Forex - The Setup

The first thing we are looking for is a very near touch or breach of the Bollinger Bands, this must not be when they are close together as the market is unpredictable at that point. Once we have a breach or near touch of the Bollinger Bands we then have to check the Stochastic Indicator to see if it confirms our intentions. If we had a breach of the upper Bollinger bands we would be looking to go short and therefore need the Stochastic indicator to be over bought and over the 80 line.

If we had a breach of the lower Bollinger bands we would be looking to go long and therefore need the Stochastic indicator to be over sold and under the 20 line. Once both of these conditions are met we look for our entry confirmation which is a candlestick formation, if we don’t see one then we wait until we do, if the trades takes off without us then we wait for the next one.

Stops are placed behind the recent high / low and always moved to break even as soon as possible, usually when in profit by the same amount you risked. Never risk more than 3% of your account on any one trade. Candlestick formations are used to identify the underlying physiology of the market, usually with a reasonable accuracy. Below is an example of a normal falling and raising candlestick.

When a candlestick tries to make a new high/low but fails to close at those levels it gives some clues as to who is in charge, the bulls or the bears. There are literally hundreds of candle stick formations used by traders all over the world to profit from the markets. We are only going to focus 4 formations here in this system, these are the formations I found to be most profitable and occur regularly.

Doji's.

The Doji is generally a small candle indicating a period of indecision with not much movement, the open and close should be at the exact same price but it is acceptable within a pip or two.This small candle if seen after a good move is a strong reversal signal, with confirmation it is very reliable entry point. You will often see the Doji when trading the divergence system, usually when the stochastic is topping/bottoming out, a great confirmation that you are on the right side of the market.

Engulfing.

An engulfing candle is a strong change in momentum in the market often seen off of breaks of support/resistance. For a buy confirmation the first candle would be red followed by a green candle that completely engulfs the previous one. For a sell confirmation the firs candle would be green followed by a red candle that completely engulfs it.You will often see engulfing candles with the 4H breakout system on the break of the support/resistance line, this idicats good volume and momentum in the market.

Inside candle.

The inside candle formation is basically the complete opposite of the engulfing formation, the second candle is formed completely inside the body of the previous candle. This formation give us a heads up that the bears/bulls are loosing steam and the market may be thinking about a reversal. This formation often happens just before a strong move or breakout, be sure to have your eye out for this formation when trading the divergence system.

Pin formation.

The pin formation is one of my favorites, it shows huge emotion of the market indicating a sign of a reversal, in this case the bulls pushed the market high but failed to hold it so price returned back to around the open leaving a pin formation. The pin always points away from where price may be heading, the opposite is true for a bullish pin formation. You will often see these formations after a breakout on the 4H breakout system when the retrace takes place.

These formations take some getting used to in the beginning but with a little practice you will be seeing them everywhere.