Fibonacci is a huge subject and there are many different Fibonacci studies with weird-sounding names but we’re going to stick to two: retracement and extension.

Let us first start by introducing you to the Fib man himself…Leonardo Fibonacci.

No, Leonardo Fibonacci isn’t some famous chef. Actually, he was a famous Italian mathematician, also known as a super-duper uber ultra geek.

He had an “Aha!” moment when he discovered a simple series of numbers that created ratios describing the natural proportions of things in the universe.

The ratios arise from the following number series: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…

This series of numbers is derived by starting with 0 followed by 1 and then adding 0 + 1 to get 1, the third number.

Then, adding the second and third numbers (1 + 1) to get 2, the fourth number, and so on.

After the first few numbers in the sequence, if you measure the ratio of any number to the succeeding higher number, you get .618.

For example, 34 divided by 55 equals .618.

If you measure the ratio between alternate numbers you get .382.

For example, 34 divided by 89 = 0.382 .

You have now just experienced the Fibonacci Sequence!

## Fibonacci Sequence

Fibonacci sequence is formed by taking 2 numbers, any 2 numbers, and adding them together to form a third number.

Then the second and third numbers are added again to form the fourth number.

And you can continue this until it’s not fun anymore.

The ratio of the last number over the second-to-the-last number is approximately equal to 1.618.

This ratio can be found in many natural objects, so this ratio is called the golden ratio.

It appears many times in geometry, art, architecture, and even on Sonic the Hedgehog.

The golden ratio is actually an irrational number, like pi, and is often denoted by the Greek letter, phi (φ).

Okay, that’s enough mumbo jumbo.

With all those numbers, you could put an elephant to sleep. We’ll just cut to the chase; these are the ratios you HAVE to know:

## Fibonacci Retracement Levels

0.236, 0.382, 0.618, 0.764

## Fibonacci Extension Levels

0, 0.382, 0.618, 1.000, 1.382, 1.618

You won’t really need to know how to calculate all of this. Your charting software will do all the work for you.

However, it’s always good to be familiar with the basic theory behind the indicator so you’ll have the knowledge to impress your date.

Fibonacci retracement levels work on the theory that after a big price moves in one direction, the price will retrace or return partway back to a previous price level before resuming in the original direction.

Traders use the Fibonacci retracement levels as potential support and resistance areas.

Since so many traders watch these same levels and place buy and sell orders on them to enter trades or place stops, the support and resistance levels tend to become a self-fulfilling prophecy.

Traders use the Fibonacci extension levels as profit-taking levels.

Again, since so many traders are watching these levels to place buy and sell orders to take profits, this tool tends to work more often than not due to self-fulfilling expectations.

Most charting software includes both Fibonacci retracement levels and extension level tools.

In order to apply Fibonacci levels to your charts, you’ll need to identify Swing High and Swing Low points.

Swing High is a candlestick with at least two lower highs on both the left and right of itself.

Swing Low is a candlestick with at least two higher lows on both the left and right of itself.

Did you get all that? Don’t worry, we’ll explain retracements, extensions, and most importantly, how to grab some pips using the Fibonacci tool in the following lessons.

## Candlesticks with Support and Resistance

Remember, candlesticks are useless on their own, and you must always consider the market environment and what the price is telling you.

But before we begin, just a few words of caution…

As with any technical indicator or tool, if candlesticks point to a reversal or continuation that does NOT mean it will happen.

This is the forex market and nothing is set in stone!

## Using Candlesticks with Support and Resistance

The simplest way to use candlesticks is with support and resistance levels.

Because support and resistance levels determine areas, where buyers and sellers have set up their defenses, looking at how candlesticks react to them, will help you greatly in predicting where price will head next.

Here’s a real forex world example:

In this scenario, you can see that there is resistance around the 1.4900 level.

You badly want to enter but you decide to wait instead because the candle that touched this level looks very bullish.

Two candles later, you spot a nice three inside down candlestick pattern, which is considered a very potent bearish signal.

Using the formation as your sell signal confirmation, you go ahead and short the pair.

Since you’re a smart trader, you also set a stop loss above the resistance.

Because of your high level of patience and your knowledge of candlestick formations, you have greatly increased the odds in your favor.

Let’s see what happened after you shorted…

Ka-pow! The pair almost immediately goes in your favor and nets you hundreds of pips.

You go to the nearest car dealership and buy yourself an exotic sports car.

And a jet. With matching colors.

You might be thinking, “Why do I have to pair support and resistance levels with candlesticks? I could get a lot more signals with just candlesticks and make more money!”

We’ve taken the liberty of highlighting some potential trade signals based solely on candlestick formations.

