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Hello once again to all of you in this lecture, where I will explain two more of my favorite candlestick
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formations. Before I begin, I want to remind you guys that the candlestick patterns that you're studying
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in this lecture are in no particular order.
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So every pattern carries equal significance in my trading and therefore there is no pattern that I regard
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superior to any other.
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So guys, the patterns we are studying here in this lecture are called the signal top
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and the signal bottom, which consists of one candle. A signal top is defined as a candle
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where market posts a higher-high than the previous candle and then closes much lower than the opening
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price of the candle.
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It is a very powerful indicator of a top formation and indicating sellers entering in large numbers.
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Guys, a signal top
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is very different from a shooting star.
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Firstly, the real body of the signal top is much bigger than that of a shooting star.
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Secondly, it is possible for a signal top to have a very small upper tail or upper wick compared to a
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shooting star. On the other side,
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as the name suggests, a signal bottom candle appears after a clear downtrend in price.
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Then the candle posts a lower-low when compared to the previous candle and by the end of the session
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it closes well above the opening price of the candle.
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A signal bottom is a sign of buyers taking control of the market by the end of the session and is a
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strong indicator of bullish sentiment entering the market.
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Please use the same guidelines as we studied above in this lecture to differentiate a signal bottom
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from a hammer formation.
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Let us quickly study signal top and signal bottom using illustrations.
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Please remember that signal top candle's real body must be bearish in color and signal bottom candle's
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real body must be bullish colored.
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Guys, with both of these patterns, you will always analyze them while keeping the below guidelines
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in your mind:
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1. Whether signal top or signal bottom appeared after a clear uptrend or downtrend, respectively.
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This means that the importance of the pattern increases when they have come after a prolonged move in
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terms of both price and time.
2. Whether these points are also associated to key support and resistance
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zones on the trading chart.
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If this happens, you are able to trade them with more confidence.
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Now, let us go through some examples of signal top and signal bottom. First example is of USDCAD
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and we are seeing a signal top candle on daily charts starting from here.
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This forex pair enjoyed a sharp rally for more than 60 trading days.
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And then we saw a signal top at a major level which acted as price resistance.
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Notice the size of the tail and real body of the candle.
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Both are almost equal in price.
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These are the key differences you will notice when comparing a signal top to a shooting star.
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Price declined sharply for more than 70 trading sessions on this pair.
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Let's study another example of Signal top.
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Once again, this signal top appeared after a prolonged trend in price and time.
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It was once again associated to major resistance, the real body is larger than the tail, and candle
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posted a strong bearish close after opening higher than previous day's close.
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And following the signal top, price declined sharply in a bearish trend. More often than not, a signal top
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formation linked to key level presents a highly profitable opportunity on larger timeframes.
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Let's continue studying next example of EURUSD but this time we're focusing on a signal bottom
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which appears after a clear downtrend. The signal bottom candle has a large real body with a small,
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lower and upper wick and presented a major buy set up on this support zone after a sharp decline,
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as you see here.
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And what followed was the retest of the support zone multiple times in this period before price advanced
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in a bullish trend.
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The next example of a signal bottom is of Crude oil daily Chart
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Notice once again, the size of real body of this candle guys. Larger the real body, bigger the
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preceding price action will be.
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Before this signal bottom, price was moving in a sideways trend, and then it rallied sharply once the
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bullish sentiment was confirmed by this formation. Guys, the final example is of
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USDJPY.
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The criteria remains the same to test the strength of the signal bottom, as I show you here.
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Please remember that a signal bottom or a signal top which is not associated to clear market trend
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is not as effective when compared to those associated to clear market trends.
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This also concludes this lecture, and I will see you in the next lecture in this section.
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