Doji: How To Use It To Make Profit

doji-candlesticks

Doji is candlestick pattern which signifies a balance in between supply and demand by opening and closing at the same price.

 

How are they identified?

Dojis form when a security’s open and close are virtually equal. A doji candlestick looks like a cross, inverted cross, or plus sign. Alone, doji are neutral patterns.

 

What does it signifies?

The Doji conveys a sense of indecision or tug-of-war between buyers and sellers. The relevance of a doji depends on the preceding trend or preceding candlesticks.

Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.

Doji act as warning signal that trend might change. You should wait for confirmation.

usd-chf-daily-chart-doji

As you can see in the above chart of US Dollar and Swiss Franc a doji forming in 28 april with opening and closing at minimal distance. After the doji the long white candle confirm the change in trend and the usdchf move in the direction of uptrend.

Same thing happen in the other doji but this time the doji is made at the top of the up trend giving you the warning that the trend might change. At next day the long black candle confirms the change in trend from up to down.

As I have said earlier that doji gives us only warning not a confirmation signal so wait for the other candle after doji to confirm your signal.

 

Thursday: Thoughts Peter Lynch

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”

– Peter Lynch

You should be prepared to trade in all type of market conditions. Because if you trade long enough you will face all of them.

Fear Of Loss And Trading

When you are trading if you have a constant fear of loss then it will be very hard for you take trade. And if you do not make trades and then market go into your direction you feel the loss again because you have loss the opportunity to make profit.

 

How to overcome fear of loss?

 

Master one trading method

You should master one method at a time. So that you know when your are entering a trade you are certain of your position.

 

Always place stop loss with your trades

Place your stop loss before placing your trade. So that when trade goes against you, you get out of the trade automatically.

 

Ask yourself what is the real reason behind your fear?

Do you really know what make you fear. If not then find out and get over it.

 

When do start to feel fear?

 

At what stage of trading do you think your fear start to kick in like when you see an trade and then the market start to go in another direction. Or when price bounces at you stop level.

You need to find out the source of fear and then eliminate it. Fear is caused by lack of knowledge when you have knowledge there is nothing to fear.

Why Being Right Is Not Important For Making Money In The Market

When we trade or starting trading we think that we have to find good trades and have a high percentage of winning trades. But it is farther from the truth you can make money even when if you are wrong 60% of the time.

Let me explain it with an example this is your trading plan for capital of $10,000 in any given market

  1. You will risk $100 on every trade which will include commission and slippage.
  2. You will take only those trades which will give you profit of $200 after all expenses.
  3. You will use position sizing for determining number of securities you wish to trade.

What will happen after 100 trades?

Profit = $200 * 40 = $8000

Loss = $100 * 60 = $ 6000

Balance = $ 2000

If this trades happen in year you would have made 20% return on your capital which pretty great right.

It is the return with 2:1 Reward risk ratio. And if you find a method with which you can find trades you can find trades what will give you 3:1 reward risk ratio you have to be right even less.

You can make the above return with 3:1 reward risk ratio even if you right only 30% of the time.

What will happen after 100 trades?

Profit = $300 * 30 = $9000

Loss = $100 * 70 = $ 7000

Balance = $ 2000

You are thinking it is just a high ratio of profit compared to risk. If you want to make long term profits only take trades that give you more then 2:1 reward risk ratio.

 

Candlestick Pattern: Dark cloud cover

 candlesticks-dark-cloud-cover

How are they identified?

Essentially, the large black candle is forming a “dark cloud” over the preceding bullish trend. Dark cloud cover is a reversal candlestick pattern.

Open of second candle is above the previous close and then the price push down.

The dark cloud must have a closing price that is:

  • within the price range of the previous day, but
  • Below the mid-point between open and closing prices of the previous day.

 

What does it signifies?

  • A change in trend and that the other side is becoming strong.
  • What are the points that make them more effective?
  • A preceding bullish trend
  • The more the price penetrates in the first candle the stronger the signal.
  • If the second have a shaved head which mean no upper shadow. The opening price of the market is also high of the market it will increase the strength of the signal. And if the there is also no lower shadow mean low of the day is close the signal is more strong.
  • If the opening is above an important resistance level and then it close in the second candle it increase the power of the dark cloud cover pattern.
  • If there is very high volume on opening mean new buyers are getting in the market. If the price closes lower. Then the market sells off. It shows the bears are strong. And trend is changing.

 GBPUSD-dark-cloud-cover

As you can see in above chart of GBPUSD that two white candles is made and after that the next candle open at the top of previous candle and went up but retrace in the pattern again and cover more than 50% of the previous candle.

Which make it good dark cloud cover but the down trend come after some consolidation.

Money Management The Holy Grail Of Trading Success

 

If you want to make long term consistent profit the most important thing for you is money management and risk reward. Money management and risk reward will make you consistent profit you will have consistent result in the market.

The many reason for failure of people in the market there inability to manage their risk. Because if anybody is trading in the market for some time he gets some idea how the market works.

Your winning percentage is not that important in making money in the market. The most important thing you need to learn first is to manage your money.

So how to make long term consistent profit in the market

 

Small loss big profits

Keep your loss small and keep your profit large. Make trades which will give you at least twice the reward then the money you are risking in the market.

 

Cut your loss let your profit run

It is age old philosophy of the market but there is little percentage of individual that actually follow it that cut your loss short and let your profit run.