Take a look!

If you had traded on those candlesticks formations alone, you would have lost every single time!

By simply pairing candlestick formations WITH support and resistance levels, you have increased your odds your winning.

## Triple Candlestick Patterns

To identify triple Japanese candlestick patterns, you need to look for specific formations that consist of three candlesticks in total.

These candlestick formations help traders determine how the price is likely to behave next.

Some three candlestick patterns are reversal patterns, which signal the end of the current trend and the start of a new trend in the opposite direction.

And other three candlestick patterns are continuation patterns, which signal a pause and then the continuation of the current trend.

Let’s take a look at the popular triple Japanese candlestick patterns.

## 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 recognized through three characteristics.

We’ll use the Evening Star Pattern on the right as an example of what you may see:

1. The first candlestick is a bullish candle, which is part of a recent uptrend.
2. 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.
3. 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

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. It either ends the downtrend or implies that the period of consolidation that followed the downtrend is over.

For the Three White Soldiers pattern to be considered valid, the second candlestick should be bigger than the previous candle’s body.

Also, the second candlestick should close near its high, leaving a small or non-existent upper wick.

For the Three White Soldiers pattern to be completed, the last candlestick should be at least the same size as the second candle and have a small or no shadow.

The Three Black Crows candlestick pattern is just the opposite of the Three White Soldiers.

It 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.

Finally, the third candle should be the same size or larger than the second candle’s body with a very short or no lower shadow.

For the Three Black Crows pattern to be completed, the last candlestick should be at least the same size as the second candle and have a small or no shadow.

## Three Inside Up and Down

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.

For a valid three inside up candlestick formation, look for these properties:

1. The first candle should be found at the bottom of a downtrend and is characterized by a long bearish candlestick.
2. The second candle should at least make it up all the way up to the midpoint of the first candle.
3. The third candlestick needs to close above the first candle’s high to confirm that buyers have overpowered the strength of the downtrend.

Conversely, the Three Inside Down candlestick formation is found at the top of an UPTREND.

It means that the uptrend is possibly over and that a new downtrend has started.

A Three Inside Down candlestick formation needs to have the following characteristics:

1. The first candle should be found at the top of an uptrend and is characterized by a long bullish candlestick.
2. The second candle should make it up all the way down the midpoint of the first candle.
3. The third candlestick needs to close below the first candle’s low to confirm that sellers have overpowered the strength of the uptrend.

## Dual Candlestick Patterns

What’s better than single candlestick patterns?

DUAL candlestick patterns!

To identify dual Japanese candlestick patterns, you need to look for specific formations that consist of TWO candlesticks in total.

## Engulfing Candles

There are two types of Engulfing candles: Bullish Engulfing and Bearish Engulfing.

The Bullish Engulfing pattern is a two candlestick reversal pattern that signals a strong up move may occur.

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

This second candle “engulfs” 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.

On 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 “engulfs” it.

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

## Tweezer Bottoms and Tops

Tweezer patterns are two candlestick reversal patterns.

This type of candlestick pattern is usually spotted after an extended uptrend or downtrend, indicating that a reversal will soon occur.

There are two types of Tweezer patterns: the Tweezer Bottom and the Tweezer Top.

Notice how the candlestick formation looks just like a pair of tweezers!

Amazing!

The most effective Tweezers have the following characteristics:

The first candlestick is the same as the overall trend. If the price is moving up, then the first candle should be bullish.

The second candlestick is opposite the overall trend. If the price is moving up, then the second candle should be bearish.

The shadows of the candlesticks should be of equal (or near-equal) length.

## Single Candlestick Patterns

When these types of candlesticks appear on a chart, they can signal 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. It is named because the market is hammering out a bottom.

When the price is falling, hammers signal that the bottom is near and the 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! More bullish confirmation is needed before it’s safe to pull the trigger.

A typical example of confirmation would be to wait for a white candlestick to close above the open to the right side of the Hammer.

### Recognition Criteria for a Hammer:

• 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.

When the 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.

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.

### Recognition Criteria for a Hanging Man:

• A 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.

An Inverted Hammer is a bullish reversal candlestick.

A Shooting Star is a bearish reversal candlestick.

Both candlesticks have petite little bodies (filled or hollow), long upper shadows, and small or absent lower shadows.

### Inverted Hammer

The Inverted Hammer occurs when the price has been falling suggests the possibility of a reversal. Its long upper shadow shows that buyers tried to bid the price higher.

However, sellers saw what the buyers were doing, said “Oh heck no!” and attempted to push the price back down.

Fortunately, the buyers had eaten enough of their Wheaties for breakfast and still managed to close the session near the open.

Since 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.

