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Single Candlestick Patterns

Learn how to use single candlestick patterns to identify potential market reversals.

Here are the four basic single Japanese candlestick patterns:

Hammer and Hanging Man

The hammer and hanging man look exactly alike but have totally different meanings depending on

past price action. Both have cute little bodies black or white!" long lower shadows" and short or

absent upper shadows.

The hammer is a bullish reversal pattern that forms during a downtrend. #t is named because the

market is hammering out a bottom.

$hen price is falling" hammers signal that the bottom is near and price will start rising again. The long

lower shadow indicates that sellers pushed prices lower" but buyers were able to overcome this selling

pressure and closed near the open.

Just because you see a hammer form in a downtrend doesn%t mean you automatically place a buy

order& 'ore bullish confirmation is needed before it%s safe to pull the trigger.

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( typical example of confirmation would be to wait for a white candlestick to close above the open to

the right side of the hammer.

)ecognition *riteria:

The long shadow is about two or three times of the real body.

Little or no upper shadow.

The real body is at the upper end of the trading range.

The color of the real body is not important.

The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level.

$hen price is rising" the formation of a hanging man indicates that sellers are beginning to outnumber

buyers.

The long lower shadow shows that sellers pushed prices lower during the session. Buyers were able to

push the price back up some but only near the open.

)ead more: http:++www.babypips.com+school+elementary+,apanese-candle-sticks+lone-rangers-single-

candlestick-patterns.htmlix//0l)$1(2x1

This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to

keep raising the price.

)ecognition *riteria:

( long lower shadow which is about two or three times of the real body.

Little or no upper shadow.

The real body is at the upper end of the trading range.

The color of the body is not important" though a black body is more bearish than a white body.

Inverted Hammer and Shooting Star 

The inverted hammer and shooting star also look identical. The only difference between them is whether you%re in

a downtrend or uptrend. Both candlesticks have petite little bodies filled or hollow!" long upper shadows" and

small or absent lower shadows.

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The inverted hammer occurs when price has been falling suggests the possibility of a reversal. #ts long uppershadow shows that buyers tried to bid the price higher.

However" sellers saw what the buyers were doing" said 34h heck no&5 and attempted to push the price back down.

6ortunately" the buyers had eaten enough of their $heaties for breakfast and still managed to close the session

near the open.

7ince the sellers weren%t able to close the price any lower" this is a good indication that everybody who wants to

sell has already sold. (nd if there are no more sellers" who is left8 Buyers.

The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price

has been rising. #ts shape indicates that the price opened at its low" rallied" but pulled back to the bottom.

This means that buyers attempted to push the price up" but sellers came in and overpowered them. This is a

definite bearish sign since there are no more buyers left because they%ve all been murdered.

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patterns.htmlix//0l)$rw9*

Dual Candlestick Patterns

Engulfing Candles

The bullish engulfing pattern is a two candlestick pattern that signals a strong up move may be coming. #t

happens when a bearish candle is immediately followed by a larger bullish candle.

This second candle 3engulfs5 the bearish candle. This means buyers are flexing their muscles and that there could

be a strong up move after a recent downtrend or a period of consolidation.

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4n the other hand" the bearish engulfing pattern is the opposite of the bullish pattern. This type of candlestick

pattern occurs when the bullish candle is immediately followed by a bearish candle that completely 3engulfs5 it.

This means that sellers overpowered the buyers and that a strong move down could happen.

Tweezer Bottoms and Tops

The twee/ers are dual candlestick reversal patterns. This type of candlestick pattern are usually be spotted after an

extended uptrend or downtrend" indicating that a reversal will soon occur.

)ead more: http:++www.babypips.com+school+elementary+,apanese-candle-sticks+double-trouble-dual-candlestick-patterns.htmlix//0l)Horwwm

;otice how the candlestick formation looks ,ust like a pair of twee/ers&

(ma/ing&

The most effective Twee/ers have the following characteristics:

The first candlestick is the same as the overall trend. #f price is moving up" then the first candle should be

bullish.

The second candlestick is opposite the overall trend. #f price is moving up" then the second candle should

be bearish.

