All posts in "Technical Trading"

Using Fibonacci in Technical Analysis – Part 2

First of all, I would like to point out in this series I will be covering Fibonacci retracements and extensions only for now. The reason being, I want to showcase the most simple and most mango way to implement Fibonacci into your own analysis.

Personally, I do not use these Fibonacci tools solely on their own, but in confluence with other indicators or methods of analysis which (I will touch on some briefly later in the series).

Fibonacci Retracements

Fibonacci retracements come from ratios used to distinguish possible reversal levels, or support and resistance zones (S&R* zones). These ratios are from the Fibonacci Sequence. 

A Fibonacci retracement is made up by taking a low and high point of a trend, then dividing the distance between them by Fibonacci ratios (23.6%, 38.2%, 61.8%). This plots out horizontal levels between the two anchor points.

A retracement can be seen as a pause in trend, or a higher time frame pull-back, which can be an edge for getting into larger trends at possibly better entries when used in a strategy with other indicators. A retracement is not a reversal, because, after a retrace, the price will usually continue in the same direction as the former trend.

Furthermore, retracements are a stationary tool so naturally, they give confluence with already priced in areas of support or resistance. But also price usually respects them more compared to other “reactive” or “lagging” indicators like Moving Averages because they are not reacting to price action and are fixed S&R*.

Each retracement level represents a Fibonacci percentage or ratio.
However, some traders may not strictly use numbers derived from Fibonacci, mainly as a personal preference. For example, I actually use 0.35, 0.5 & 0.65 as I have found these to add extra edge and confluence in my analysis’ which I will go over further in the series.

Simple Visuals for different Retracements:

Bullish Fibonacci retracement:
Price is trending up, and has a pause in the uptrend, essentially creating a higher low. Also seen as an opportunity in the market to enter longs at lower prices to position for another impulsive move upwards.

Also, any shorts may exit their positions around the same Fibonacci levels, as they anticipate a higher low. They want to get out before the price starts moving against them, especially if it’s a bullish trend.

Bearish Fibonacci retracement:

Price is trending down, and has a pause in the downtrend, essentially creating a lower high. Also seen as an opportunity in the market to enter shorts at higher prices for another impulsive move downwards.

Also, any longs may exit their positions around the same Fibonacci levels, as they anticipate a lower high.

The Most Common Retracements:

For now, I will provide examples of the most commonly found retracement levels (or ratios), and ones that I have found to be respected the most.  

  • 0.236 or a 23.6% retrace. 
  • 0.382 or a 38.2% retrace.
  • 0.618 or a 61.8% retrace. 
  • 0.786 or a 78.6% retrace. 

Additionally, you can implement a 0.5 or 50% retrace, although it is not a Fibonacci number, often traders will use it as a midline or median point between a swing high and low as it frequently gets well-respected as a level.

[ *Tip: I added two extra retracements to my tool, the 0.35 and the 0.65 values. The reason I do this is to simply mark out zones so I can more easily find confluence with other tools like analysing horizontal support/resistance from price action. ]

Fibonacci levels have been marked out on the chart below as a visual reference.

In this example you can see how after Bitcoin bottomed out in the $3-4k region, it manages to retrace and find resistance firstly at the 0.382 zones, then also rejects the 0.618 retracements (this was almost to the wick high perfectly). What previously is resistance is then used as support as it based right along the top of the yellow 0.382 zone before breaking below it and seeing a deeper correction.

I used this Bitcoin example as I know a lot of you reading this will be familiar with this particular chart, and for those who haven’t seen this Fibonacci retracement example before you may find it interesting, to say the least.

Calculating Fibonacci Retracement values:

23.6% – This is when you divide one number by another number three places to the right in the sequence. For example, if you do 13/55, or 21/89. These equal approximately 0.236 or 23.6%. 

38.2% – This is when you skip a sequence in the division. For example, if you do 21/55, or 55/144. Another way to get it is: 0.618². These equal approximately 0.382 or 38.2%. 

61.8% – This is when you divide the current number in the sequence with the next number (starting from 13). For example, if you do 34/55, or 55/89. These equal approximately 0.618 or 61.8%. 

78.6% – Simply put, is when you get the square root of 0.618. For example √0.618.

