping up slightly
      |
      |  Flagpole (strong drop)
      |
      |
      ↓

Forms during strong downtrends

Trading: Same as bullish flag, but inverted

8. Bullish Pennant (Similar to Flag)

    |
    |  Flagpole
    |
    ◇  ← Pennant (symmetrical triangle)
   ↑ ← Breakout up

Difference from flag:

• Pennant is symmetrical (converging lines)
• Flag is parallel channel
• Both are continuation patterns
• Win rate similar (~60-65%)

9. Ascending Triangle (Bullish Continuation)

Resistance ─────────────────
         /  /  /
        / /  /   ← Rising lows
       //  /     ← Flat top
      / / /
     /  /
    ↑ ← Breakout

Formation:

• Flat resistance at top
• Rising support at bottom
• Forms triangle shape

Psychology:

• Sellers defending resistance level
• But buyers increasingly aggressive (higher lows)
• Eventually buyers overwhelm sellers
• Breakout above resistance

Trading:

Entry: Buy on close above resistance
Stop: Below most recent low
Target: Height of triangle projected upward

Example:

EUR/USD Ascending Triangle

Formation:

Resistance at 1.0900 (flat top, tested 3 times)
Support: 
- Touch 1: 1.0820
- Touch 2: 1.0850 (higher low)
- Touch 3: 1.0870 (even higher low)
Triangle formed over 2 weeks

The Trade:

Entry: 1.0905 (break above 1.0900)
Stop: 1.0865 (40 pips, below last low)
Target: 1.0980 (80 pips, triangle height)

Result: Hit target in 3 days, +75 pips

10. Descending Triangle (Bearish Continuation)

    \  \  \
     \ \  \  ← Falling highs
      \\  \  ← Flat bottom
       \ \ \
        \  \
─────────────────  Support
           ↓ ← Breakout down

Opposite of ascending triangle

Psychology:

• Buyers defending support
• Sellers increasingly aggressive (lower highs)
• Eventually sellers overwhelm buyers
• Breakdown below support

Trading: Same as ascending, but inverted

11. Symmetrical Triangle (Bilateral – Can Go Either Way)

      \      /
       \    /
        \  /  ← Converging lines
         \/
         ↑↓ ← Could break either direction

Formation:

• Both highs and lows converging
• Neither buyers nor sellers dominant
• Indecision pattern

Trading Strategy:

Wait for breakout direction, then trade it:

If breaks UP:

• Entry: Above resistance
• Stop: Below triangle
• Target: Triangle height projected up

If breaks DOWN:

• Entry: Below support
• Stop: Above triangle
• Target: Triangle height projected down

Important: Don’t predict direction. Wait for break, then follow.

Part 4: Multiple Timeframe Analysis – Seeing The Complete Picture

This is where beginners fail most:

They look at one timeframe (usually 1-hour or 15-minute) and make decisions.

Professionals analyze AT LEAST 3 timeframes before every trade.

The Timeframe Hierarchy

Think of timeframes like Google Maps zoom levels:

Higher Timeframe = Zoomed Out (Daily, Weekly)

• Shows the big picture
• Long-term trend direction
• Major support/resistance
• “Where are we going?”

Medium Timeframe = Zoomed Medium (4H, 1H)

• Shows medium-term momentum
• Intermediate levels
• “How are we getting there?”

Lower Timeframe = Zoomed In (15M, 5M)

• Shows precise entry timing
• Exact entry and stop placement
• “When exactly do I enter?”

The 3-Timeframe Rule

Always analyze 3 timeframes before trading:

1. Higher Timeframe – Determine overall trend
2. Trading Timeframe – Find your setup
3. Lower Timeframe – Time your entry

Example: Day Trading EUR/USD

Step 1: Check Daily Chart (Higher Timeframe)

Daily Chart Analysis:
- Clear uptrend since Jan 1
- Price above 50-day and 200-day MA
- Recent swing low: 1.0850
- Recent swing high: 1.0950
- Currently: 1.0900

Conclusion: UPTREND INTACT
→ Only look for BUY setups

Step 2: Check 1-Hour Chart (Trading Timeframe)

1-Hour Chart Analysis:
- Price pulled back from 1.0920 to 1.0880
- Approaching 1.0870 (minor support)
- Bullish divergence on RSI
- Potential bounce setup forming