The shadows of the candlesticks should be of e<ual length. Twee/er Tops should have the same highs"

while Twee/er Bottoms should have the same lows.

)ead more: http:++www.babypips.com+school+elementary+,apanese-candle-sticks+double-trouble-dual-candlestick-

patterns.htmlix//0l)#=>ki

Triple Candlestick Patterns

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Evening and Morning Stars

The morning star and the evening star are triple candlestick patterns that you can usually find at the end of a

trend. They are reversal patterns that can be recogni/ed through three characteristics. $e%ll use the ?vening 7tar

@attern on the right as an example of what you may see:

A. The first candlestick is a bullish candle" which is part of a recent uptrend.

. The second candle has a small body" indicating that there could be some indecision in the market. This

candle can be either bullish or bearish.

0. The third candlestick acts as a confirmation that a reversal is in place" as the candle closes beyond the

midpoint of the first candle.

Three White Soldiers and Black Crows

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The three white soldiers pattern is formed when three long bullish candles follow a downtrend" signaling a

reversal has occurred. This type of triple candlestick pattern is considered as one of the most potent in-yo-face

bullish signals" especially when it occurs after an extended downtrend and a short period of consolidation.

The first of the three soldiers is called the reversal candle. #t either ends the downtrend or implies that the period

of consolidation that followed the downtrend is over.

6or the pattern to be considered valid" the second candlestick should be bigger than the previous candle%s body.

(lso" the second candlestick should close near its high" leaving a small or non-existent upper wick.

6or the three white soldiers pattern to be completed" the last candlestick should be at least the same si/e as the

second candle and have a small or no shadow.

)ead more: http:++www.babypips.com+school+elementary+,apanese-candle-sticks+threes-not-a-crowd-triple-candlestick-patterns.htmlix//0l)#,uCk,

The three black crows candlestick pattern is ,ust the opposite of the three white soldiers. #t is formed when three

bearish candles follow a strong uptrend" indicating that a reversal is in the works.

The second candle%s body should be bigger than the first candle and should close at or very near its low. 6inally" the

third candle should be the same si/e or larger than the second candle%s body with a very short or no lower shadow.

Three Inside p and !own

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The three inside up candlestick formation is a trend-reversal pattern that is found at the bottom of a downtrend.

This triple candlestick pattern indicates that the downtrend is possibly over and that a new uptrend has started. 6ora valid three inside up candlestick formation" look for these properties:

A. The first candle should be found at the bottom of a downtrend and is characteri/ed by a long bearish

candlestick.

. The second candle should at least make it up all the way up to the midpoint of the first candle.

0. The third candlestick needs to close above the first candle%s high to confirm that buyers have overpowered

the strength of the downtrend.

*onversely" the three inside down candlestick formation is found at the top of an uptrend. #t means that the

uptrend is possibly over and that a new downtrend has started. ( three inside down candlestick formation needs to

have the following characteristics:

A. The first candle should be found at the top of an uptrend and is characteri/ed by a long bullish candlestick.. The second candle should make it up all the way down the midpoint of the first candle.

0. The third candlestick needs to close below the first candle%s low to confirm that sellers have overpowered

the strength of the uptrend.

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Japanese Candlestick Cheat Sheet

Cid you click here first8 #f you did" stop reading right now and go through the entire Japanese *andlesticks Lessonfirst&

#f you%re )?(LLD done with those" here%s <uick one page reference cheat sheet for single" dual" and triple Japanese

candlestick formations to easily identify what kind of pattern you are looking at whenever you are trading.

)ead more: http:++www.babypips.com+school+elementary+,apanese-candle-sticks+,apanese-candlesticks-cheat-sheet.htmlix//0l)J72'

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Eo ahead and bookmark this pageF ;o need to be shy&

Number of Bars Candlestick Name Bullish or Bearish? hat !t "ooks "ike?

Single

7pinning Top ;eutral

Co,i ;eutral

$hite 'arubo/u Bullish

Black 'arubo/u Bearish

Hammer Bullish

Hanging 'an Bearish

#nverted Hammer Bullish

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7hooting 7tar Bearish

Number of Bars Candlestick Name Bullish or Bearish? hat it "ooks "ike?

