Core Forex Skills – Candlestick Analysis, Part 2

Please note that there is more to trading reversals than what is shown in this article. This article is about spotting potential reversals. Taking the trades will be discussed in the next article in this series.

The last article, in this series, explained what candle patterns are and how to use them. In this article, I am going to explain the importance of viewing candle patterns as a whole and not just as a single pattern. I will also explain a few simple concepts on using candle patterns together.

Forget Perfect Reversals

When you start trading reversals you’re going to notice that very few reversals are actually perfect. Looking for a perfect trend followed by a perfect candle and a perfect reversal can work but do you really want to take a trade only once a month?

Reversal trades can be taken even when the formations are not perfect.
If you remember, in the last article in this series, I talked about understanding that candles represent the struggle between the bulls and the bears. If you look at these imperfect reversals in this way you can clearly see why it’s a reversal and why you should enter. Just because it does not look like a text book reversal doesn’t mean it won’t work.

I took one of these imperfect looking reversals today and I walked away with 93 pips.

Let’s take a look at some of these reversal patterns.

Good But Ugly Reversals

When reading about taking reversals you’re probably used to seeing patterns like this one:

perfect reversal set up

This reversal pattern is quite sexy. It’s nice, clean, simple and obvious. However, what about when you see something like this:

ugly reversal set up

This one is a little harder to see, however, the chance of a good reversal here is just as strong if not stronger. The trick is to stop looking at these as patterns but instead read the actual candles. So in the last example what are the candles telling us?

strong bearish trend

This is just the preceding trend nothing special here.

ugly indecision candles

This is where it gets interesting. This is far from your normal clean reversal pattern. You’ve got four indecision candles and the last one actually makes a new low. A lot of newbie traders would look at this and not be sure what to do.

However, it is quite simple. Despite the messiness of these candles all we are seeing here is a period of indecision. The bulls and the bears are fighting it out, sometimes the bulls win sometimes the bears, but all their victories are short lived.

What we do know, for certain, is up until five candles ago the bears were in complete control of the market. However, for the past four candles, the bulls have been fighting back. It makes sense that we would see a reversal here.

Read Candles

The main idea of trading candles is to read what they tell us. Too many traders look for generic patterns such as Doji’s and hammers. However, the truth is you won’t always get a perfect reversal patterns. Sometimes you will get a bunch of candles at the end of a trend. A true candle trader can step back, look at the candles, and decide if a reversal is likely.

This is why it is essential to always think of candles as a struggle between the bulls and the bears. When you look at your chart you should ask yourself three simple questions:

Who was in power recently?
Has the balance of power changed?
What is likely to happen from here?

If you ask yourself these questions at a time the charts are showing you something similar to the picture below:

learn to read candles

Your answers would be something like this:

1) The bulls were in power.
2) Yet the bears are fighting back.
3) It is possible we will see a reversal from this point.

So try to stop thinking of candles simply as patterns. You have to realize that you cannot concentrate on a single candle. It is so much easier when you look at them and you read them like you would a story.

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28 thoughts on “Core Forex Skills – Candlestick Analysis, Part 2
  1. It is a wiser person that listens, understands and apply’s the lessons learnt. Because of you and your wisdom, I am becoming much more assured in my trading.

    Many thanks.

  2. Thanks for the post, NickB!

    Have a question though. When trading candle patterns (in this case reversals), which time frame should we be working with? If we work with the H4 time frame, won’t there be very little trading opportunities?

    Thanks in advance!

  3. Your candle courses 1 and 2 are great. Very clear and simple. I learn to recognize the condition of market base on the power strugling between the bull and the bear. Looking forward to learn new things from you again.

