range of techniques to understand the price chart and find profitable entry points,

ranging from technical analysis to wave analysis and from price action and
candlestick patterns to indicators. All of these methods are based on “historical
price”. Technical traders analyse these price charts with historical price to study
how price moved in the past, which in turn, offers information about how it could
move in the (near) future. This technique is not only used in trading and charting
but is equally valid for a wide range of topics such as weather, geology shifts
(movements of continents), changes in the universe (change in planets, stars and
universes), consumer patterns and much more. Historical data is also used for
instance to understand, improve and forecast traffic jams, political changes,
economic trends and a whole range of fields. Historical data is always a key
component of any analysis. Analysis of price via technical analysis is not
different in this regard. Generally speaking, analysing the past helps us predict
the future. The same is true for charts: analysing past price helps us predict the
future of price movement. But traders must realise that the accuracy rate goes down
when looking further into the future, which is why it's more accurate to say:
analysing the past helps us predict the immediate future. Why do we emphasize the
“immediate” future? Because forecasts are most reliable in the short-term and
become more difficult when applied to the more distant future. The reason is
simple: the further we look into the future, the more difficult it becomes to
analyse all aspects - including current, hidden, and unknown factors - because
there are more variables along the way that can impact the future. The path of the
future can run in many different directions and so it is much easier to make a
forecast when analysing events close(r) to now. This is also valid for the markets
and the charts. When analysing the charts now, traders can make a decent assessment
about the next few hours or days ahead. But the longer a trader looks into the
future, then there is an increasing chance that unknown variables might appear and
impact the price in an unexpected way.This in turn makes it more difficult to
predict long-term price movements. The further a trader tries to forecast into the
future, the more difficult it becomes to forecast with a higher degree of accuracy.
Of course, making an incorrect forecast would not lose you any money unless you
make a bet. However, entering a trade setup that is aiming for a target 2 years
from now is just simply more difficult because the market can undergo many changes.
The entire ECS team uses technical and wave analysis to understand how price moved
in the past. We use this analysis to make estimates about how price is expected to
move in the immediate future and then we look for potential trade setups. Sometimes
we find setups and sometimes we don’t, which depends on how probable a certain
trade setup is. Some charts are easier to analyse and hence, more reliable to
predict in the near future, and more potential to find a high probability trade
setup, whereas other charts can be enormously tricky and difficult. So now that you
know why we use technical and wave analysis for analysing the financial markets,
price charts, and assets in general, it is time to explain our methods. But before
we can do that, we will be explaining how we analyse the charts first of all. To
analyse each and every chart, we use an approach that is called “triangle of
analysis” which analyses trend & momentum, support & resistance, and price
patterns. The next 3 chapters will explain each segment one by one. We start with
trends and momentum. Trend, Momentum, and the Building Blocks of the Charts Before
we can explain what is trend and momentum, we must take a step back and explain the
type of price chart used. Nenad and I mostly use candlestick charts. The
candlestick is the basic and smallest unit of measurement on the chart - regardless
of the time frame.The candlestick is like the 1 cent coin with the Euro or US
Dollar, because there is a not smaller unit of accounting. Of course, there are
some traders that use bars while others use line, renko or range bar charts.
Nowadays most traders choose the candlestick as the basic building block of a
chart…Both Nenad and I use candlesticks so the focus of this book will be on them.
The credit for candlestick development and charting goes to a legendary rice trader
named Homma from the town of Sakata, Japan. There is a high probability that his
original ideas were modified and filtered over time, eventually evolving into
candlestick trading we use today. Candlesticks provide a wide range of visual hints
and thanks to them we can understand price action trading in a much easier way.
Time frame trading with Japanese candlestick charts also allows traders to grasp
market sentiment. Thanks to rice trader Homma to Steve Nison (who introduced the
concept to the West), candlestick charts offer a much deeper depth of information
than traditional bar charts. All of the candlesticks on any given chart represent
the flow of price of a particular instrument and time frame. Each single,
individual candlestick represents one building block of that larger picture.
Traders can connect those building blocks to construct larger structures. For
instance, traders can (sometimes) connect multiple candlesticks to build bigger
entities like candlestick patterns. The same logic can be used for language. Words
form sentences which again form paragraphs. Or, you can compare candles to pieces
of Lego (the children’s toy), which are used to build bigger structures like a
house. With trading it works like this: 1. Candlestick = the basic unit on the
chart. 2. Candlestick patterns = a group of 1-3 candles that form specific patterns
which in turn provide information about the direction of the chart. 3. Price swings
= a group of candles, usually more than 3 or 5, that indicate a larger price
movement. A price swing is when a series of candles form one larger unit or “leg”,
which has (mostly) the same direction (sideways, up, down) and speed (impulsive or
corrective). 4. A price pattern = a group of swings that connect to form a pattern.
