The Engulfing Candle is one of the simplest and possibly most underrated chart patterns in trading.

In this tutorial, I'll show you how to identify the pattern, what it tells us as traders and I'll give you some trading strategies that use this pattern.

Many people over-complicate this pattern, but it's very simple.

There are basically 2 types of Engulfing Candles.

Here's how to identify them. 

Bullish Engulfing Candle

A Bullish Engulfing candlestick pattern signals a potential reversal from a downtrend to an uptrend.

Here's what to look for:

• 2-candle formation
• First candle is smaller than the second candle and the close is lower than the open
• Second candle has the largest candle body that has been seen in awhile and the close is higher than the open
• The high of the second candle is higher than the high of the first candle
• The low of the second candle is lower than the low of the first candle
• The second candle closes near the high of its range
• This pattern has to print on a support or resistance level

Examples

Here is an example of a Bullish Engulfing pattern on a Bitcoin chart. The blue arrow shows the Engulfing Candle. 

Notice how this was a dramatic turning point on the chart.

This obviously won't happen all the time, but it does happen frequently enough that you should pay attention.

Here's a second example on the USDCHF Forex pair.

This one rallied hard after the pattern printed on a previous support level.

So those are just a couple of examples of when a Bullish Engulfing Candle can signal an upward move in a market.

Now let's take a look at the opposite of this pattern.

Bearish Engulfing Candle

A Bearish Engulfing candlestick pattern signals a potential reversal from a downtrend to an uptrend.

Here's what to look for:

• 2-candle formation
• First candle is smaller than the second candle and the close is higher than the open
• Second candle has the largest candle body that has been seen in awhile and the close is lower than the open
• The high of the second candle is higher than the high of the first candle
• The low of the second candle is lower than the low of the first candle
• The second candle closes near the low of its range
• This pattern has to print on a support or resistance level

Examples

This example on the AUDNZD chart shows how fast price can move after a Bearish Engulfing candle pattern.

Notice how it prints on a previous level of resistance.

Now here's an example on the NZDCAD chart.

Again there was a sharp move after the engulfing candle prints on the resistance zone.

Take any chart and start looking for this pattern.

You'll notice that it happens more often than you might expect.

But don't stop there.

Be sure to test this pattern out before risking real money.

My Favorite Engulfing Candle Resources

Here are resources for Engulfing Candle trading strategies that I've found super useful.

You can use them to help you create, test and trade Engulfing Candle trading strategies.

• Naked Forex: High-Probability Techniques for Trading Without Indicators – This book teaches a trading strategy called The Big Shadow that uses Engulfing Candles.
• Naked-Markets Backtesting Software – This software will identify Engulfing Candles and can pause the backtest so you can manually enter a trade, or automatically enter a trade that you have an automated entry created. Saves a ton of time when backtesting.
• Engulfing Bar Alert Indicator for MT4 – Get alerts on your screen or mobile app when an Engulfing Candle prints.
• TradingView – Setup alerts for Engulfing Candles by using the built-in indicators.

How to Prove Engulfing Candles Actually Work

At this point, you're probably wondering: Does this actually work?

That's a perfectly natural question and the only one that matters, quite frankly.

So here's the truth about trading Engulfing Candles…

Just like with any other trading method, the success of the chart pattern will be determined by the specific trading plan.

There are many ways to enter and exit trades with this pattern, so you need to define these parameters in order to have a real trading strategy.

I'll provide specific trading strategy plans in the next section. 

But here's where most traders get tripped up…

Remember, there are only 2 types of trading strategies, discretionary and fully automated.

Most Engulfing Candle strategies are discretionary.

Therefore, the results can vary greatly between traders.

So it is essential that you backtest it for yourself to find out how good you are at identifying the setups in your trading strategy plan.

Practice can also improve your skills, so don't be afraid to keep running through simulations until you feel you've maxed out your potential.

Now it might be possible to automate an Engulfing Candle strategy. If so, then the results are usually reproducible between traders.

Even then, you still have to create an automated strategy and test it on every market/timeframe you trade.

Always verify, never take another person's word for it.

Remember, profitable trading strategies usually start out as very unprofitable ideas.

So start experimenting and don't be afraid to test your own ideas.

You just might discover something amazing.

Trading Strategies That Use Engulfing Candles

Here are some trading strategies that you can review and start testing for yourself.

I've also included my own backtesting results so you can compare notes and make improvements on these strategies.

• Coming soon

Final Thoughts

This super simple candlestick pattern could be the basis for your next grail trading strategy.

It is easy to identify and can be programmed into most trading platforms.

But it's up to you to test it out and find out if it will work.

Remember, the most profitable strategy in the world is the one that fits YOU best.

Now get to work. 

The post Beginner’s Guide to the Engulfing Candle Chart Pattern appeared first on Trading Heroes.

In this tutorial, I'll introduce you to the Second Spike chart pattern. I'll show you how to identify it properly and what it can tell you about what the market is likely to do next.