Double

Bullish ?ngulfing Bullish

Bearish ?ngulfing Bearish

Twee/er Tops Bearish

Twee/er Bottoms Bullish

Triple

'orning 7tar Bullish

?vening 7tar Bearish

Three $hite 7oldiers Bullish

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Three Black *rows Bearish

Three #nside Gp Bullish

Three #nside Cown Bearish

)ead more: http:++www.babypips.com+school+elementary+,apanese-candle-sticks+,apanese-candlesticks-cheat-sheet.htmlix//0l)Jm)2r;

#ow to $se %ibonacci &etracement to 'nter a %ore( Trade

The first thing you should know about the 6ibonacci tool is that it works best when the forex market is trending.

The idea is to go long or buy! on a retracement at a 6ibonacci support level when the market is trending up" and

to go short or sell! on a retracement at a 6ibonacci resistance level when the market is trending down.

"inding "i#onacci $etracement %evels

#n order to find these 6ibonacci retracement levels" you have to find the recent significant 7wing Highs and 7wings

Lows. Then" for downtrends" click on the 7wing High and drag the cursor to the most recent 7wing Low.

6or uptrends" do the opposite. *lick on the 7wing Low and drag the cursor to the most recent 7wing High.

Eot that8 ;ow" let%s take a look at some examples on how to apply 6ibonacci retracements levels to the

currency markets.

ptrend

This is a daily chart of (GC+G7C.

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Here we plotted the 6ibonacci retracement levels by clicking on the 7wing Low at .=22 on (pril > and dragging

the cursor to the 7wing High at .I on June 0. Tada& The software magically shows you the retracement levels.

(s you can see from the chart" the 6ibonacci retracement levels were .K=22 0.!" .KK 0I.!" .K>=

2>.>!" .K2 A.I!" and .K0 K.!.

;ow" the expectation is that if (GC+G7C retraces from the recent high" it will find support at one of those 6ibonacci

retracement levels because traders will be placing buy orders at these levels as price pulls back.

;ow" let%s look at what happened after the 7wing High occurred.

@rice pulled back right through the 0. level and continued to shoot down over the next couple of weeks. #t

even tested the 0I. level but was unable to close below it.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+fibonacci-retracement.htmlix//0l)Mvlmb

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Later on" around July A" the market resumed its upward move and eventually broke through the swing high.

*learly" buying at the 0I. 6ibonacci level would have been a profitable long term trade&

!owntrend

;ow" let%s see how we would use the 6ibonacci retracement tool during a downtrend. Below is a -hour chart of

?G)+G7C.

(s you can see" we found our 7wing High at A.A=2 on January 2 and our 7wing Low at A.0I2 a few days later

on 6ebruary A. The retracement levels are A.0=00 0.!" A.0=I0 0I.!" A.>0 2>.>!" A.> A.I!

and A.AA K.!.

The expectation for a downtrend is that if price retraces from this low" it could possibly encounter resistance at one

of the 6ibonacci levels because traders who want to play the downtrend at better prices may be ready with sellorders there.

Let%s take a look at what happened next.

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Dow/a" isn%t that a thing of beauty8&

The market did try to rally" stalled below the 0I. level for a bit before testing the 2>.> level. #f you had some

orders either at the 0I. or 2>.> levels" you would%ve made some mad pips on that trade.

#n these two examples" we see that price found  some temporary forex support or resistance at 6ibonacci

retracement levels. Because of all the people who use the 6ibonacci tool" those levels become self-fulfilling support

and resistance levels.

4ne thing you should take note of is that price won%t always bounce from these levels. They should be looked at

as areas of interest " or as *yclopip likes to call them" 3)!"" *+N'S,5 $e%ll teach you more about that later on.

6or now" there%s something you should always remember about using the 6ibonacci tool and it%s that they are not

always simple to use& #f they were that simple" traders would always place their orders at 6ibonacci retracement

levels and the markets would trend forever.