And if there are no more sellers, who are left? Buyers.

### Shooting Star

The Shooting Star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when the price has been rising.

Its 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 overpowered.

## Spinning Tops

Japanese candlesticks with a long upper shadow, long lower shadow, and small real bodies are called spinning tops. The color of the real body is not very important.

The Spinning Top pattern indicates the indecision between the buyers and sellers.

The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand.

Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime.

Neither buyers nor sellers could gain the upper hand, and the result was a standoff.

• If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.
• If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

## Marubozu

Sounds like some kind of voodoo magic, huh? “I will cast the evil spell of the Marubozu on you!”

Fortunately, that’s not what it means. Marubozu means there are no shadows from the bodies.

The word “marubozu ” translates to “bald head” or “shaved head” in Japanese.

So a Marubozu candlestick is a bald candle or shaved candle means it has no shadow or wick.

Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as its open or close.

Check out the two types of Marubozus in the picture below.

White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price.

This means that the candle opened at its lowest price and closed at its highest price.

This is a very bullish candle as it shows that buyers were in control of the entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.

Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low.

This means that the candle opened at its highest price and closed at its lowest price.

This is a very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal.

Depending on where a marubozu is located and what color it is, here are few guidelines:

White Marubozu

• If a White Marubozu forms at the end of an uptrend, a continuation is likely.
• If a White Marubozu forms at the end of a downtrend, a reversal is likely.

Black Marubozu

• If a Black Marubozu forms at the end of a downtrend, a continuation is likely.
• If a Black Marubozu forms at the end of an uptrend, a reversal is likely.

## Doji

Doji candlesticks have the same open and close price or at least their bodies are extremely short. A Doji should have a very small body that appears as a thin line.

Doji candles suggest indecision or a struggle for turf positioning between buyers and sellers.

Prices move above and below the open price during the session, but close at or very near the open price.

Neither buyers nor sellers were able to gain control and the result was essentially a draw.

There are FOUR special types of Doji candlesticks.

The length of the upper and lower shadows can vary and the resulting forex candlestick looks like a cross, inverted cross, or plus sign.

The word “Doji” refers to both the singular and plural form.

When a Doji forms on your chart, pay special attention to the preceding candlesticks.

If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening.

In order for the price to continue rising, more buyers are needed but there aren’t any more! Sellers are licking their chops and are looking to come in and drive the price back down.

If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weakening.

In order for the price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.

While the decline is sputtering due to a lack of new sellers, further buying strength is required to confirm any reversal.

Look for a white candlestick to close above the long black candlestick’s open.

In the next following lessons, we will take a look at specific Japanese candlestick patterns and what they are telling us.

Hopefully, by the end of this lesson on Japanese candlesticks, you will know how to recognize different types of candlestick patterns and make sound trading decisions based on them.

## Japanese Candlestick Anatomy

Let’s break down the different parts of a Japanese candlestick.

## Sexy Bodies

Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!

Long bodies indicate strong buying or selling.

The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.

Short bodies imply very little buying or selling activity. In trading lingo, bulls mean buyers and bears mean sellers.

Long white Japanese candlesticks show strong buying pressure.

The longer the white candlestick, the further the close is above the open.

This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls were kicking the bears’ butts big time!

Long black (filled) candlesticks show strong selling pressure.

The longer the black Japanese candlestick, the further the close is below the open.

This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body-slamming them.

Upper shadows signify the session high.

Lower shadows signify the session low.

Candlesticks with long shadows show that trading action occurred well past the open and close.

Japanese candlesticks with short shadows indicate that most of the trading action was confined near the open and close.

If a Japanese candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher.

But for one reason or another, sellers came in and drove prices back DOWN to end the session back near its open price.

If a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced the price lower.

## What is a Japanese Candlestick?

Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. That’s right, rice.

Traders be hustin’ back then also. To rock ice, you traded rice. 💎

A Westerner by the name of Steve Nison “discovered” this secret technique called “Japanese candlesticks,” learning it from a fellow Japanese broker.

Steve researched, studied, lived, breathed, ate candlesticks, and began to write about it.

Slowly, this secret technique grew in popularity in the ’90s.

To make a long story short, without Steve Nison, candlestick charts might have remained a buried secret.

Steve Nison is Mr. Candlestick.

## What are Japanese candlesticks?

The best way to explain is by using a picture:

Japanese candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes ….whatever you want!

They are used to describe the price action during the given time frame.

Japanese candlesticks are formed using the open, high, low, and close of the chosen time period.

• If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
• If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
• The hollow or filled section of the candlestick is called the “real body” or body.
• The thin lines poking above and below the body display the high/low range and are called shadows.
• The top of the upper shadow is the “high“.
• The bottom of the lower shadow is the “low“.