The Second Spike chart pattern is a reversal pattern that happens after a strong move, usually in the bullish direction. It signals that the market could be reversing and may provide a trading opportunity in the opposite direction. 

How to Identify a Second Spike

There are basically 3 components of this chart pattern.

Once these characteristics are present on your chart, you may have a Second Spike.

1. Look for a Strong Move

The first criteria to look for is a strong move in the upward direction.

This pattern works best with bullish reversals, so I'm only going to look for strong upward moves. It can work for bearish reversals, but I've noticed that it's less reliable.

But test both to see what works best for the market you're trading.

Here's an example of a strong bullish move.

2. Mark off the Elbow

The elbow is a zone on a chart where price previously turned.

Mark off the bottom of the turn, until about half way to the high of the move.

You're going to be targeting this area if the market does a Second Spike.

This is what it looks like.

3. Look for a Retracement Back Into the Elbow

Now that you have the retracement zone marked off, it's time to watch your chart and wait for price to move back into that area.

Set an alert if your platform has that feature. 

This will ensure that you never miss a trade.

Once price enters the zone, it's time to take a trade.

How to Trade a Second Spike

Now as you may have guessed, the ideal entry for trading this chart pattern is to take a trade as soon as price gets into the elbow zone. 

This is called a Hard Fade entry and you can learn more about it here.

Do not wait for any confirmation. 

Entering as soon as price enters the elbow zone will give you the best chance of success and is usually the cheapest price you're going to get on this trade.

The example above shows an idea entry in the elbow zone. The trade worked out well, with price moving back down near a previous support level.

Examples of Second Spikes

Here are more examples, so you can see this concept in action. I'll show you each step of the process, so you'll have a better idea of what to look for in real-time.

Example 1

After a big bullish move, price starts to stall and forms a top.

At this point, I mark off the elbow zone, as shown in this chart.

Next, I wait for price to re-enter that zone and I take a trade in the opposite direction. Here's where I would take a short trade.

It can take a little bit of practice to enter these trades because the big bullish bar might make you nervous.

But once you get the hang of it, that's not a big deal.

The stop loss will go above the highest high of the last move.

Now that the trade is on, I'm just going to sit back and wait to see what the market does.

I would set a take profit on this trade, based on where I think price is likely to go. The horizontal lines would be my 2 potential profit targets.

In this example, I did not get stopped out. Price retested the elbow zone, but it did not hit the stop loss.

If I was able to hold the trade for this long, I would have been rewarded with a big downward move.

As you can see, it took some time for this trade to work out, so I would have had to be patient.

Not all Second Spikes are clean, some of them are messy, like in this example.

Example 2

Now I'll speed things up a bit and put all of the information on 1 chart.

There was a strong upward move in the GBPJPY and there were 2 opportunities to enter a short position on a Second Spike entry.

Example 3

This is another example where there were 2 opportunities to enter on a Second Spike.

If you took this trade, it would have worked out well, with price dropping below previous support.

What Happens When They Don't Work

If a Second Spike doesn't work, your stop loss will get hit and you're out of the trade.

It's all good, move on to the next trade.

Just like with any other profitable trading strategy, not all trades will be winners.

But if you've backtested your strategy and it has an edge, then keep calm and keep trading.

Final Thoughts on Second Spikes

Now that you know what Second Spikes look like, it's time for you to create a trading strategy.

If this chart pattern appeals to you, of course.

The first step is to create a trading plan. I have a free worksheet that will help you create a detailed trading plan.

Then backtest your trading strategy to see if it has an edge.

If your strategy doesn't perform as well as you would like, experiment with different ideas and optimizations until you develop a trading strategy that you're happy with.

Now get to work!

The post What is the Second Spike Chart Pattern in Technical Analysis? appeared first on Trading Heroes.

This cheat sheet will help you remember the common chart patterns that traders use.

It helps to print it out and tape it to your monitor or put in your notebook.

That will allow you to reference it while you're trading or when you're testing new trading strategies.

This post will give you the downloadable PDF, 2 bonus chart patterns, and most importantly…the best way to find out if these chart patterns actually work.

Here's what the downloadable PDF looks like.

Chart Patterns PDF (Free Download)

This handy PDF will help you remember these chart patterns. Click the button to download the PDF.

Bonus Chart Patterns

Here are 2 bonus chart patterns that you probably haven't seen on other lists. It's included in the PDF above, but we have provided a more detailed description below.

Batman Chart Pattern

This is a variation of the double top/bottom. The only difference with a Batman is that there is a period of consolidation between the tops/bottoms.

When the market consolidates like that, it shows that the market tried to accumulate and move higher, but was not able to.

So if the second peak shows a sharp rejection of the previous high/low, then there's a good chance that price will reverse. Here's a bearish example.

You can get a detailed description of the Batman chart pattern here.

3 Drives Chart Pattern

A 3 Drives pattern consists of 3 higher highs, or 3 lower lows, followed by a reversal.