0% and 100% are not actually Fibonacci numbers but represent the start (first anchor point) and the end of the retracement (second anchor point). 50% is midline or the median between the two.

 



Fibonacci Extensions

Fibonacci extensions are ratios formed by the Fibonacci sequence, these ratios are applied to a high and low point that create extensions beyond the 100% retracement level (first anchor point).

Extensions are commonly used to establish projected areas of projected support and resistance that can form when assets are in price discovery (making new highs or lows), or where there is little/no price history for you to use obvious horizontal support and resistance lines (or other similar methods).

However, extensions can be used when a chart is not in price discovery as they can provide additional confluence to your levels using existing support and resistance zones or other indicators. (I will touch on some examples of this in another part of the series).

Simple Visuals for different Extensions:

Fibonacci extension – Uptrend:
Price is trending up (higher highs & higher lows) and has a pause in the uptrend, essentially creating a higher low. Once the higher low is confirmed, the price moves up past the previous high and beyond.

Extensions can become targets for longs to exit positions, or to take profits.

Fibonacci extension – Downtrend:
Price is trending down (lower lows & lower highs) and has a pause in the downtrend, essentially creating a lower high. Once the lower high is confirmed, the price moves down past the previous lows and beyond.

Extensions can become targets for shorts to exit positions, or to take profits.

The Most Common Fibonacci Extensions:

Here are some of the most common Fibonacci Extension ratios, I will point out the ones I would recommend as a start because you can always try new ones and implement them later. Ultimately you can decide which ones you would like to use, this is just a general guide to try to help narrow your focus.

  • 1.272 or a 127.2% ratio.
  • 1.414 or a 141.4% ratio.
  • 1.618 or a 161.8% ratio.
  • 2.36 or a 236% ratio.
  • 2.618 or a 261.8% ratio.
  • 4.236 or a 423.6% ratio.

As seen below, these are the Fibonacci extension levels I have decided to recommend for starting off.

This is a simple example of how to place an extension, you can see the values I have used here:
1.272, 1.618, 2.36, 2.618.

You can see how the price didn’t really respect the 1.272 level much, whereas with the other three extensions it respected them much more obviously (evident with the 2.618 around the top).

This is only a brief explanation of how you can use this tool in your technical analysis but I will give a deeper explanation & tutorial in the upcoming part of the series, ‘Diving into Fibonacci Extensions’.

Calculating some Fibonacci Extension values:

127.2% – Is the square root of 1.618: √1.618

161.8% – Divide the next number in the sequence with the current number (these are covered in Part 1 when explaining where the golden ratio comes from).

236% – This is from removing the decimal place from “23.6%” and making it “236%”.

261.8% – Divide a number by two places to the left in the sequence and it equals roughly 2.618.
Also calculated from 1.618².

423.6% – Divide a number by three places to the left and the ratio equals approximately 4.236.
Example: 377/89 = 4.23595.

Other extensions that show up are actually not derived from the Fibonacci sequence, but use existing Fibonacci numbers that are and add 100% or 200% etc to the number. For example, the 361.8% & 461.8% ratios are just using the base of the 161.8% golden ratio and replacing the first 1 with 3 and 4.

The reason these ratios still may work is that as an asset continues to go further into price discovery the higher the relevant extension ratios become. Often traders will use these more ‘uncommon’ extensions like 361.8% or 427.2% as they might be the only way to gauge potential points of support or resistance.

This should give you a decent starting point and overview of Fibonacci Retracements & Extensions, and hopefully, you have learnt something new.

Part 3 is the next in the series, and that is solely focused on Fibonacci retracements.

Our Mango Socials

If you enjoyed this article and want to stay up to date with more to come, please join the discussion in our Community through Discord.

If you’re a trader, technical or fundamental analyst wanting to learn trading the Mango way, please check out the Mango Seed Program and join the Seed fam. Make sure to also reach out to some Seedlings who are in the program to get another perspective on their experience. 

Explained, Technical Trading, Tutorials

Using Fibonacci in Technical Analysis – Part 2

First of all, I would like to point out in this series I will be covering Fibonacci retracements and extensions only for now. The reason being, I want to showcase the most simple and most

Read More

September 6, 2021

First of all, I would like to point out in this series I will be covering Fibonacci retracements and extensions ...

