Ready for some live examples/ walkthroughs?
Cool. If by chance you have landed on this page first please ensure you read Part 1 of this Trading tip before carrying on otherwise it may not make any sense.
Ok, so lets take a look at a couple of markets from today (24th March 2016)
First up is GBPUSD on the 5min timeframe;
In this screenshot what I’m indicating using the arrow is the last dominant selling candle in the initial downward trend;
What happens next is that a large green candle forms challenging the sellers;
However, take note in the following screenshot that at no point do the buyers overcome the last dominant selling candle (arrowed)
So, at this point you would know that sellers still have control of the market & should be avoiding any buy trades. What happens next is that the sellers take back the initiative thus creating sell trade entries;
As price moves downwards we now have more dominant selling candles forming. I’ve arrowed the next one that has formed below & also notice how the buyers try to overcome it with the spike upwards;
Let’s fast forward a bit to the point where the buyers do indeed overcome the last dominant selling candle;
Note the green candle as indicated by the red arrow has not only over come the last dominant selling candle (black arrow) but has also closed beyond it. This would indicate that buyers are about to take control of the market.
The next questions that spring to mind are where is entries, stops etc etc however in this article I want to cover off the basics & in Part 3 I’ll cover off the entries, exits & specifics.
Note in this next screenshot that the sellers try to take back control pretty much straight away but fail;
After this you will notice that the buyers have full control of the market & sure enough, up it moves.
That was a pretty easy market to read but what about the Dax which was a little bit more erratic? Lets have a look.
Ok, so in the next screenshot I have indicated the last dominant selling candle & you will notice the next arrowed green candle is the buyers trying to take control but failing;
Following this you would be looking for sell entries & raking in the pips. (Thats the idea anyway!)
As the market moves downward then as normal, fresh dominant candles start forming. In the next screenshot we have a great example of where people can potentially get caught out;
The first arrow is the last dominant selling candle followed by arrow 2 which is the buyers starting to make their move & the third candle is the one which actually breaches & closes beyond the last dominant selling candle. You would assume that buyers now have control however remember they only potentially have control & in this example the third candle has no further follow through suggesting the buyers have exhausted themselves. The candle that breaks & closes beyond the last dominant candle must itself have further movement beyond its highest point in order to confirm control of the market as per the GBPUSD example.
In the next screenshot we see the sellers take back control & also overcoming the last dominant buying candle giving a very nice sell entry;
The market then drops nicely & again, starts to form fresh dominant selling candles. In the next example we see yet again, the buyers trying to work their way back into control;
Yet again, even though the buyers manages to break & close beyond the last dominant candle, there is no follow through beyond the high of this candle therefore suggesting a weakness in the buyers. They are trying, bless them, but no one is picking up the gauntlet!
And yet again, fresh dominant candles are formed & again the buyers are trying to get a foothold into the market;
As mentioned before, these are all areas where traders get fooled into reversal trades thinking they can get an ultra early entry into a massive reversal. However by understanding the buyers vs sellers (& vice versa) you can prevent yourself getting trapped in these moves.
Lastly, you can see good solid sell entries where the sellers once again overcome any dominant buying candles;
Now, all of this is magnifico, however spotting dominant candles can be subjective however watching these moves play out will go a very long way in identifying them. There is no right or wrong answer in what is or isn’t a dominant candle however a good starting point is looking for decent, healthy solid candles.
In part 3 I’ll be showing you entries & examples of stop levels.
Hope thats useful!