#n the next lesson" we%ll show you what can happen when 6ibonacci retracement levels fail.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+fibonacci-retracement.htmlix//0l)L9ybT

%ibonacci &etracement is N+T %oolproof 

Back in Erade A" we said that support and resistance levels eventually break. $ell" seeing as how 6ibonacci levels

are used to find support and resistance levels" this also applies to 6ibonacci&

6ibonacci retracements do ;4T always work& They are not foolproof. Let%s go through an example when the

6ibonacci retracement tool fails.

Below is a -hour chart of EB@+G7C.

Here" you see that the pair has been in downtrend" so you decided to take out your 6ibonacci retracement tool to

help you spot a good entry point. Dou use the 7wing High at A.20I0" with a swing low at A.K==.

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Dou see that the pair has been stalling at the 2>.> level for the past couple of candles.

Dou say to yourself" 34h man" that 2>.> 6ib level& #t%s holding baby& Time to short this sucka&5 

Dou short at market and start day dreaming that you%ll be driving down )odeo Crive in your

new 'aserati with 7carlett Johansson or if you%re a lady trader" )yan Eosling! in the passenger seatF

;ow" if you really did put an order at that level" not only would your dreams go up in smoke" but your account

would take a serious hit if you didn%t manage your risk properly&

Take a look at what happened.

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#t turns out that that 7wing Low was the bottom of the downtrend and market began to rally above the 7wing High

point.

$hat%s the lesson here8

$hile 6ibonacci retracement levels give you a higher probability of success" like other technical tools" they don%t

always work. Dou don%t know if price will reverse to the 0I. level before resuming the trend.

7ometimes it may hit 2>.> or the A.I levels before turning around. Heck" sometimes price will ,ust ignore 'r.

6ibonacci and blow past all the levels ,ust like how Lebron James bullies his way through the lane with sheer force.

)emember" the market will not always resume its uptrend after finding temporary support or resistance" but

instead continue to go past the recent 7wing High or Low.

(nother common problem in using the 6ibonacci retracement tool is determining which 7wing Low and 7wing High

to use.

@eople look at charts differently" look at different time frames" and have their own fundamental biases. #t is likely

that 7tephen from @ipbuktu and the girl from @ipanema have different ideas of where the 7wing High and 7wing

Low points should be.

The bottom line is that there is no absolute right way to do it" especially when the trend on the chart isn%t so clear.

7ometimes it becomes a guessing game.

That%s why you need to hone your skills and combine the 6ibonacci retracement tool with other tools in your forex

toolbox to help give you a higher probability of success.

#n the next lesson" we%ll show you how to use the 6ibonacci retracement tool in combination with other forms of

support and resistance levels and candlesticks.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+when-fibonacci-fails.htmlix//0l);Jlp=

#ow to $se %ibonacci &etracement with Support and &esistance

Like we said in the previous section" using 6ibonacci levels can be very sub,ective. However" there are ways that

you can help tilt the odds in your favor.

$hile the 6ibonacci retracement tool is extremely useful" it shouldn%t be used all by its lonesome self.

#t%s kinda like comparing it to ;B( superstar Mobe Bryant. Mobe is one of the greatest basketball players of all time"

but even he couldn%t win those titles by himself. He needed some backup.

7imilarly" the 6ibonacci retracement tool should be used in combination with other tools. #n this section" let%s takewhat you%ve learned so far and try to combine them to help us spot some sweet trade setups.

(re y%all ready8 Let%s get this pip show on the road&

"i#onacci $etracement & Support and $esistance

4ne of the best ways to use the 6ibonacci retracement tool is to spot potential support and resistance levels and

see if they line up with 6ibonacci retracement levels.

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#f 6ibonacci levels are already support and resistance levels" and you combine them with other price areas that a

lot of other traders are watching" then the chances of price bouncing from those areas are much higher.

Let%s look at an example of how you can combine support and resistance levels with 6ibonacci levels. Below is a

daily chart of G7C+*H6.

(s you can see" it%s been on an uptrend recently. Look at all those green candles& Dou decide that you want to get

in on this long G7C+*H6 bandwagon.

But the <uestion is" 3$hen do you enter85 Dou bust out the 6ibonacci retracment tool" using the low at A.>A0 on

January AA for the 7wing Low and the high at A.>I== on 6ebruary A= for the 7wing High.