In this chart pattern, traders try to push price in one direction 3 times, but if there isn't enough momentum, the push will fail and the reversal tends to be swift.

To get a more detailed description of the 3 Drives pattern read this.

Final Thoughts on Chart Patterns

Remember that chart patterns cannot be traded in a vacuum.

Not every instance of a chart pattern will guarantee a good trading opportunity.

But how do you know which chart patterns are high quality and which ones are low quality? How do you know if a chart pattern will work with your trading personality?

The best way to do this is to test chart patterns until you understand their probabilities and profitability. This guide will show you how to get started with the testing process, so you can find out what to realistically expect from the chart patterns above.

The post Chart Patterns Cheat Sheet (Plus Bonus) appeared first on Trading Heroes.

Not many websites talk about the Batman, so let's take a trip into the cave where this this mysterious chart pattern lives, and find out what it's all about.

It's called a Batman because it looks like the top of Batman's cowl. These patterns are easy to spot because of the characteristic “ears” and price consolidation between them. 

But that's not all that you should be looking for.

Let's get into a more detailed description of what to look for in a Batman and how it can be traded.

Video Demonstration

Batman Chart Pattern Definition

The “Batman” is basically a variation of the double top/bottom reversal pattern. Here's what you are looking for:

• Strong trend
• Price hits key zone
• Failed high volatility spike
• Consolidation period
• Another failed high volatility spike in the same direction

This is an example of a bearish Batman. We would expect price to drop after the second failed spike and we would look for an opportunity to go short.

The important thing to look at is where this pattern prints on the chart. Just like any other countertrend chart pattern, this one has a much higher probability of success if it prints on a key support or resistance zone.

This is an example of a bullish Batman. It's just the opposite of the the example above, but the principles are the same.

Again, we see the big spike into the support level, followed by consolidation. Then another push lower that's rejected, and price heads higher.

The Psychology Behind a Batman

Like any other chart pattern, you shouldn't look at the pattern in isolation.

Take a few minutes to understand the market backstory, psychology behind the pattern and what it's telling you about the market.

When you understand what traders are doing behind the scenes, it's easier for you to identify a high quality setup.

The first part of a Batman is a strong trend. Obviously, this isn't close to being a Batman yet, but it's an important precursor.

When the market moves swiftly like this, it's also more likely to move quickly through this area of the chart, in the opposite direction. There's no guarantee that it will move through this part of the chart again.

But if it does, it will probably move rapidly. That means quick profits.

…and that's good for a Batman trade. 

Next, price approaches a strong zone.

This is when it's time to pay attention.

Remember that this has to be a significant zone. The more times price has touched this zone and decisively rejected it, the better.

Take a minute to look at the history of the chart and see how significant this level has been. If it hasn't been that significant, then this probably isn't a good opportunity.

Now we wait to see what happens. There could be several reversal patterns that could happen here, including a Batman.

Bulls try to push the price higher, but fail the first time. You'll notice a strong rejection at this point.

That's the left ear.

The bulls gear up to make another push and this is where price consolidates. There's a lot of buying and selling here as the bulls and bears battle it out for what the next big move will be.

Finally the bulls give it another try, and fail again. This forms the right ear and is another sharp price rejection of the key zone.

That's when there's an opportunity to possibly take a trade because there's a good chance that price will start to move away from the support or resistance zone. In this case, it's a resistance zone.

Of course, it doesn't always work out as nicely as this, but here's what this opportunity ended up looking like.

Where to Enter a Trade

There are three places that you can potentially enter a Batman. Stick around because I'll show you how to test this for yourself.

1. At the right “ear” rejection
2. At a break of the “forehead”
3. On a retest of the pattern

Ear Entry

This is most aggressive entry, and potentially the most profitable…but also the most risky. It's riskier because you have less confirmation that price will reverse.

For this entry, you are going to try to enter as close to the top of the right ear as possible. The idea is to enter when you are reasonably confident that the level is going to be rejected, but not too late that you miss out on a majority of the profits.

In our example trade, this might be a good place to go short.

Forehead Entry

The next place that you can enter is when price closes below the forehead.

This is a level that's drawn at the support zone.

It also helps if there was a test of the level from the bottom, as you see to the left of this chart. When you see touches of the zone from both sides, that helps to confirm that it's an important level.

Pattern Retest

Finally, you can trade a Batman at the point where price retests the formation and rejects it. Here's where price retested the pattern twice and is now looking to head lower.

When a Batman Fails

Just like any other chart pattern, this one will not work out 100% of the time. This pattern will usually fail at the forehead or the right ear of the pattern.

Here are the points on the example chart. These are the areas on the chart that price is most likely to continue upwards, in this example. It would be the opposite for a bullish Batman.

Is There a Difference Between a Bearish Batman and a Bullish Batman Pattern?

There isn't a difference between a bearish and bullish Batman. The pattern appears at both market tops and bottoms.

So keep an eye out for this pattern on the timeframe that you currently trade.

But be sure to test the pattern before you start risking real money on it. 