The pattern either indicates bullish or bearish and continuation or reversal. 5.
Trend or range = multiple price swings that can be connected to form a larger
direction. A channel would have multiple price swings in it. The overall angle of
the channel could be up, down or sideways. A trend channel is either up or down
whereas a range is always going sideways. Chart Hierarchy In the next section we
will explain step by step all of the building blocks that make up the larger market
structure. As mentioned above, the single candle is the smallest unit and the
largest is the entire market structure of the chart. Here is the sequence for a
full overview. The next paragraphs will discuss all of these building blocks.
Bottom of sequence (smallest) 1. 1x candle is smallest unit of chart 2.
Candlesticks make 1x candle pattern 3. Candlesticks and candle patterns make 1x
swing 4. Multiple price swings make price patterns 5. Multiple price swings and
price patterns make 1x trend or range 6. Multiple trends, ranges, and price
patterns make chart and market structure Top of sequence (largest) Let’s dive into
each of these steps. First of all, the candlestick basics and then we will address
each of the price action steps one by one. Followed by candlesticks are candlestick
patterns, price swings, price patterns, and trend / range. Candlestick Basics The
candlestick is either bullish or bearish: ● A price closing higher than where it
opened will produce a white candle by default - bullish. ● A price closing lower
than where it opened makes a black candle by default - bearish. The candle consists
of a body, nose, and the tail (wick or a shadow): ● The boxes that are formed by
price action are called "the body". ● The extremes of the daily price movement,
represented by lines extending from the body, are called "shadow, tails or wicks".
● A small part of the candle that is left behind is called “the nose”. A price
closing where it opened or very close to where it opened is called a “doji”. You
don't need to memorise names and descriptions of the candlesticks because it is not
needed for successful trading. Nevertheless, it is helpful for any price action
trader. Candlesticks Explained The candlestick offers four data points per
candlestick: 1. Candle open (O): the starting price of the candlestick. 2. Candle
close (C): the closing price of the candlestick. 3. Candle high (H): the high price
of the candlestick. 4. Candle low (L): the low price of the candlestick. The same
information is provided for each candlestick regardless of the time frame and
financial instrument. All candles have the exact same composition. So a candlestick
on the daily chart would show the price of the open, close, high and low for each
day. The 4 hour or 15 minute chart also indicate the open, close, high and low but
of the lower time frames The main difference between the time frames is how quickly
a new candlestick appears on the chart. A daily chart will only get a new candle at
the start of each trading day. A weekly chart will take a full week before a new
candlestick is available. Lower time frames of course change quicker. A 15 minute
chart will get a new candle every 15 minutes as long as the market is open. The
importance of a candlestick does depend on the time frame. The candlesticks from
higher time frames offer more value than from lower time frames. A daily chart
candlestick has more weight and significance than a candlestick from a 30 minute
chart. The same is true for a 60 min candle, which has more importance than a 1
minute candlestick. Correlation between the Open
and the Close The colour of the body in the candle tells us whether it is a
positive or negative candle session. In an uptrend or bullish market, the buying
often happens at the open price. As the price rises, a white candle is formed. The
length, or the distance between the open and the close, reflects the dominance of
the bulls. But keep in mind the character of the candle is never fully known until
the candle closes. In many cases, candles also retrace first before moving into the
dominant direction. In contrast, during a bearish market, a dark body candle is
created, which means sellers are entering the market on the open and selling the
price lower to the close. But once again, only when the candles closes will a
trader be sure if it’s a bearish or bullish candle. In many cases, candles also
retrace first before moving into the dominant direction. Candlestick charts provide
great insights into the market dynamics based on the shape and colour of the
candle’s body when comparing it to previous candles. Key Dynamics of Each
Candlestick That said, each candlestick provides a ton of value and information.
Here are some vital questions it covers: ● What is the direction of the
candlestick: bear or bull? ○ C vs O. ○ This is answered by analysing the candle
close versus candle open. ○ A candle close above the open indicates a bullish
candle. ○ A candle close below the open indicates a bearish candle. ○ A candle
close that is equal to the open is called a Doji candlestick pattern and indicates
indecision. ● Which side is in control of the candlestick, bear or bull? ○ C near
H/L. ○ This is answered by analysing the candle close versus the high or low. ○ A
candle close near the high indicates that the bulls are in control. ○ A candle
close near the low indicates that the bears are in control. ○ A candle close near
the middle of the candle indicates correction and indecision. ○ Here is how traders
can assess the control: ■ 0-5%: extremely strong. The close is almost right at the
high or low which is indicating extreme strong candlestick close. The bulls or
bears have a dominant and clear control of the candle. First candle on the left. ■
5-10%: very strong. The bulls or bears have a dominant and clear control of the
candle. ■ 10-20%: strong. The candle is under control by the bears or bulls but not
as dominant as the first two groups. Second candle from the left. ■ 20-25%: decent.