;ow your chart looks pretty sweet with all those 6ibonacci retracement levels.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+combining-fibs-with-support-and-resistance.htmlix//0l);dlp?E

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;ow that we have a framework to increase our probability of finding solid entry" we can answer the <uestion

 3$here should you enter85 

Dou look back a little bit and you see that the A.>2A> price was good resistance level in the past and it ,ust

happens to line up with the 2>.> 6ibonacci retracement level. ;ow that it%s broken" it could turn into support and

be a good place to buy.

#f you did set an order somewhere around the 2>.> 6ib level" you%d be a pretty happy camper&

There would have been some pretty tense moments" especially on the second test of the support level on (pril A.

@rice tried to pierce through the support level" but failed to close below it. ?ventually" the pair broke past the 7wing

High and resumed its uptrend.

Dou can do the same setup on a downtrend as well. The point is you should look for price levels that seem to have

been areas of interest in the past. #f you think about it" there%s a higher chance that price will bounce from these

levels.

$hy8

6irst" as we discussed in Erade A" previous support or resistance levels would be good areas to buy or sell because

other traders will also be eyeing these levels like a hawk.

7econd" since we know that a lot of traders also use the 6ibonacci retracement tool" they may be looking to ,ump

in on these 6ib levels themselves.

$ith traders looking at the same support and resistance levels" there%s a good chance that there are a ton of orders

at those price levels.

$hile there%s no guarantee that price will bounce from those levels" at least you can be more confident about your

trade. (fter all" there is strength in numbers&

)emember that trading is all about probabilities. #f you stick to those higher probability trades" then there%s a

better chance of coming out ahead in the long run.

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#ow to $se %ibonacci &etracement with Trend "ines

(nother good tool to combine with the 6ibonacci retracement tool is trend line analysis. (fter all" 6ibonacci

retracement levels work best when the market is trending" so this makes a lot of sense&

)emember that whenever a pair is in a downtrend or uptrend" traders use 6ibonacci retracement levels as a way to

get in on the trend. 7o why not look for levels where 6ib levels line up right smack with the trend8

Here%s a A-hour chart of (GC+J@D. (s you can see" price has been respecting a short term rising trend line over the

past couple of days.

Dou think to yourself" 3Hmm" that%s a sweet uptrend right there. # wanna buy (GC+J@D" even if it%s ,ust for a short

term trade. # think #%ll buy once the pair hits the trend line again.5 

Before you do that though" why don%t you reach for your forex toolbox and get that 6ibonacci retracement tool out8

Let%s see if we can get a more exact entry price.

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Here we plotted the 6ibonacci retracement levels by using the 7wing low at I.A and the 7wing High at I0.I.

;otice how the 2>.> and A.I 6ib levels are intersected by the rising trend line.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+combining-fibs-with-trend-lines.htmlix//0l))sb$M?

*ould these levels serve as potential support levels8 There%s only one way to find out&

Euess what8 The A.I 6ibonacci retracement level held" as price bounced there before heading back up. #f you

had set some orders at that level" you would have had a perfect entry&

( couple of hours after touching the trend line" price /oomed up like (stro Boy on )ed Bull" bursting through the

7wing High.

(ren%t you glad you%ve got this in your forex toolbox now8

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(s you can see" it does pay to make use of the 6ibonacci retracement tool" even if you%re planning to enter on a

retest of the trend line. The combination of both a diagonal and a hori/ontal support or resistance level could mean

that other traders are eying those levels as well.

Take note though" as with other drawing tools" drawing trend lines can also get pretty sub,ective.

Dou don%t know exactly how other traders are drawing them" but you can count on one thing N that there%s a trend&

#f you see that a trend is developing" you should be looking for ways to go long to give you a better chance of a

profitable trade. Dou can use the 6ibonacci retracement tool to help you find potential entry points.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+combining-fibs-with-trend-lines.htmlix//0l)7I()v<

#ow to $se %ibonacci &etracement with Japanese Candlesticks

#f you%ve been paying attention in class" you%d know by now that you can combine the 6ibonacci retracement tool

with support and resistance levels and trend lines to create a simple but super awesome trading strategy.But we ain%t done yet& #n this lesson" we%re going to teach you how to combine the 6ibonacci retracement tool with

your knowledge of Japanese candlestick patterns that you learned in Erade .