Setup: BUY at 1.0870 support

Step 3: Check 15-Minute Chart (Entry Timeframe)

15-Minute Chart:
- Price at 1.0872
- Forming bullish pin bar (long lower wick)
- Rejection of 1.0870 support

Entry Signal: BUY NOW at 1.0875
Stop: 1.0860 (15 pips, below pin bar low)
Target: 1.0920 (45 pips, previous high)

Why This Works:

✓ Daily confirms uptrend (trade WITH the trend)
✓ 1-hour shows pullback to support (entry opportunity)
✓ 15-minute confirms rejection (precise entry timing)

All three timeframes align = HIGH PROBABILITY TRADE

What Happens When Timeframes Conflict?

Scenario: Timeframes Show Different Directions

Daily Chart: Downtrend
1-Hour Chart: Bullish setup
15-Minute Chart: Buy signal

What do you do?

Answer: DON’T TRADE.

When timeframes conflict, probability drops significantly.

Options:

1. Wait for alignment
2. Trade only in direction of higher timeframe
3. Skip this setup entirely

Rule: Higher timeframe always wins long-term.

Real Example of Timeframe Analysis Saving a Trade

Trader sees this on 15-minute chart:

15M: Perfect double bottom at 1.0850
     Neckline break at 1.0865
     Looks like great BUY signal!

But checks 1-hour chart:

1H: Strong downtrend
    Just broke support at 1.0870
    Heading toward 1.0800

And checks daily:

Daily: Major resistance at 1.0900
       Price rejected twice this week
       Overall downtrend

Decision: DON’T BUY

What happened:

• 15M double bottom was SHORT-TERM bounce
• 1H downtrend continued
• Price fell from 1.0865 to 1.0810
• Would have been -55 pip loss

Multiple timeframe analysis SAVED this trader from a bad trade.

The “Waterfall” Effect

When all timeframes align in same direction:

Example: All Bearish

Monthly: Downtrend
Weekly: Downtrend
Daily: Downtrend
4H: Downtrend
1H: Sell setup
15M: Sell signal

This is a “waterfall”—price likely to fall HARD.

These are the highest-probability trades.

Real Example:

GBP/USD, October 2024

All timeframes bearish:

• Monthly: Lower high formed
• Weekly: Broke support at 1.2800
• Daily: Death cross (50 MA below 200 MA)
• 4H: Bear flag forming
• 1H: Break below flag
• 15M: Strong bearish engulfing

Entry: Sell at 1.2720
Stop: 1.2750 (30 pips)
Target: 1.2580 (140 pips)

Result: Hit target in 2 days

When all timeframes align, follow the signal aggressively.

Part 5: Practical Chart Reading – Putting It All Together

Let’s analyze a complete trade setup from start to finish using everything we’ve learned.

Real Trade Example: EUR/USD, March 2024

Step 1: Open Daily Chart

Daily Analysis:
✓ Uptrend from Feb 1 (1.0700 to 1.0950)
✓ Currently at 1.0890
✓ Pulled back from 1.0950 resistance
✓ Approaching 1.0850 support (previous high from Feb 15)
✓ 50-day MA at 1.0840
✓ Overall: Uptrend intact, looking for buy opportunities

Step 2: Identify Support/Resistance Levels

Key Levels on Daily:
Resistance: 1.0950 (recent high, tested twice)
Support 1: 1.0850 (previous high, now support)
Support 2: 1.0800 (major level, multiple tests)
Support 3: 1.0750 (trend line support)

Step 3: Drop to 4-Hour Chart

4H Chart Shows:
- Pullback from 1.0950 to current 1.0870
- Falling in parallel channel (bearish flag pattern)
- But this is in uptrend = Bullish flag (continuation)
- Approaching bottom of channel at 1.0855
- Setup: Wait for bounce from channel support

Step 4: Check 1-Hour for Entry Timing

1H Chart:
- Price at 1.0858
- Just formed bullish pin bar at 1.0852
- Long lower wick to 1.0848 (rejected lower prices)
- Closed at 1.0858
- RSI showing bullish divergence
- Entry signal forming!