The control is weaker but one side is still dominant. Analyse other parts of the
charts to understand the overall picture. Second candle from the right. ■ 25-30%:
mild. Be careful, control of one side is becoming much weaker. Context is
important. ■ 30-35%: weak. There is significantly less control of one side and
candle looks more indecisive. ■ 35-50%: very weak. There is no control of one side
and the candlestick is corrective. First candle from the right. ● Is there selling
or buying pressure in the candlestick? ○ C and O away from H/L ○ This is answered
by analysing how far the candle open and close are compared to the high or low.
This is called a candle wick. ○ A candle close and open that is far away from the
high indicates selling pressure. ○ A candle close and open that is far away from
the low indicates buying pressure. ○ Less than 50% wick: probably no extreme
selling or buying pressure in that candle. ○ Bottom/top 50% of the candle is wick:
some pressure to up or down but if candle open and close are equal, then this could
also mean indecision and no pressure. ○ Bottom 65% of the candle is wick:
significant pressure to up. First candle on the left is an example. ○ Top 65% of
the candle is wick: significant pressure to down. Second candle on the left is an
example. ○ Bottom 80% of the candle is wick: significant pressure to up. Second
candle on the right is an example. ○ Top 80% of the candle is wick: significant
pressure to down. First candle on the right is an example. The wick length can
represent a price low and/or high when comparing it with an open or close price
from the real body of the candle. This may provide insights on the market’s
rejection for a resistance or support price level. The longer the tail, wick or
shadow as they are often called, the more likely it indicates a trend reversal
because demand is increasing or supply is reducing. A wick at the bottom of the
candle could indicate the end of the downtrend for instance. Conversely, tails,
wicks or shadows at the top of up-trending real candle bodies, may indicate that
demand is slowing or supply is increasing. Again, a large shadow, relative to the
real body, may signify a stronger reversal, with the strongest being when a pin bar
is formed. ● What is the size of the candlestick? ○ A larger candlestick has more
weight and importance than a smaller candlestick. ○ The relative size of the
candlestick compared to the candlestick of the same time frame and on the same
chart is the key aspect. The absolute size is not important. ● Sequence of 2
candlesticks: ○ A trend is visible when price shows: ■ Lower lows and/or lower
highs for a downtrend ■ Higher highs and/or higher lows for an uptrend ■ Especially
a new candle low or high is considered to be more important than a higher low or
lower high. ○ The close versus the close: ■ A close below the previous close
indicates bearishness. ■ A close above the previous close indicates bullishness.
Quiz time! Now it's time to check your progress after finishing the first part on
candlesticks. Question 1: What does the candlestick with the purple box indicate to
traders? Which answer is correct? Answer A) indecision, there are no significant
wicks on either side, which means indecision. Answer B) bullish, the candle closed
bullish so an uptrend continuation is likely. Answer C) bearish, there is a strong
wick on the top of a candle with a close near the low. Question 2: What does the
candlestick with the purple box indicate to traders? Which answer is correct?
Answer A) indecision, there is no wick. Candles provide little information. Answer
B) bullish, the candle is a retracement of a larger uptrend. Answer C) bearish, the
candle closed near the low, is a reasonable size and closed below the previous
close. Curious what the answers are? See the answers below the video! In the
meantime, check out Nenad’s webinars series called Price Action Trading School
(PATS) on YouTube: https://www.youtube.com/watch?
v=PuZCris_jZ0&list=PLVXHWHUPFSpDt0PA9YhFcsnkXhTJu Bggy The answers to the quiz
questions are: 1) C - large wick on top indicates selling pressure and a potential
reversal. 2) C - candle close near the low indicates that bears are in control.
Candlestick Patterns Explained Now that we covered the basics, it’s time to discuss
the candlestick patterns. Candlestick patterns are one of the core methods of price
action trading. In some cases one specific candlestick can also be a candlestick
pattern but other times you need to see a group of candles display a certain
pattern. One of the most used candlestick patterns is the so-called “Pin Bar”. Pin
Bars effectively indicate current buyers and sellers. If the tail is longer than
the body, then it’s a strong signal that the price might turn. As mentioned above,
candlesticks are the basic building blocks for every trader. Some candlesticks will
have more “value” than other candles due