Trading Mania

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05/26/2021

Bollinger Bands explained: What is it and how does it work?

Bollinger Bands is a trading indicator (which consist of 3 lines) created by John Bollinger.

It can help you:

Identify potential overbought/oversold areas

Identify the volatility of the markets

Now you’re probably wondering:

“What do the 3 lines mean?”

Upper band – Middle band plus 2 standard deviation

Lower band – Middle band minus 2 standard deviation

Middle band – 20-period Moving Average.

Note: I’ve used the default settings for Bollinger Bands which is 20-period moving average and 2 standard deviations for the upper and lower bands.

05/23/2021

05/10/2021

The Morning Star Candlestick Pattern

No. of Candlesticks in play- 3 (1st candlestick is a bearish, 2nd a Doji & 3rd Bullish candle, explained later in the article)

Occurrence- Common pattern that has applicability in all timeframes

Signal Strength- This is a fairly strong bullish reversal signal. The Doji (the middle candle in this formation) is classed as an indecisive candlestick and is viewed as a tug of war where neither buyers or sellers have gained momentum during the trading session. A better version of the Morning Star Candlestick formation is dependent on the type of Doji candle seen and the length of the Bullish candle that succeeds the Doji. A Morningstar pattern that consists of an abandoned Baby Gapped Doji or a Dragon Fly Doji (mentioned later) is the strongest affirmation for a potential reversal. The illustration in the above EURUSD chart shows the pattern with a dragonfly Doji proceeded by a Long Bullish candle that Engulfs the initial 1st Bearish candlestick in the pattern.

How to identify? – This is a three candlestick pattern. All criteria and conditions have to be met for its validity. As it’s a Bullish Reversal pattern the first candlestick would be a bearish candle of any size. The second is integral, which is a Doji candle. This indicates that the downward selling pressure has come to halt and the number of buyers and sellers are equally numbered in the market. The main body of a Doji is very small and thin. Sometimes you may see a Doji candlestick like the ones below which have a much longer wick/shadow (i.e. Long-legged Doji); this would still make pattern credible.

Useful Timeframes for different types of traders-

Intraday or Day Trading- 30 minute or Hourly Timeframe

Swing Trader- 4 hourly or Daily Timeframe

Long-term – Weekly or Monthly Time Frame (A Morning Star seen at major support level or 61.8% of a Fibonacci Retracement level are very strong signs for reversal and potential entry of Long/buy trade)

05/10/2021

The Hammer Candlestick Pattern

No. of Candlesticks in play- 1 (Only the hammer candlestick to look out for)

Occurrence- Fairly rare pattern in the longer timeframes (e.g. Weekly & Monthly)

Signal Strength- This is a strong bullish reversal signal but has to be specific in its appearance and match its description.

How to identify? – In essence, it’s easy to identify but you could easily make an error in identifying a ‘Hammer’ candlestick. The Hammer candlestick can be either bullish or bearish i.e. assume either can be red and green if we use default colour candlesticks. The main body of the candlestick is at the upper end of the trading range i.e. in the chart above, the red body is at the top of the candle visually mimicking a hammer. Also, the long lower shadow/wick should be twice the length of the main body. This is very important because sometimes you may see a candlestick that has a main body equal in length to the shadow/wick. It’s vital that a ‘Hammer’ should have no upper shadow (i.e. above the main upper body part). A longer the lower shadow and a smaller real body is a more meaningful version of the bullish hammer pattern.

Useful Timeframes for different types of traders-

Intraday or Day Trading- 30 minute or Hourly Timeframe

Swing Trader- 4 hourly or Daily Timeframe

Long-term – Weekly or Monthly Time Frame (A ‘Hammer’ candlestick seen at a major support level is a very strong sign for reversal and entry of Long/buy trade)

05/10/2021

Piercing Pattern

No. of Candlesticks in play- 2 (1st Bearish and the 2nd Bullish candle)

Occurrence- Rare candlestick pattern. This doesn’t occur often but is a powerful signal when it does appear.

Signal Strength- This is amongst one of the strongest signals for the end of a downtrend and the start of a potential rally.

How to identify? – At times this is a difficult candlestick to spot as it requires a more of a mathematical approach to determine its validity. This is a two candlestick bottom reversal pattern that occurs after a substantial downtrend price action. The first candle is normally a large bearish candle with high traded volume (i.e. a large body).

The second candle (Bullish) price opens below the prior sessions close.

However, by the end of the second candlestick session, the market closes by more than 50% of the previous candlestick session. You are probably thinking this is quite confusing but simple maths is required by working out the differences between open and close of the first candlestick session and then find the midway or price at 50% (best mark this with a horizontal line). Please see the illustration below for further clarification.







For a stronger signal, the bullish candlestick penetrates well beyond 50% of the previous day session. In the example above of the GBPUSD chart, the bullish (green) closes by only a mere 2 PIPS (Percentage in points) above the 50% mark of the previous bearish red candlestick. This is sufficient enough but has to close beyond the 50% level.

Many books and traders also consider that the second bullish candle should open below the low (the shadow) of the previous candlestick for it to give a stronger signal.

05/10/2021

Bullish Engulfing Pattern
No. of Candlesticks in play- 2 (The Bullish Engulfing candle (large green candlestick outline) and the previous bearish candlestick).

Occurrence- Common pattern

Signal Strength- This is one of the strongest signals for the end of a downtrend and the start of a potential rally.

How to identify? - This is an easy candlestick to identify and should always be seen at support levels. As it is classed as a Bullish reversal signal the entire body of the Bullish Candle Engulfs or wraps the previous candlestick body. This becomes a sign of a trend reversal after a persistent bearish downtrend. It also shows the buying pressure has overwhelmed the selling pressure or bears (shorts) and has taken over from the bulls (longs).

The main body of the large Bullish candle engulfs the main body of the previous Bearish candle, albeit, a stronger sign would be if it engulfs the entire candle including the shadows/wicks. Another stronger sign would be when the bullish candle (green candlestick shown above) engulfs multiple previous candles i.e. the illustration shows the entire body of bullish candle Engulfs almost 5 previous candlesticks.