#n combining the 6ibonacci retracement tool with candlestick patterns" we are actually looking for exhaustive

candlesticks. #f you can tell when buying or selling pressure is exhausted" it can give you a clue of when price may

continue trending.

$e here at Baby@ips.com like to call them 36ibonacci *andlesticks"5 or 3%ib Sticks5 for short. @retty catchy" eh8

Let%s take a look at an example to make this clearer.

Below is a A-hour chart of ?G)+G7C.

The pair seems to have been in a downtrend the past week" but the move seems to have paused for a bit. $ill

there be a chance to get in on this downtrend8 Dou know what this means. #t%s time to take the 6ibonacci

retracement tool and get to work&

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(s you can see from the chart" we%ve set our 7wing High at A.00 on 'arch 0" with the 7wing Low at A.20 on

'arch .

7ince it%s a 6riday" you decided to ,ust chill out" take an early day off" and decide when you wanna enter once you

see the charts after the weekend.

$hoa& By the time you popped open your charts" you see that ?G)+G7C has shot up <uite a bit from its 6riday

closing price.

$hile the 2>.> 6ib level held for a bit" buyers eventually took the pair higher. Dou decide to wait and see whether

the A.I 6ib level holds. (fter all" the last candle was pretty bullish& $ho knows" price ,ust might keep shooting

up&

)ead more: http:++www.babypips.com+school+elementary+fibonacci+combining-fibs-with-candlesticks.htmlix//0l)7rkwM>

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$ell" will you look at that8 ( long legged do,i has formed right smack on the A.I 6ibonacci retracement level. #f

you paid attention in Erade " you%d know that this is an 3exhaustive candle.5 Has buying pressure died down8 #sresistance at the 6ibonacci retracement level holding8 #t%s possible. 4ther traders were probably eyeing that 6ib

level as well.

#s it time to short8 Dou can never know for sure which is why risk management is so important!" but the

probability of a reversal looks pretty darn good&

#f you had shorted right after that do,i had formed" you could have made some serious profits. )ight after the do,i"

price stalled for a bit before heading straight down. Take a look at all those red candles&

#t seems that buyers were indeed pretty tired" which allowed sellers to ,ump back in and take control. ?ventually"

price went all the way back down to the 7wing Low. That was a move of about 2>> pips& That could%ve been your

trade of the year&

Looking for 36ib 7ticks5 can be really useful" as they can signal whether a 6ibonacci retracement level will hold.

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#f it seems that price is stalling on a 6ib level" chances are that other traders may have put some orders at those

levels. This would act as more confirmation that there is indeed some resistance or support at that price.

(nother nice thing about 6ib 7ticks is that you don%t need to place limit orders at the 6ib levels. Dou may have

some concerns whether the support or resistance will hold since we are looking at a 3/one5 and not necessarily

specific levels.

This is where you can use your knowledge of candlestick formations.

Dou could wait for a 6ib 7tick to form right below or above a 6ibonacci retracement level to give you more

confirmation on whether you should put in an order.

#f a 6ib stick does form" you can ,ust enter a trade at market price since you now have more confirmation that level

could be holding.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+combining-fibs-with-candlesticks.htmlix//0l)T?mth

#ow to $se %ibonacci '(tensions to )now hen to Take Profit

The next use of 6ibonacci will be using them to find targets.

Eotta always keep in mind 3ombieland )ules of 7urvival 5 N $hen in doubt" know your way out& Let%s start

with an example in an uptrend.

#n an uptrend" the general idea is to take profits on a long trade at a 6ibonacci @rice ?xtension Level. Dou

determine the 6ibonacci extension levels by using three mouse clicks.

6irst" click on a significant 7wing Low" then drag your cursor and click on the most recent 7wing High. 6inally" drag

your cursor back down and click on any of the retracement levels.