  4. Nice explanation on reversal patterns. We can see a similar pattern in USD/JPY H4 chart.
    (15thMay2009 GMT1200 to 18thMay2009 GMT0000)

  5. Hey Nick, Ive seen the diagrams that you have shown in my charts and sometimes they are not a reversal but just a breather in the continuation of the trend. the other day you waited for the candle to move 80 or so pips before you took the trade becauase you wanted for confirmation and it turned out to be the right thing to do. so my question is, shouldnt you be teaching us this, dont worry about missing out on 100 pips or even 200 pips, just wait and be patient for the right moment when its most likely to get your 50 pips.

    i think this is the lesson to be learned that a 1000 pips can pass you by but having the patience and the dicipline to wait for the most probabale time to take a trade, knowing what we know now is the key to success and for me understanding the Nickb method is the easy bit, having the dicipline and patience to apply that method is the hard bit.

    so in conclusion Nick, stay focused on your method man dont get side tracked by others I´ve had to blow 2 accounts before realising and understanding what youre saying. I know you wanna premote the site but dont forget what you taught us “2 or 3 trades a week will get you your 100 pips” keep it simple, if it works then works.

    Geoff.x

  6. Trading in reversal strategy, how should we put our tp and sl. Recently my one week gain was swap away by one lost.
    thank you

  7. …in a follow up to my last post i would like to say that if you can get away with working 4 hours a week rather than 40 or 50 or 60 f**king hours a week then keep it simple guys, its all there in front of you. having spent time in the chatroom i kinda feel like i wanna start a new forum called the original NickB method…do you know what i mean?

    1. @geoff:

      I understand what your saying but I am not sure you understand the article. This is all part of the original NickB method. Also this is not a trading method it is an in-depth explanation of how to spot reversals. It all ties in with the NickB method. In the next article I will cover how to actually trade these reversals. It is all about selecting the perfect entry point and waiting for the entry point to be hit.

  8. Fetor’s video, 1st lesson of the 5 day Blitz put’s a new emphasis on FX trading, I believe. It is masterly presented and explained in a way that makes me look at trading a little differently.

    Thanks to all of you for this FREE opportunity in learning.

  9. Nick, yes i got it, your idea is an eye opener, not just the recent candle but already formed ones will give direction of the market trend. SEE U @ THE TOP.

  10. @geoff:

    Wait for part three…

    I never said they are all reversals, they are indecision periods, it is a struggle between the bulls and bears not a decisive victory for either. I will edit the article.

  11. Nick congratulations on these lessons, the visuals/graphics are brilliant and compliment the explanations very well. As they say a picture says a thousand words, yours sure do. Thanks for the effort, well done.

  12. Excellent article, it showed me what beyond the candlestick pattern. I can’t wait for the third.

  13. Ok thx Nick appriciate the reply, i’ll look out for the next article. can i just ask has anyone had any trouble with downloading the webinars, my laptop is not impressed with the zip files. any clues anyone?

  14. Actually I am having problems I down downloaded the webinars but the visual is not coming on ,I only get the voices. Have tried on Laptop and Pc with same result, so far.
    Damien

  15. hi nick
    it s a very nice topic you took on trading reversals and i thank you for this explanation
    but without combining support and resistance levels with reversal candles it wont work very well as i do trade this way . all the best and thank you for all the education
    you ve given me over the years.

  16. Cheers Nick Lad ya the best i can understand what ya talking about yip education is the best way and keep it really simple L&L to you nick ………

  17. Nick! I have been following you and your efforts to educate all of us novice traders in the nuance’s of trading the FOREX market. Especially where the emphasis is placed on understanding CANDLES. Personally, I find that once one understands the concept of the CANDLES in relation to PRICE ACTION, then you can develop yourself as a better trader. And that is just how I am developing now, thanks to you and your team.

    Following you and your educational lessons via FX4Noobs etc., has been, and still is for me, an exceptional FOREX learning opportunity. Many thanks!

    The article written by Geoff. is, I feel, quite correct and I’m in aggreement with what he has written.

    You are greatly appreciated.

    Thanks

  18. hi nickb, can i ask, should i bought your video or just learn from here for free?i am confused! but if u are kind enough to teach us what your video taught so that most of us can save on the $$$, then i think i will still buy the video from you as a appreciation on your effort too.thanks and god bless… to you and everyone here.

  19. Thanks, Thanks and Thanks again, Nick.I just can’t get enough of this stuff of yours.I am beginning to understand quite a lot right now.Thanks again.Kingsley.O.

  20. Hi Nick,

    Excellent information. Really good to know forex4noobs. Anyway, can you please provide me the link to part 3?Sorry, i really couldn’t find it.