And, naturally, a bearish candle has a red body and shadows. 

Even though the market opens Sundays for a few hours in New Zealand, some brokers eliminated the Sunday candle.

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When trading forex, How to Spot and Trade Bullish and Bearish Divergence Patterns. The bullish divergence has absolutely the same characteristics as the.

With this idea in mind we will focus on recognizing and trading one of the markets most clear cut price action signals, the bullish engulfing candle pattern. What is a bullish engulfing pattern?

A bullish engulfing pattern is a candlestick pattern normally foundafter a period of downward market pressure. Pictured above we can see that the bullish engulfing candle pattern is actuallycomprised of two completed candles!

The first candle will normally depict the end of the currency pairs established weakness. This first candle can come in a variety of shapes and sizes and will vary from chart to chart. While it is notdirectly related to the next engulfing pattern, this candle should denote the end of the markets current decline.

Small candles such as dojis are considered preferable in this position though, as they can reflect market indecision in the current trend. Confluence Areas with Candlestick Patterns The idea behind this principle is simple. The more patterns form in an area, the better. If you want, the principle resembles the one used in support and resistance areas.

The price finds it difficult to break an area with multiple support and resistance levels surrounding it. The same with candlestick patterns. Moreover, they work in combination with classic patterns too. The price of a currency pair reverses after it makes two attempts to break higher. And, it failed both times, around the same price level. If on any one of the tops, a bearish engulfing exists, the double top has more strength. Hence, traders combine the candlestick patterns trade with a regular double top trading.

Scale into a bearish engulfing trade Use the double top measured move to trade the classic pattern The difference between comes from the time. Typically, the engulfing pattern reaches the take profit faster. The same thing applies to the triple top, the head and shoulders, and even the rising and falling wedge. When an engulfing pattern forms too, the patterns confluence gives traders more faith in the upcoming trades. From a four-digit trading account to a five-digit quote, the leap happened virtually overnight.

Hence, the way the traders see the market changed too. Imagine how a candlestick chart changes, when the opening and closing levels change. For this reason, candlestick patterns differ than other markets. Fantastic execution altered the patterns. For example, a candlestick stock chart almost always has gaps. The stock market gaps frequently.

As such, the engulfing pattern appears relatively often. The second candle has enough room to engulf the previous one. However, on the Forex market, liquidity makes such a thing impossible during the trading week.

Only over the weekend the market gaps, and even then, not always. Therefore, Forex traders must leave room for the engulfing pattern.

Another thing to remember is the Sunday candle. Some traders chose not to show the Sunday candle anymore. Even though the market opens Sundays for a few hours in New Zealand, some brokers eliminated the Sunday candle. Hence, before interpreting a bullish or bearish engulfing pattern on the daily chart, double and triple check if the Sunday candle appears.

If yes, beware that every six candles, an engulfing pattern may emerge. One last thing to consider. Going back to how to trade the bullish engulfing, the stop loss appears at the lows.

However, some traders disregard it on the Forex market. They use the stop-loss only if the market manages to close below that level. Only then, in their opinion, the support in a bullish engulfing pattern disappears.

Or, bears retake control of the market. If this is true or not, it depends on your beliefs in the market. In any case, such an approach is riskier. Conclusion The bullish and bearish engulfing patterns offer great risk-reward ratios. On top of that, they provide a disciplined approach to trading. The beauty of candlestick patterns is that they form on all time frames. And, on all markets that display a candlestick chart. Keep in mind though, that the position size needs to follow the time frame.

Apparently, a candlestick pattern on the monthly chart or even weekly requires a bigger stop loss than one on the four-hour chart. Merely use a percentage of the trading account on any given trade one or two percent.

Next, adjust the risk to the number of pips needed for a stop loss. Finally, calculate the right volume based on that distance. The rules of trading a bullish engulfing apply to the bearish engulfing pattern too. Also, they both need the presence of a previous trending market. If no trend exists, traders should skip the patterns.

As simple as that. The Stochastic indicator can be used for overbought and oversold readings. This is its primary purpose. However, the Stochastic Oscillator is an excellent tool for recognizing divergence trade setups. In order to find a divergence between price action and Stochastic, you should look for discrepancies between the price direction and Stochastics tops or bottoms.

It acts the same way as with the MACD. The reason for this is the dynamic character of the Stochastic. It simply gives more opportunities than the MACD. However, since the signals can be more frequent, many of them might be false signals which need to be filtered out.

Have a look at the image below. There are two divergences on the chart, which gives an opportunity for two trades. We start by analyzing the first case. We observe higher tops on the chart, while the Stochastic Oscillator creates lower tops.

The price starts decreasing afterwards. However, the Stochastic suddenly starts closing with higher bottoms. This is the second divergence pattern.

The RSI indicator consists of a single line, which moves between an overbought and oversold zone. In this manner, the RSI has a leading character. It is an oscillator like the Stochastic. Therefore, it is a good tool for spotting divergences on your chart. If you spot the pattern, it will provide for an early entry signal for your trade. The image below will show you how to trade divergence with the RSI indicator.

At the bottom of the chart you see the Relative Strength Index indicator. The chart shows lower bottoms, while the RSI shows higher bottoms. We will use the Momentum Indicator to spot divergence with the price action. However, we will enter trades, only if the price breaks the Moving Average of the Bollinger Bands and the bands are expanding at the same time. This way we will get confirmation for our signals and we will enter trades only during high volatility.

We will exit our trades when the price crosses the Moving Average of the Bollinger Bands in the opposite direction. This is how this strategy works: At the bottom of the chart you see the Momentum Indicator. On the price chart you see the Bollinger Bands overlay in green. After a period of price increase, the Momentum Indicator starts recording lower top while price is making higher highs. This is a bearish divergence between the price action and the Momentum Indicator.

Then, we see a large bearish candle, which breaks the Moving Average line between the bands. At the same time, the Bollinger Bands start expanding, indicating higher volatility.

The short trade in this case could have been closed out when price breaks the Moving Average of the Bollinger Bands in bullish direction. The proper location of a stop loss order in this trade should be above the last top of the price action prior the price break at the center Bollinger band line. As you can see the risk was very nominal in relation to the overall profit that could have be realized from this trade.

Money Management when Trading Divergences in Forex We have discussed the types of divergence patterns and some reliable indicators to trade divergence with.


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Bullish Investors who believe that a stock price will increase over time are said to be bullish. Investors who buy calls are bullish on the underlying stock. That is, they believe that the stock price will rise and have paid for the right to purchase the stock at a specific price known as the exercise price or strike price.

After entering a bullish position in the market, naturally, you are what is called "long". Once again, price movement from this point up or down will change a bull’s account value in increments of the chosen market. Long, Short, Bullish and Bearish Every trader should understand these terms since they're used frequently in financial news, trading articles and in the papers. Long, short, bullish and bearish are terms used in all markets and on all time frames, regardless of whether you're day trading or investing, or trading soybeans or currencies. 

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