This will display each of the @rice ?xtension Levels showing both the ratio and corresponding price levels. @retty

neat" huh8

Let%s go back to that example with the G7C+*H6 chart we showed you in the previous lesson.

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The 2>.> 6ib level held strongly as support and" after three tests" the pair finally resumed its uptrend. #n thechart above" you can even see price rise above the previous 7wing High.

Let%s pop on the 6ibonacci extension tool to see where would have been a good place to take off some profits.

Here%s a recap of what happened after the retracement 7wing Low occurred:

@rice rallied all the way to the A.I level" which lined up closely with the previous 7wing High. #t fell back to the 0I. level" where it found support

@rice then rallied and found resistance at the A>> level.

( couple of days later" price rallied yet again before finding resistance at the AA.I level.

(s you can see from the example" the A.I" A>> and AA.I levels all would have been good places to take

off some profits.

;ow" let%s take a look at an example of using 6ibonacci extension levels in a downtrend.

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#n a downtrend" the general idea is to take profits on a short trade at a 6ibonacci extension level since the market

often finds support at these levels.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+fibonacci-extensions.htmlix//0l)Tkhid

Let%s take another look at that downtrend on the A-hour ?G)+G7C chart we showed you in the 6ib 7ticks lesson.

Here" we saw a do,i form ,ust under the A.I 6ib level. @rice then reversed as sellers ,umped back in" and

brought price all the way back down to the 7wing Low.

Let%s put up that 6ib ?xtension tool to see where would have been some good places to take profits had we shorted

at the A.I retracement level.

Here%s what happened after price reversed from the 6ibonacci retracement level:

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#f you had shorted at the 2>.>" you could have placed your stop loss order ,ust past the A.I 6ib level.

The reasoning behind this method of setting stops is that you believed that the 2>.> level would hold as a

resistance point. Therefore" if price were to rise beyond this point" your trade idea would be invalidated.

The problem with this method of setting stops is that it is entirely dependent on you having a perfect entry.

7etting a stop ,ust past the next 6ibonacci retracement level assumes that you are really confident that the support

or resistance area will hold. (nd" as we pointed out earlier" using drawing tools isn%t an exact science.

The market might shoot up" hit your stop" and eventually go in your direction. This is usually when we%d go to a

corner" and start hitting our head on the wall.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+placing-stops-with-fibs.htmlix//0l)Gn#kh4

$e%re ,ust warning you that this might happen" sometimes a few times in a row" so make sure you limit your losses

<uickly and let your winners run with the trend. #t might be best if you used this type of stop placement method for

short term" intraday trades.

;ow" if you want to be a little safer" another way to set your stops would be to place them past the recent 7wing

High or 7wing Low.

This type of stop loss placement would give your trade more room to breathe and give you a better chance for the

market to move in favor of your trade.

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#f the market price were to surpass the 7wing High or 7wing Low" it may indicate that a reversal of the trend isalready in place. This means that your trade idea or setup is already invalidated and that you%re too late to ,ump in.

7etting larger stop losses would probably be best used for longer term" swing-type trades" and you can also

incorporate this into a 3scaling in5 method" which you will learn later on in this course.

4f course" with a larger stop" you also have to remember to ad,ust your position si/e accordingly.

#f you tend to trade the same position si/e" you may incur large losses" especially if you enter at one of the earlier

6ib levels.

This can also lead to some unfavorable reward-to-risk ratios" as you may have a wide stop that isn%t proportional to

your potential reward.

So which wa' is #etter(

The truth is" ,ust like in combining the 6ibonacci retracement tool with support and resistance" trend lines" and

candlesticks to find a better entry" it would be best to use your knowledge of these tools to analy/e the current

environment to help you pick a good stop loss point.

(s much as possible" you shouldn%t rely solely on 6ibonacci levels as support and resistance points as the basis for

stop loss placement.

)emember" stop loss placement isn%t a sure thing" but if you can tilt the odds in your favor by combining multiple

tools" it could help give you a better exit point" more room for your trade to breathe" and possibly a better reward-

to-risk ratio trade.

)ead more: http:++www.babypips.com+school+elementary+fibonacci+placing-stops-with-fibs.htmlix//0l)92Ls

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