Is the Batman a Type of Head and Shoulders?

No, the Batman is more like a double top.

Even though we are using Batman's head to describe a chart pattern, this is not a head and shoulders (H/S) formation.

A H/S has three pushes into a zone. The middle push is the strongest, with the other two being weaker…looking like shoulders.

The concept behind them is similar. You are looking for a failed push into a key level.

But the way that this plays out on a chart is different.

Here's an example:

Is the Batman a Type of Harmonic Pattern?

There's a type of harmonic chart formation called the bat pattern. Harmonic patterns also include the Gartley, crab and butterfly.

They use Fibonacci retracement levels to predict price movement, and are way too complex to get into in this article.

If you want to learn more about them, you can check them out here.

The bat pattern looks nothing like the Batman pattern.

I'll have more about harmonic patterns in future posts, but for the purposes of this post, it's enough to say that harmonic bat patterns are totally different from Batman patterns.

Does it Really Work?

Alright, now this is all great in theory, but does this chart pattern actually work?

Does it give you a quantifiable edge in the markets? 

That's what we will take a look at in the next Batman chart pattern blog post. I'll do some backtesting and show you the results. 

If you want to check to see when my results are posted, click here to read all posts associated with this chart pattern.

In the meantime, feel free to start testing it yourself. You can get started with this tutorial.

Remember…never, ever assume that a trading strategy you read in a blog post will work. Always test it for yourself. This includes trading strategies that you read about on this blog. 

The strategy may not have an advantage, or it may not be a good match for your personality.

Test it for yourself before risking real money. 

Stay tuned for the results…

More Indicators and Chart Patterns Explained

• The Beginner’s Guide to Trading Pin Bars
• The “Batman” Chart Pattern Explained
• Inside Bar Pattern Explained
• A Forex Price Action Trader’s Guide to Outside Bars
• RSI Indicator Explained: Calculation and Definition

The post The “Batman” Chart Pattern Explained appeared first on Trading Heroes.

The Three Drives Pattern is a well-known harmonic chart pattern. It is a relative of the ABCD pattern, for reasons you will learn about in a bit.

This pattern was mentioned in Robert Prechter's famous book “Elliot Wave Principle.”

In this post, I will explain how to identify it and show you how it is traded.

If you want to learn how this pattern works, this post will give you everything you need to know.

But that's not all…

I will also show you how to backtest the pattern so you can find out if it is really something that you want to pursue in your live trading. 

Here we go…

How to Identify the Three-Drive

The pattern consists of a series of three higher highs or lower lows, which signals a potential reversal.

Sometimes the reversal can be a huge move because the built-up pressure is finally released.

Not always of course, but that is what happens when it works well.

Are there time and distance requirements for the moves? Some books say yes, others say no.

So I'm going to take the most basic explanation that I think all Three Drives traders can agree on.

Let's take a look at how it works…

Bullish Three Drives

In the bullish version of this pattern, there are three drives or pushes in the upward direction.

After each push, there is a retracement, marked A and B. The retracements are a 0.618 Fibonacci retracement of the previous drive.

The next drive needs to end near the 1.272 Fibonacci extension for the price action to qualify for the for the pattern.

When price gets close to the drive 3 point at the 1.272 extension, you would put in an order to sell.

Your target would be the 0.618 retracement of the entire move from point zero to the top of drive 3. 

At least that is how the textbooks teach it. So that is where you should start testing it.

Let's take a look at a real example, so you can get a better idea of how this works.

This is the GBPUSD 4 hour chart on May 16, 2016, on TradingView and Oanda data.

For those of you who want to follow along at home.

Here's what the chart looks like when we mark point zero.

The first retracement hits the 0.618 Fibo level almost exactly.

Now if you Fibo the retracement, you will see that price extended way beyond the 1.272 extension. So if you were following the rules of the Three Drives Pattern exactly, this would no longer be a valid signal.

However, just for fun, let's keep going…

The next retracement also blows through the 0.618 retracement level.

The next push hits the 1.272 Fibonacci extension exactly.

Then when we look for a profit target, the 0.618 Fibo retracement of the entire move.  In this example, that gets hit easily.

So in summary, this was not a textbook pattern, but it would have ultimately worked out. That brings up the question:

Should I follow the system exactly or should I allow the rules to be bent?

Well, that all depends on what your backtesting tells you. 

Bearish Three Drives

Then of course, the bearish pattern is the same thing, but upside down.

How to Trade this Harmonic Forex Pattern

Just like with any other trading strategy, different traders will trade this pattern in different ways. But let's take a look at the most commonly taught way to trade this setup.

It is a good starting point for you to do your own testing and optimization.

There are basically three ways that you could enter a trade:

1. Put in a pending order at the last 1.272 level, with a stop loss guess
2. Wait for the market to print a strong rejection bar, like a Pin Bar or Outside Bar, then enter the trade, with a stop loss on the other side of the bar
3. Wait for the market to break through the 1.272 level, then put in a pending order if the market drops below the 1.272 level and use the previous swing high/low as the stop loss

Most resources will tell you to wait for the level to be rejected, then put in a trade (#2). So let's go with that method for now. 