You should make a trading plan in which you will let your profit become large and you should protect those profits by trailing your stop in the direction of the trend so that when the trend changes you will have a portion of profit covered.

 

Preserve your capital

If you follow proper money management it will preserve your capital and for long term returns it is very important that you have capital the trade with where good trading opportunity present themselves.

You have learn about money management first if you are thinking of making consistent profit in the market you will only resvive in the market for long if you apply proper risk management to every trade you take.

You have to understand when you trade in the market you will not make money on every trade you make so for keeping your loss small on those trades become crucial.

Shooting Star

shooting star

 How are they identified?

A type of candlestick formation that results when a security’s price, at some point during the day, advances well above the opening price but closes lower than the opening price. In order for a candlestick to be considered a shooting star, the formation must be on an upward or bullish trend. Furthermore, the distance between the highest price for the day and the opening price must be more than twice as large as the shooting star’s body. Finally, the distance between the lowest price for the day and the closing price must be very small or non-existent.

 

What does it signifies?

  • A Shooting Star can also mark a potential trend reversal or resistance level.
  • It is not a major reversal signal like evening star but it an indication of change in trend.

 

As you can see in below chart of USD/CHF

usd-chf-shooting-star

The shooting star is black with a long upper shadow and very little lower shadow. The star has a small real body. The trend before the star is not very much straight to top but a choppy one.

But as you can see that after the shooting star the long black candle clearly give us a reason that the trend has changed and we should trade in short side.

You can trade this set up with take stop loss at the high of shooting star and sell USDCHF at the opening of the next candle.

Always trade with stop loss so that you can preserve your capital. Technical analysis will help you improve your odds of success but will not remove your failure altogether.

Here on completetechnicalanalysis.com we teach you for free how to use technical tools to improve your odds and get a edge.

Hanging Man

How are they identified?

A bearish candlestick pattern forms at end of uptrend. It is created when there is a significant sell-off near the market open, but buyers are able to push this stock back up so that it closes at or near the opening price.

  • Small real body.
  • Long lower wick more than twice the real body.
  • It forms at the top of an uptrend.

 

What does it signifies?

This formation does not mean that the bulls have definitively lost control, but it may be an early sign that the momentum is decreasing and the direction of the asset may be getting ready to change.

 

What are the points that make them more effective?

The reliability of this signal is drastically improved when the price of the decreases the day after the signal.

The color of the real body is not important but it improves result if hammer has white and hanging has a black real body. Longer the lower shadow the shorter the upper shadow the more meaningful is the bearish reversal signal the hanging man.

Below is a 4 hour chart of USDCHF US dollar vs. Swiss Franc

usdchf-4hr-hanging-man

As you can see in above chart that there is a hanging man formation after a rally. The upper shadow is small and the lower shadow is long. Even if the real body is of white color we see a decline in the candle after the hanging man which conform the signal.

The color of the real body is not important.

Three Black Crows

Three black crows or sometime called three winged crows are bad news as crows sitting on your rooftop. They are indication that the trend is going to change that the power has changed hands for bull to bear.

This pattern has three long black candles which open inside of previous candle and close below the previous candle. You should cover your longs if you see these candles.

 

How are they identified?

This pattern consists of three consecutive long-bodied candlesticks that have closed lower than the previous day with each session’s open occurring within the body of the previous candle.

 

What does it signifies?

The three black crow’s pattern is a sign of the bulls’ lack of conviction in the current uptrend. So the trend is changing.

 

What are the points that make them more effective?

  • A significant up trend
  • Candles must be long

EURJPY-THREE-BLACK-CROWS

In the above daily chart of EURJPY you can three black crows pattern where the open of the new candle is at the close level of previous candle and close of the new candle is below the previous levels.

You can enter a trade in this pattern by placing your stop just above the high of the third candle and take profit according to the risk reward levels.

Candle sticks do not provide a profit targets so you have to use different methods to calculate profit targets for your trades.

Three White soldiers

Three white soldiers or three advancing white soldiers is a continuous pattern in which you will three large white candles making a new high every time it close.

It indicates that the bulls are in strength and market is advancing. If the last candle or last two candle of this pattern is smaller than the first then it is sign of weakness but not of reversal so you should tight you stop loss but do not take a short position till it cross a support level.

 

How are they identified?

This pattern consists of three consecutive long-bodied candlesticks that have closed higher than the previous day, with each session’s open occurring within the body of the previous candle. And then closing above the previous one.

 

What does it signifies?

It’s a sign of the change in investor sentiment and is used by traders to confirm a shift in momentum from bear to bull mentality.

So you should cover your shorts and make long trades in the market.

 

What are the points that make them more effective?

  • A prolonged downtrend
  • If candle is significantly long.

 

EURJPY-THREE-WHITE-WHITE-SOLDIER

 

You can see in above chart of EURJPY in 4 hours. The first three white solder pattern after a significant downtrend and then a hanging man forming that corrected the trend.

The second formation is a break out of the consolidation and the last one in the yellow box in again after a short downtrend and the third candle was a small one comparison to the previous trend which is an indication that the uptrend is not that strong where you should tight your stop loss. Then after a short rally we have a hanging man forming that reverse the trend.

You can see that this pattern apply to all the time frames but the most profitable are long ones. So you should trade when trading in Forex market in time frame longer than 4 hour.