Long Wicked Candles and Inside Bar forex System

Rules of the method: None. This is chart analysis, and every situation is different, so there are no “enter when x crosses y” type rules here. You have to use your brain... there is no blind rule following here! Indicators used: None. All you need is the ability to draw lines on your chart.
Timeframe: Any timeframe will work, but higher ones work best.
I don't trade on anything less than a 4 hour chart.
Pairs: This method works on any pair, although I personally like GBP/JPY!
Candlesticks formations
I know candlestick formations and patterns can be confusing, but don't worry. You don't need to memorize dozens of candle patterns with weird Japanese names in order to trade! All we need are two basic candle concepts... Long Wicked Candles and Inside Candles.
Long Wicked Candles (LWC) are just what they sound like, candles with long wicks. I've circled some LWC's on the chart below. Notice that almost every time price changes direction we see a LWC
Long Wicked Candles and Inside Bar forex System
“There are long wicked candles all over that chart, and they aren't just in the places where price is
reversing!” You're right, but remember we aren't basing trades off these LWC's by themselves. They are simply a tool to help us identify price reversals. We need to use them along with all the other tools we're going to learn later in the method.
The other type of candlestick we're going to be using is the Inside Candle, also known as an Inside Bar, or IB. Even though we're using candlesticks and not bars I've gotten used to calling these IB's, so just humor me here. An IB is a candle that is completely engulfed by the previous candle.
Long Wicked Candles and Inside Bar forex System
Notice how the top of the green candle is lower than the top of the red candle, and the bottom of the green candle is higher than the bottom of the red candle? This is an IB. An IB is the same type of signal as a LWC. It can tell us that a possible reversal is coming. Here's a chart with some IB's circled.
Long Wicked Candles and Inside Bar forex System
Remember, we're not taking any trades based off LWC's or IB's alone, they are used in conjunction with the other lessons we're about to learn.
Support and Resistance Zones
Understanding support and resistance is essential if you want to successfully interpret Forex charts, but what exactly is support and resistance (abbreviated S+R)?
What causes S+R is an economic question that's beyond the scope of this lesson, but understanding the reason for it really isn't important to us anyway. All we need to know is this...
RESISTANCE levels exists above the current price, and act as a barrier to the price increasing above the level. Imagine you were inside your house and tried to jump up through the roof... You would encounter resistance from your ceiling, and it would be very hard to break through that resistance.
SUPPORT levels exist below the current price, and act as a barrier to the price falling below the level. When you fall back down from your previous jump you will encounter support from the floor when you hit it. You would have to do a lot of stomping to break through the support of your floor So why is it important that you know where the current support and resistance levels are? The reason is simple... Support and resistance levels are places where price direction can possibly reverse onyou. So if you know ahead of time where they are, then you can take profit on your trades before the price reverses against you, and you can enter into new trades!
So how do we find these S+R levels. It's actually pretty easy, it just takes practice to get good at it.
Look at this chart... The gray bar marks a very strong area of support. A total of 15 candles have their bottoms on or in this gray box. I call an area such as this an S+R zone.
Long Wicked Candles and Inside Bar forex System

Here's the same chart, with an area of resistance added. A total of 9 candles have their tops on or in this gray box.
Long Wicked Candles and Inside Bar forex System
We can see in the above picture that the price is heading back up, so if we were in a trade where do you think a good exit point might be? That's right, the upper S+R zone!
You may have noticed that I'm using what I call S+R zones, and not single S+R lines like a lot of other traders. Lines tend to be too rigid for me, because prices rarely bounce directly off a certain line. A zone is a much more realistic representation of S+R levels. So how do we use these S+R zones to trade? You can trade directly off S+R bounces, but I like to add one more tool to the toolbox... The trendline!
Predicting Trends
Anyone who's been trading for any time at all has heard the phrase “The trend is your friend,” but what exactly is a trend, and more importantly, how to we predict them and use them to our advantage?
A trend is nothing more than a series of higher highs and higher lows (or lower highs/lows for a downward trend). The following picture is a GBP/JPY daily chart. I've marked the trend with two purple trendlines, and I've circled the significant high/low points of the trend. Notice how the high points I've circled in blue keep getting lower and lower, and how the low points circled in red also keep getting lower?
Long Wicked Candles and Inside Bar forex System
When this pattern of lower highs and lower lows stops it means the trend is coming to an end, and that a new trend will be beginning. Here are the three things to look for that signal the death of a trend.
1. A break in the trend's trendline. A trendline is just a line connecting the significant high/low points of a trend.
2. A high that's above the previous major high point.
3. A low that's above the previous major low point.
This example is for a downward trend, an upward trend would need to use the opposite of steps 2 and 3. On the next page is a chart that zooms in on the end of this trend and shows these 3 things.
Long Wicked Candles and Inside Bar forex System
All 3 criteria have been identified, so we can safely say this trend is coming to an end and a new trend is beginning.
Here's a chart that shows our signals were correct. The old downward trend ended and new upward trend began. It did not last very long, however, and you can see the same 3 signs again at the point where the new trend ended.
See if you can pick them out...
Long Wicked Candles and Inside Bar forex System
Finding Entries, Stoplosses and Profit Targets.
Let's practice putting everything we've learned together to find potential trades. Here is a EUR/JPY 4H chart with trendlines and S+R zones already drawn. Can you see the trade opportunity?
Long Wicked Candles and Inside Bar forex System
As you can see, the last candle on the chart is a Long Wicked Candle, and it has bounced directly off both an S+R zone and off a trendline. This makes it an excellent trade opportunity! But when do we enter, and what do we use for our stoploss and profit target? In the picture on the next page I've added two lines to our chart. An orange line for our entry point, and a red line for our stoploss.
Long Wicked Candles and Inside Bar forex System
The Entry:
Before we enter we need to confirm that this is a valid price reversal. Even though all the signs of a reversal are there, we need to be safe and wait for the actual reversal to start. To confirm the price is reversing we want to wait until the current candle moves a few pips above the red LWC that signaled the reversal. This is represented by the orange 132.45 line in the above picture. After the price broke above that orange line I would have entered the trade. Remember, we're not waiting for the candle to close, just move above the line. If we wait for a close we'll miss out on too much profit!
The StopLoss:
We want our stop to be somewhere safe, in a place is is very unlikely to get hit. In this case I would place my stop at the red 131.40 line, which is on the other side of both the S+R zone and the trendline. You'll also notice that if price did reach this level then we would have a lower low than the previous 131.46 low. This would mean our upwards trend was failing, and that the price is probably not going to go back up anyway, so it's a great place for a stoploss.
The TakeProfit:
For a TP level I would be watching two different areas, the upper S+R zone, and the area around the upper trendline. If the price started to reversal around the S+R zone, I would take my profit and be out of the trade, but if it moved through the zone, I would exit around the upper trendline. You could also exit half your position at the S+R zone and the other half at the trendline, if you prefer. Either way is acceptable. Let's look at the chart after the trade is completed...
Long Wicked Candles and Inside Bar forex System
As you can see, the candle after our entry flew straight through the S+R zone, and on the candle after that price touched our trendline, signaling our exit from the trade. If you got out on the trendline touch you would have gotten 230 pips with a 105 pip risk. That's a reward:risk ratio of 2.19, and was an excellent trade. Even if you waited and got out after the bounce you still would have gotten +180 pips That's the conclusion of my basic chart analysis method, but here is one more picture to help you see how to spot trades. In the following picture the orange line is the entry, the red line the stoploss, and the dark green is the profit target.
Long Wicked Candles and Inside Bar forex System


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