Potential Optimizations

When you are testing, one way that you could potentially optimize your entry, is to look for divergence of some sort. RSI can be a good indicator to use.

As you can see from the example above, drives 2 and 3 form higher highs on the chart, but RSI forms a lower high on drive 3.

Another potential optimization is to look to see if the top of drive 3 matches up with a previous major support or resistance point. In the same example, the turning point does indeed match up with a resistance level.  

How to Backtest the Three Drives Pattern

Alright, now let's get down to business.

After most traders read about a trading strategy, they go directly into trading it in their live account.

…and big surprise, they lose money and they say that it doesn't work. There are so many things that can go wrong in between the time you learn a trading method and actually trading it with real money.

Here's a short list:

• You misread the instructions
• You are risking too much per trade and are freaking out every time your trade moves one pip
• The trading method doesn't actually work and it turns out that everything on the internet is not true
• You start trading it correctly and forget the rules because you didn't write them down
• You think you know better and keep changing the rules
• You second guess yourself and miss good trades
• And more

These are natural mistakes that all humans make. Myself included. So why risk your hard-earned money on your unproven skills? 

First, write down the exact rules of the system that you want to test.

You can download the backtesting plan worksheet for free here.

This will ensure that you don't deviate from your plan.

Next, you need to backtest your system and make sure that it has positive expectancy.

Fire up NakedMarkets and test your system.

If it does not work in backtesting, then it certainly won't work in live trading.

Once you have a system that works in backtesting, then move it into a demo account. Do not risk real money at this point. 

Only when you are comfortable in a demo account, should you even consider trading live. 

Other Resources

Here are some other resources that you can use to learn more about this chart pattern.

It's always a good idea to look at how others are trading a chart pattern, to get ideas on how you can improve your strategy.

You don't have to follow them exactly and you will probably throw out a lot of the ideas. But it only takes one good idea to dramatically improve your results. 

• TradingView Three Drives tag – These are charts that community members have posted on the TradingView website.
• YouTube videos – Here are the search results for videos related to this chart pattern.

A Close Cousin: The ABCD Pattern

One pattern that you will hear associated with the Three Drives is the ABCD Pattern. This could also be called the Two Drives pattern…I guess.

If I had to choose, I would personally start testing the Three Drives first because there is a greater chance that price will reverse after three moves, than two.

Price simply has to travel a longer distance and therefore will be more “tired.”

Conclusion

So that is how you identify the Three Drives technical chart pattern.

Remember that just because you see other traders using this pattern, does not mean that it will work for you.

You need to backtest it for yourself and figure out if it matches your trading personality.

Never take anyone's word that a trading system works.

Not even me

Do you own homework and you will progress much faster as a trader.

The post Three Drives Pattern Explained appeared first on Trading Heroes.

As I write this, Bitcoin has just hit $18,000 for the first time. Crazy right?! This is when I believe that the word “bubble” starts to become very relevant.

The office manager at your job, your neighbor and your hair stylist are now going to start talking about Bitcoin, if they aren't already.

….wait for it….wait for it…

We saw this in the dot com boom, the real estate boom and every other bubble in human history. If you don’t believe me, read the book Extraordinary Popular Delusions and the Madness of Crowds, which can be found here.

But isn’t this new blockchain technology here to stay?

Certainly.

However, just like the tech companies of the dot com bomb, a large majority of cryptocurrencies out there will not survive. A lot of them have no product and are just jumping on the bandwagon to make a quick buck on an ICO.

So how can you protect yourself and still try to maximize your profits?

I believe that one of the keys is to wait for the Baseball Cap chart pattern.

In this post, I’ll show you why it works, when it will probably stop working and I’ll share with you my own personal experience that has led me to use this pattern.

[toc]

The Baseball Cap Chart Pattern Explained

It’s called a Baseball Cap because it looks sort of like the top of a hat and a bill.

Like this example in Litecoin.

The pattern happens because of the nature of the cryptocurrency market right now. Here's a video that I did that explains the technical chart pattern.

Cryptocurrencies are not something that the general public understands very well yet.

Almost everyone understands how real estate and stocks work. But how can you create a new currency out of thin air?

…is a common question.

So the prices of cryptocurrencies are much more susceptible to pump and dumps.

When an uneducated public learns about a new feature that was added to a cryptocurrency, a rush of new buyers can come in and inflate the price very quickly. Once they find out that the currency wasn't as good as they thought, or they get bored, they will dump it and move on to the next “hot tip.”

A rapid rise can also be caused by a newly educated public that just figured out legitimate reasons why they should be buying a certain cryptocurrency.

But how can you tell the difference between the two?

Research and the Baseball Cap pattern are your best weapons in this emerging market. They won’t always be right, but they will greatly increase your odds of picking the currencies that will keep appreciating.