Step 5: Confluence Check

At 1.0850, we have:

1. Daily support (previous high)
2. 50-day MA (1.0840)
3. 4H bullish flag support
4. 1H pin bar rejection
5. Round number (1.0850)

5 factors = STRONG CONFLUENCE

Step 6: Execute Trade

Entry: Buy at 1.0860 (above pin bar)
Stop Loss: 1.0835 (25 pips below confluence zone)
Take Profit: 1.0950 (90 pips, previous resistance)
Risk-Reward: 1:3.6

Position Size (for $5,000 account, 1.5% risk):
- Risk: $75
- Stop: 25 pips
- Lot size: 0.30 lots
- Pip value: $3

Step 7: Trade Management

Day 1 (Entry):

• Entered at 1.0860
• Price consolidated 1.0855-1.0870
• Holding

Day 2:

• Price rallied to 1.0895 (+35 pips)
• Moved stop to break-even (1.0860)
• Now risk-free trade

Day 3:

• Price at 1.0920 (+60 pips)
• Moved stop to 1.0890 (locked in +30 pips minimum)

Day 4:

• Price hit 1.0950 (target)
• Closed at 1.0948
• Profit: +88 pips = +$264

Why This Trade Worked:

✓ Traded WITH the daily uptrend
✓ Multiple timeframe alignment
✓ Strong confluence at entry
✓ Clear rejection pattern (pin bar)
✓ Excellent risk-reward (1:3.6)
✓ Proper position sizing
✓ Managed trade by moving stops

This is professional-level chart reading and execution.

Common Chart Reading Mistakes (And How to Avoid Them)

Mistake 1: Trading Against Higher Timeframe Trend

Wrong:

• Daily shows downtrend
• 15M shows bullish pin bar
• Trader buys because “pin bar is bullish signal”

Result: Small bounce, then trend resumes down, stop hit

Correct:

• Daily shows downtrend
• Only look for SELL setups
• Ignore bullish signals on lower timeframes
• Trade WITH the trend

Mistake 2: Ignoring Context

Wrong:

• Sees head and shoulders pattern
• Trades it immediately

Problem: Pattern is in middle of strong uptrend, unlikely to reverse

Correct:

• See head and shoulders
• Check: Is this at TOP of uptrend? (reversal likely)
• Or middle of trend? (probably fails)
• Context determines pattern reliability

Mistake 3: Not Waiting for Confirmation

Wrong:

• Support level at 1.0800
• Price hits 1.0800
• Immediately buys

Problem: No confirmation price will actually bounce

Correct:

• Support at 1.0800
• Price hits 1.0800
• WAIT for rejection candle (pin bar, engulfing, etc.)
• Then buy with confirmation

Mistake 4: Overcomplicating Charts

Wrong:

• 15 indicators on screen
• 47 lines drawn
• Can’t see actual price action

Correct:

• Clean chart
• Key support/resistance only
• 1-2 indicators maximum (if any)
• Focus on price, not indicators

Your Chart Reading Checklist

Before every trade, verify:

☐ Step 1: Checked higher timeframe trend?
☐ Step 2: Identified key support/resistance levels?
☐ Step 3: Pattern confirmed with candlesticks?
☐ Step 4: Multiple timeframes align?
☐ Step 5: Confluence present at entry level?
☐ Step 6: Risk-reward at least 1:2?
☐ Step 7: Position sized correctly (1-2% risk)?

If ALL boxes checked → Take the trade
If ANY box unchecked → Skip the trade

Key Takeaways (Summary)

About Candlesticks:

1. Each candle tells a story of buyer/seller battle
2. Body size shows conviction, wicks show rejection
3. Context matters more than individual candles
4. Learn to “read” what price is saying

About Support/Resistance:

1. Psychological levels where traders remember wins/losses
2. More tests = stronger level
3. Broken support becomes resistance (and vice versa)
4. Confluence of multiple factors = highest probability

About Chart Patterns:

1. Patterns repeat because psychology repeats
2. Reversal patterns signal trend changes
3. Continuation patterns signal trend pauses
4. Always wait for pattern completion + confirmation

About Multiple Timeframes:

1. NEVER trade based on one timeframe alone
2. Higher timeframe determines overall trend
3. Lower timeframes time your entry
4. When all align = highest probability trades

The Professional Approach:

Start with higher timeframe → Identify trend →
Find support/resistance → Look for patterns →
Drop to lower timeframe → Time entry →
Execute with proper position sizing →
Manage the trade