Read More

September 6, 2021

The Fibonacci Sequence, one of the most well-known formulas in mathematics, was invented by the Italian Leonardo Pisano Bigollo (or ...

Read More

July 5, 2021

TLDR: Your leverage (3x , 5x, or 10x) does not change your Position Size or Portfolio Size ever. Your leverage ...

Read More
Continue reading >
Share

What is Fibonacci? – Part 1

The Fibonacci Sequence, one of the most well-known formulas in mathematics, was invented by the Italian Leonardo Pisano Bigollo (or Leonardo Fibonacci) in his book “Liber Abaci”.

Simply put, each number in the sequence is the sum of the two numbers that precede it. For example: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… To infinity.

This sequence was then found to create what is known as the “golden spiral” which implements these numbers into a “golden rectangle”. Each square is a Fibonacci number timesed by itself (8×8, 13×13 etc).

To get the Fibonacci spiral, draw a line starting in the bottom corner of a golden rectangle within the first square (start of the blue line) and then touch each succeeding multiple squares outside corners, this creates a Fibonacci spiral that continues forever.

Fibonacci Golden Spiral

Fibonacci sequence is seen in many things of nature so here is a smaller list of examples: Fibonacci can be found in sunflowers, korus, snails, eggs, many vegetables like romanesque broccoli & spiralled chillis. In pinecones, chameleon tails, waves, shells, whirlpools, spiral galaxies, and may even be visible in your own fingerprints.

Examples of Fibonacci in Nature

The Fibonacci sequence is all about proportion, and the 1.618 ratios (or its inverse 0.618) is referred to as the “golden ratio” or the “golden mean ratio”. This ratio is essential in almost everything and you can find it throughout nature. 

In the Fibonacci sequence, every number is approximately 1.618 times greater than the previous number. You can multiply one number by 1.618 and it will give you approximately the next number in the sequence.

Calculating numbers in the Fibonacci Sequence:

  • 3 x 1.1618 = (5)
  • 5 x 1.618 = (8)
  • 8 x 1.618 = 12.944 (13)
  • 13 x 1.618 = 21.034 (21)
  • 21 x 1.618 = 33.978 (34)
  • 34 x 1.618 = 55.012 (55)

To add to the importance of the golden ratio, here is another example.
If you take any two successive numbers in the sequence and divide them, their ratio gets closer to 1.618 as you go further along in the sequence:

3/2 = 1.5
8/5 = 1.6
13/8 = 1.625
21/13 = 1.6153
34/21 = 1.61904
… 196418/121393 = 1.61803

In the next part, I will show how you can implement Fibonacci into your technical analysis.

Our Mango Socials

If you enjoyed this article and want to stay up to date with more to come, please join the discussion in our Community through Discord.

If you’re a trader, technical or fundamental analyst wanting to learn trading the Mango way, please check out the Mango Seed Program and join the Seed fam. Make sure to also reach out to some Seedlings who are in the program to get another perspective on their experience. 

Explained, Technical Trading

What is Fibonacci? – Part 1

The Fibonacci Sequence, one of the most well-known formulas in mathematics, was invented by the Italian Leonardo Pisano Bigollo (or Leonardo Fibonacci) in his book “Liber Abaci”.Simply put, each number in the sequence is the



Read More

September 6, 2021

First of all, I would like to point out in this series I will be covering Fibonacci retracements and extensions ...



Read More

September 6, 2021

The Fibonacci Sequence, one of the most well-known formulas in mathematics, was invented by the Italian Leonardo Pisano Bigollo (or ...



Read More

July 5, 2021

TLDR: Your leverage (3x , 5x, or 10x) does not change your Position Size or Portfolio Size ever. Your leverage ...



Read More

Continue reading >
Share

Position Sizing and Leverage Trading

TLDR: Your leverage (3x , 5x, or 10x) does not change your Position Size or Portfolio Size ever. Your leverage only dictates how much margin you need on the exchange to EXECUTE the trade. The higher the leverage, the lower the margin/funds needed. But your position size is still the same regardless of leverage. MRM and YOU dictate the position size. Not the leverage

How To Position Size with Leverage?

So, the other day I received a question from new Mango Seedling in regard to Position Sizing when using Leverage:

"Hey Shawn,


“I’ve decided to start with a very small portfolio of a $1000 to get comfortable with longs and shorts


 if i did a 3x leverage does that mean I will input $3000 instead under the portfolio amount? "

It seems like some of you are still confused on how to position size your trades when putting on a leverage trade.