After all, that’s why they call it trading…and not easymoneymaking.

Before you go buying any ol’ crypto with this pattern, you first have to understand that this will only work with cryptocurrencies that actually have a solid use case and real world value.

So you need to do your research before you even look at a chart. Understand why the cryptocurrency is useful and if it solves a big problem.

It’s like buying a tech stock.

This research will also help you hang on to a currency if the price blasts off. It can be easy to take your profit too early if you don’t have a good reason to keep holding the currency.

Once you have a few cryptocurrencies that you have researched and believe in, then it’s time to look at the charts.

Yes, it can be tempting to buy when a chart is going parabolic, like this…

After you have done all that research, you will probably think that the currency is going to the moon and it doesn’t matter where you buy.

Hold on there tiger.

You need to optimize your entry by waiting for the Baseball Cap.

What goes straight up, must come down.

So wait for the market to pull back and stabilize at a defined level. This is where the market is catching its breath and could go on another run.

If price continues to drop and does not stabilize, then you know that there is nobody there to “catch” the price and it is not time to get into the market yet.

How long should the market stabilize? Based on past results, two months or more is ideal, but the minimum seems to be one month.

Here's an example of a long base that happened in EOS.

Understanding this one simple pattern can save you a ton of money and protect you from a world of hurt.

Of course, there are no guarantees in trading and price could continue to drop from a base. But that sure beats buying at the top and getting rocked.

FOMO is a bitch, avoid it at all costs.

Baseball Cap Examples

Now let's take a look at two charts. One where the pattern worked and one where it didn't.

GameCredits

This is a cryptocurrency that I believe won't make it. They have created a currency that allows video game players to do things like earn money and buy upgrades inside games.

Basically a universal game credits system. Players could earn money in one game and use them to buy upgrades in another game.

There is probably a need for it. But my question is: Why not just use another cryptocurrency like Bitcoin or Ripple? That would be a much better incentive for game players because people could spend that money in the real world.

When your local coffee shop starts accepting Ripple, of course.

Thus, while many cryptocurrencies have been taking off, GameCredits has languished. It is sill forming the Baseball Cap chart pattern, but the research side of the equation does not warrant a buy, in my opinion.

That could change of course. But this is an example where looking at the pattern alone won't make you any money. The fundamental analysis has to be solid too.

Ripple

I actually started buying Ripple at a bad time. That was before I figured out this chart pattern. I was buying it on the first big push, at about $0.35.

After the first big drop, I got smart and looked for a basing level. That's when I was able to get some at about $0.24, a much better price.

We had to wait awhile for this pattern to play out, but it eventually did.

Ripple will probably be one of the cryptocurrencies that succeeds, in my opinion. Bloomberg just added it their terminal, along with Litecoin and Ethereum.

When the Baseball Cap Cryptocurrency Pattern Will Stop Working

I believe that there will be a point when this chart pattern will stop working.

Once cryptocurrencies become mainstream and more heavily traded like stocks, futures or Forex, then you will probably have to look to the more traditional technical chart patterns to make trading decisions, like support/resistance, head and shoulders, the pin bar and the outside bar.

In addition, if the cryptocurrency market ever goes through an extended bear market, then all bets are off and the Baseball Cap won't work. This pattern relies on the strong bullish bias of the cryptocurrency market right now. 

You have to remember that there is a huge pool of potential cryptocurrency buyers who don't know anything about the market right now. Once they learn about cryptocurrencies and there are no more new buyers left, then we will stop having these huge price run ups.

Excessive government regulation could also slow down the growth of cryptocurrencies and kill the bullish bias.

Until then, keep an eye out for this chart pattern because it can be very profitable. This video will show you some examples.

Again, remember that past performance does not guarantee future results and you need to do your fundamental research on a cryptocurrency before you even look at a chart.

Conclusion

I recently met a guy who has literally multiplied his retirement account by purchasing Ether. His strategy was to buy when he started to see price come down, because he believed that it will eventually go back up.

That’s really dangerous.

It works well in very bullish markets, but you will get slaughtered in even a moderate bear market.

This guy has since pulled out his original investment capital and now only has his gains in the market. He even admits that he was lucky.

The moral of the story is to keep your risk low and don’t go “all-in.” Watch for the Baseball Cap chart pattern because it can help you find a good place to buy.

Luck is not a strategy.

Do your homework, be patient and stay safe in this wild and crazy market. Things will only get more volatile from here.

The post How to Maximize Cryptocurrency Returns with the Baseball Cap Chart Pattern appeared first on Trading Heroes.

Forex gap trading can be a profitable trading strategy, if you know what you are doing.

In this post, I will explore the definition of a gap and hopefully get you to increase your awareness of them.

The purpose of this post is not to teach you one way to trade it and say that is the only way.

I'm going to show you several different methods and allow you to choose the one that works best for you.

I will also show you how to test these different strategies, without risking any real money.

Gap trading can be an effective trading strategy that you can add to your arsenal.  They are easy to spot and can be traded with a rule based system.