## How to Trade Support and Resistance

Now that you know the basics of how to trade support and resistance, it’s time to apply these basic but extremely useful technical tools in your trading.

Because here at BabyPips.com we want to make things easy to understand, we have divided how to trade support and resistance levels into two simple ideas: the Bounce and the Break.

## The Bounce

As the name suggests, one method of trading support and resistance levels is right after the bounce.

Many retail forex traders make the error of setting their orders directly on support and resistance levels and then just waiting for their trade to materialize.

Sure, this may work at times but this kind of trading method assumes that a support or resistance level will hold without price actually getting there yet.

You might be thinking, “Why don’t I just set an entry order right on the line? That way, I am assured the best possible price.”

When playing the bounce, we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold.

For example, instead of simply buying right off the bat, we want to wait for it to bounce off support before entering.

If you’ve been looking to go short, you want to wait for it to bounce off resistance before entering.

By doing this, you avoid those moments where price moves fast and break through support and resistance levels. From experience, catching a falling knife when trading can get really bloody!

## The Break

In a perfect world, support and resistance levels would hold forever, politicians would never lie, McDonald’s would be healthy, and we’d all have jetpacks.

In a perfect forex trading world, we could just jump in and out whenever price hits those major support and resistance levels and earn loads of money.

The fact of the matter is that these levels break… often.

So, it’s not enough to just play bounces. You should also know what to do whenever support and resistance levels give way!

There are two ways to play breaks in trading: the aggressive way or the conservative way.

## The Aggressive Way

The simplest way to play breakouts is to buy or sell whenever price passes convincingly through a support or resistance zone.

The keyword here is convincing because we only want to enter when the price passes through a significant support or resistance level with ease.

We want the support or resistance area to act as if it just received a Chuck Norris karate chop: We want it to wilt over in pain as price breaks right through it.

## The Conservative Way

Imagine this hypothetical situation: you decided to go long EUR/USD hoping it would rise after bouncing from a support level.

Soon after, support breaks and you are now holding on to a losing position, with your account balance slowly falling.

Do you…

A. Accept defeat, get the heck out, and liquidate your position?

or

B. Hold on to your trade and hope the price rises up again?

If your choice is the second one, then you will easily understand this type of trading method.

Remember, whenever you close out a position, you take the opposite side of the trade.

Closing your EUR/USD long trade at or near breakeven means you will have to short the EUR/USD by the same amount.

Now, if enough selling and liquidation of losing positions happen at the broken support level, the price will reverse and start falling again.

This phenomenon is the main reason why a broken support level becomes a resistance level whenever it breaks.

As you would’ve guessed, taking advantage of this phenomenon is all about being patient.

Instead of entering right on the break, wait for the price to make a “pullback” to the broken support or resistance level, and enter after the price bounces.

## what is Trend Channels?

These channels aren’t television channels, they’re trend channels, sometimes also called price channels.

Still, this doesn’t mean that you should walk away like it’s a commercial break. Channels can be just as exciting to watch as Tiger King or Keeping Up with the Kardashians!

Trend channels are just another tool in technical analysis that can be used to determine good places to buy or sell.

The upper trend line marks resistance and the lower trend line marks support. So both the tops and bottoms of channels represent potential areas of support or resistance.

Trend channels with a negative slope (down) are considered bearish and those with a positive slope (up) are considered bullish.

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to a position where it touches the most recent peak. This should be done at the same time you create the trend line.

To create a down (descending) channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.

When prices hit the LOWER trend line, this may be used as a buying area.

When prices hit the UPPER trend line, this may be used as a selling area.

## Types of Trend Channels

There are three types of channels:

1. Ascending channel (higher highs and higher lows)
2. Descending channel (lower highs and lower lows)
3. Horizontal channel (ranging)

Some traders prefer to use the terms “rising channel” for an ascending channel and “falling channel” for a descending channel. Most likely, Millenials.

## Important things to remember about drawing trend channels:

When constructing a trend channel, both trend lines must be parallel to each other.

Generally, the bottom of the trend channel is considered a “buy zone” while the top of the trend channel is considered a “sell zone”.

Like in drawing trend lines, DO NOT EVER force the price to the channels that you draw!

A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at a different angle is not correct and could lead to bad trades.

When this happens, this chart pattern is no longer a trend channel but a triangle. (which you will learn about more later).

That said, trend channels don’t have to be completely parallel. Nor does 100% of price action have to fit within the channel.

A common mistake many traders make is that they only look for textbook price patterns.

They miss important information about price action and close their eyes to other important clues.

Notice the channel drawings below…