I've received similar questions like this in the past. So I thought I'd address this in a post.

Leverage vs Position Sizing

There are actually two points I want to address in the question. But let's start with this bit here:

   if i did a 3x leverage does that mean I will input 3000$ instead under the portfolio amount? "


 Your leverage should NOT impact how 
you position size...ever!

Your position size is to be determined first, and your leverage only after the fact.  

Mango Analogy: Position Sizing & Leverage

Think about a simplified mortgage example:


 Let's say you wanted to buy a brand new 3-bedroom house.

After doing a lot of financial planning and thinking, you decide that you can afford a maximum of $500,000.

We can use this scenario to draw parallels to your trading:

1. "Financial planning & Thinking" =  Risk Management Strategy

2. "Afford maximum of $500,000" =  Position sizing.

Now you tackle the big question of the down-payment. 

Again, let's keep it simple and assume you only have to worry about liquidity and monthly payments.

After more thinking, you decide the following:

1. You have $100,000 of spare liquidity

2. You want to put 20% down-payment

Again, we can draw parallels to our trading here:

1. "20% down" = 5x leverage

2. "$100,000 liquidity" = The minimum you need to have in the exchange.

(In case you're confused here, let's break down the math:

You are buying $500,00 home. But you are putting down only $100,00 of your money, and borrowing $400,00 from the bank.

When you put down only $100,000 to buy a $500,000 home, you have essentially 5x'd your buying power.

You have taken a leverage trade on your house. )

So now you have determined your position sizing and your leverage. You go over to the bank, and talk to one of the useless mortgage brokers who pretend to know what they are talking about.

The broker says:

"Hey, you can afford a $1,000,000 home if you put a 10% down-payment instead of a 20% downpayment"

Hmm... let's think about this....What happened here? 

By decreasing your down payment, the broker has:

1. Increased your position size

2. Increased your leverage.

And most importantly:

3. Taken control of your Risk Management.

Red. Frigging. Flag.

Take Control Of Your Own Risk


Your risk management should be dictated by YOU (and the MRM Tool Sheet if you're in the
Seed Program) before you even enter the exchange.

The position size remains constant once your risk criteria has been determined.

Remember from the program modules:

Do NOT let the exchange dictate your risk management. 

Again, remember that The Mango Way is:  RISK FIRST 

And your position size is a huge component of your risk. 

Once you've determined your risk, your position size is determined as well.

You should NOT change your position size... no matter what leverage you decide to use after that.


In fact, it's the exchange and leverage that should mould to your risk, not the other way around.

 Every exchange is going to have subtle differences in how you can EXPRESS your risk on the exchange.

 

The exchange is just a tool for your to express your risk.

Risk First, Leverage Second

Now let’s address this bit:


“I’ve decided to use $1000 for my portfolio….. my question is, if i did a 3x leverage does that mean i will input $3000? “

This is another example of letting leverage dictate your risk management (as opposed to the other way around).

Remember:  Your trade does not dictate your portfolio size, your portfolio size dictates your trade size.

Same rules apply here. If you're in the Seed Program and you're using the MRM Sheet, then your portfolio size remains fixed for the duration of the trade. (In this example, the your portfolio size should be set to $1000.)


Furthermore, it worth emphasizing that leverage is not used for position sizing decisions EVER

It's only used to increase efficiency and reduce counter-party risk.

Final Thoughts

New traders, disastrously, allow the temptation of high leverage dictate their risk management. 

Never do this. It's not the Mango Way!

Don't start with:
 "I want to 3x leverage so what should my position size be?"
 
Instead, start with : 
"What should my position size be? Oh, the MRM Sheet is saying $1000?" 
Okay, that means I need to put around $350 minimum in the exchange to so I can use 3x leverage to get to $1000 position size

Why $350?
Because 350 x 3 = $1050, this will be an approximate minimum of what you'd need to satisfy your MRM sheet.

But of course you can put more margin in your exchange account - for example $500.

However, if you set your isolated margin to 3x and position size to "$1000", it will isolate 330ish to give you the same position. And you'll have around $200 margin left over.