I'm going to skip the normal, definitions that you can read on any other website.

Hopefully these definitions are more practical. They are the way that I like to think of them.

The Real Trading Gap

The obvious type of gap is well, an actual gap in price.

You will typically see this when the market opens on Sunday, after there has been some big news over the weekend.

For example, this is the EURUSD chart recently. This was what the price action looked like when the situation in Greece was still up in the air.

As you can see the gaps were fairly significant. If you were in a long trade over the weekend, you could have lost money when the markets opened on Sunday.

Why Gaps Happen

We see gaps when surprise news comes out, or if there is a lot of economic activity over the weekend.

Traders want to capitalize on the events and suddenly move the market in one direction.

Forex Gap Trading

These are some of the ways that you can choose to trade a gap.

There are other ways to do it, but these are the most commonly taught methods.

Gap Fill

The most common way to trade a gap is to assume that it will get filled at some point.

In other words, you would enter the trade when the gap appears and target some point inside the gap.

Some traders target half the gap, just to be safe, while others target the whole gap.

The method you choose will depend on the pair you are trading and what your testing has told you works the best.

Where to set the stop loss isn't as clear and will take some testing and experimentation.

You could set it at a previous level of support/resistance or you can set it at an acceptable R multiple of your profit target.

For example, let's say that you always target 50% of the gap and you want a minimum 2R.

So if your target is 100 pips away from your entry, you would set your stop loss at 50 pips.

A gap tends to get filled because the market wants to bring price back into balance after such a large imbalance.

When the gap doesn't get filled right away, or it doesn't get filled completely, you could have a major followthrough on your hands.

Followthrough Gap

Another way to trade a gap is to trade the price action after the gap is filled. Some traders assume that it will act as an area of support or resistance and that price will continue to move in the direction of the gap.

So you would wait for the gap to be filled, before entering the trade.

In this example, it worked out well and price rocketed back up, after the gap was filled.

To trade this method, you would have to judge the strength of the trend and make a call on a continuation.

The Pseudo Trading Gap

There is another type of trading “gap” that doesn't get mentioned too much, but it is a pattern that you should still look out for.  Instead of a physical gap, price simply moves very quickly through a price range. This is a concept that I learned from Chris Lori.

Since there is actually price action through this price range, I consider it a Pseudo Gap. Whenever price returns to this area on the chart, it can have the tendency to run through that price range very quickly.

As you can see here, after the real gap was filled, price continued upwards to form a Pseudo Gap (shown by the arrow). Then when price returned downwards, that area on the chart was filled quickly.

So just like a Real Gap, this gap also has the tendency to get filled. Since the price action associated with this type of gap is less sudden, the fill should also have less force.

Therefore, if you do take these types of trades, it is better to target fewer pips than with a Real Gap. Again, test it out and see what works best for you.

Conclusion

At the end of the day, it is up to you to decide on the gap trading method is best for you. The only way to figure it out is to learn different systems, back/forward test them and figure out which one you resonate with.

Finally, remember that we don't trade in a vacuum. Always take into account current economic and geopolitical conditions, as well as upcoming news announcements.

To learn more about gap trading strategies, you can do a lot Googling, or you can simply take a course from one of the price action traders on my list.

Once you learn a method to test, be sure to fire up Forex Tester 2 and a demo account to test it extensively before you ever put real money on the line.

Several traders that I have talked to trade gaps quite successfully, so it is certainly worth the time to try to figure them out and work them into your trading quiver.

The post Forex Gaps: Trading the Long Lost Trading Gap appeared first on Trading Heroes.

An Inside Bar (or candle) is a 2-bar pattern where a bar is inside the total price action of the previous bar. In other words, the Inside Bar has a higher low and lower high than the previous bar. When this happens the previous bar is known as the mother bar. It does not matter if the Inside Bar is bullish or bearish, all that matters is where the Inside Bar prints relative to existing price action.

Before we get into why they happen, here's what they look like.

What is an Inside Bar?

The only thing that you have to take into account when identifying an Inside Bar is the high and the low of the previous bar.

When the high of the previous bar (or candle) is higher than the current bar and the low of the previous bar is lower than the current bar, then current bar is an Inside Bar.

Here's what it looks like…

Why Inside Bars Form

There can be many things that can cause an Inside Bar to form.

• A big news event might be coming up
• The traders who are in control (bulls or bears) are taking a break before continuing their campaign
• The traders who are in control (bulls or bears) are losing control, or are ready to stop their campaign, and price will reverse soon
• And more!

You don't need to know why Inside Bars happen, you just have to understand what the price action is telling you.

As you probably know, when price action starts to consolidate, it usually means that there will be a breakout.

We see this on longer timeframes when price forms a “box,” or a tight range. Here's a dramatic example of a range breakout.

Not all breakouts are this strong, but this is a good example of a scenario when a range lead to a big breakout.

You can think of an Inside Bar as a compressed spring.

For example when you sit on a bicycle seat with springs, you compress the springs whenever you go over a bump.

But the springs never stay compressed, they always bounce back to their original height.

A similar thing happens with Inside Bars.

Price action becomes “compressed” into a tighter range and at some point, it has to break out and resume normal volatility.

Trending Inside Bars

There are 2 basic types of Inside Bars that traders use to enter trades. The first one is the trending Inside Bar.

When looking for these types of trades, you first want to identify a strong trend. You can use moving averages, a momentum indicator, or simply just look a the price action to see strength of the trend.

Here are 2 examples of this pattern.

The way that many traders use this type of Inside Bar is to enter on a break above or below the Inside Bar.

If it's a bullish trend, then the stop entry would be set a couple of pips above the Inside Bar. In a bearish trend, then stop entry would go below the bar.

Generally, the stop loss would go on the other side of the mother bar. So if you took a short signal, the stop loss would go above the mother bar. For a long signal, the stop loss would go below the mother bar.

For many traders, it helps to have a specific definition of a trend.

Some traders like to use multiple moving averages to define a trend. They usually use 2-3 moving averages and when they are in order from shortest to longest period, that call that a valid trend.

To get notifications when Inside Bars print on your MetaTrader chart, you can use one of our handy alert indicators.

Countertrend Inside Bars

The other type of Inside Bar trading signal is the countertrend Inside Bar. This type of Inside Bar appears at support and resistance levels.

It also helps when the mother bar has the highest high or lowest low at the support/resistance level.

Here are a couple of examples.

As you can see, an Inside Bar can telegraph that price is slowing down and is getting ready to reverse.

Just be sure that the bar is at a solid support or resistance level.

When to Avoid Inside Bars

Just like any other price action pattern, you don't want to take every Inside Bar signal that comes your way.

That's a recipe for disaster.

If you trade every single Inside Bar signal, you WILL blow out your account.

So here are a few times when you should avoid taking an entry.

Choppy Price Action

A common mistake that traders make is to take signals in a choppy market.

This is what a choppy price action signal might look like. As you can see, there were several large back-and-forth bars before this Inside Bar printed.

Price action is also in a range and there is no obvious trend or support/resistance level. You might have been lucky if your took a long trade, but over time, you'll lose more of these trades than you win.

So stay away from choppy or volatile price action. It's not worth trading and will only lead to losses.

Not a Strong Trend

Before trading a trending Inside Bar, be sure that there is a strong trend in place. That may sound obvious, but many traders are so eager to enter a trade, that they don't spend a few extra seconds examining the strength of the trend.

Of course, a trend can be difficult to identify, so be sure that you have a concise definition of what a trend looks like for you.

Regardless of how you define a trend, spend a lot of time in Forex Tester or using screenshots to look at many different types of trends. Make sure that your method of identifying a trend really does give you an edge.

In addition, you can't just look at your charts once.

Review them on a weekly basis to keep your skills sharp.

It's like a basketball player who practices free throws.

Use it or lose it.

Not a Solid Support/Resistance Level

The final commonly made mistake is to take a reversal trade at a level that is not a significant support or resistance level.

Again, some traders can get so wrapped up in taking trades that they forget to examine the quality of the signal. If you are still struggling with drawing support and resistance levels, read this guide.

It will take you through the process of identifying the most significant levels on any chart.

Keep in mind that you can make almost any line fit some sort of trend or support/resistance level. Try it…just draw a random horizontal line somewhere on your chart.

You can probably make a (weak) case for the line being a support or resistance level.

The key is to be able to understand which levels are most likely to hold and which ones are just random lines on a chart.

Again, learning to identify important support and resistance levels is all a matter of practice.

To get more practice, draw major levels on all of your charts, then go back to them later and see if price ended up respecting those levels. After a few weeks of this exercise, you'll start to get the hang of it.

Conclusion

Stay tuned for future posts, where I share actual Inside Bar trading strategies and test each one to show you what works and what doesn't.

If you don't want to wait for that, start doing some testing for yourself right now…

You can do this by following these steps:

1. Write down a well-defined trading plan. You can get a trading plan worksheet here.
2. Backtest your trading plan to see if it has an edge.
3. If your testing is profitable, forward test it in a demo account for a few months.
4. From there, if you're happy with the results, you can make the decision to start trading the strategy live.

To start tracking Inside Bars on your charts, use one of our handy alert indicators.

You can also test your strategy in our community if you want to refine this idea and create a solid system around it.

Even if you do not trade this setup, it can be used as a confirmation when used in conjunction with another trading system. To get more chart patterns that you can test, go here to get the PDF cheat sheet.

Now get to work!

More Indicators and Chart Patterns Explained

• The Beginner’s Guide to Trading Pin Bars
• The “Batman” Chart Pattern Explained
• Inside Bar Pattern Explained
• A Forex Price Action Trader’s Guide to Outside Bars
• RSI Indicator Explained: Calculation and Definition

The post Inside Bar Pattern Explained appeared first on Trading Heroes.