But now I'm ranting, and we're digressing to a new topic.

Hmm...Do you guys want me to discuss more on the differences between Isolated Margin vs Cross margin?

If so, let me know in the comment section and I'll get on it 🙂

KEY TAKEAWAYS:


  • Do NOT let the exchange dictate your risk management. Your risk management is dictated YOU (and the MRM Sheet)
     
  • The exchange and leverage should mould to your risk, not the other way around
  • Your trade does not dictate your portfolio size, your portfolio size dictates your trade size
  • Leverage is not used for position sizing decisions EVER It's only used to increase efficiency and reduce counter party risk

Continue reading >
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Gravestone Doji – Types of Doji Candlestick

A Gravestone Doji pattern is a particular type of Doji Candlestick Pattern that can be very powerful in detecting price signals of an asset. In our last post, we discussed the basics of the a Doji Candlestick. Today, we will explain the Gravestone Doji in a simple way that will immediately make you a better trader.

In this post we will breakdownthe Gravestone Doji Candlestick by understanding the meaning of what it's trying to tell us. This will ensure that you don't have to memorize the candlestick name. In fact, once you're done reading this post, you'll never have to reference it again.

Gravestone Doji Candlestick Pattern

Gravestone Doji in an Uptrend

Gravestone Doji – A Bearish Doji Candlestick

The Gravestone Doji is typically viewed as a bearish doji candlestick. But why is that? Should we simply take someone else's word for it? Or should we try to understanding the meaning behind what's going on? The mango-way prefers the latter option, of course.

So let's analyse a classic Gravestone Doji candlestick. The image underneath depicts a gravestone candle:

Gravestone Doji - Candlestick Open, Close, High, Low

A Gravestone Doji Pattern Candlestick

By simply looking at the image we can derive a story (and OHLC analysis) of what happened during the trading day.

1. The Bulls were able to push the price up to a HIGH.
2. The Bulls were not able to maintain the price at that high.
3. The Bears were able to further push the price down all the way to the Open (beginning) of the candlestick.

If you're wondering what I mean by "story" and OHLC Analysis - don't worry. OHLC is simply a short-hand for representing the "Open, High, Low, Close" of the doji candlestick. We will discuss an example of "story derivation" and OHLC Analysis of a Gravestone Doji Candlestick in the next section of this article.

This candlestick pattern is often viewed as a reversal candle. The Gravestone Doji looks like an upside "T" candlestick on a chart. The  price breakdown of the gravestone doji suggests a complete sell-off of a once Green candlestick (Refer to the "High" in Image). Essentially wiping off any price gain the candlestick may have had. (refer to image)

The Gravestone Doji suggests that the bears took the bulls down at the very last moment. Despite having the initial pump (refer to high), the bulls couldn't hold price past the candlestick Open. The gravestone doji is indicative of a massive bear victory.

Gravestone Doji: Meaning & Psychology

The Gravestone Doji can be traded most effectively once a trader understands the meaning and psychology behind the pattern. Most traders attempt to memorise various patterns. This is extremely unfeasible and ineffective because each candlestick pattern is context-dependent. Once a trader understand the meaning behind the candlestick pattern, he will be able to trade the pattern in every context. In this article, we will provide examples of the Gravestone Doji Pattern in the following contexts:

1. Gravestone Doji in a Downtrend
2. Gravestone Doji in a Uptrend
3. Gravestone Doji at the Bottom
4. Gravestone Doji at the Top

Let's start with understanding the "meaning" of a Gravestone Doji Candlestick. In order to do this, we will walk through a scenario where a Candlestick Pattern is in the process of being formulated, but has not yet formed just yet. On each phase of the Doji Candlestick, we  will explain the meaning we can derive from the pattern as the candle shapes itself.

There are three images below, each depicting various stages of a Candlestick pattern. Let's assume that the Candlestick represents a single day's worth of price action.

Gravestone Doji playing out

Phase 1: A Full Body Candlestick

Gravestone Doji getting sold into

Phase 2: Bears Step In & Sell into Candlestick

Gravestone Doji upon candle close

Phase 3: Gravestone Doji Canldestick

In the first image we can see a big green full body candle: 

Gravestone Doji playing out

Phase 1: A Full Body Candlestick

What information is this providing us? What can we derive from this? We can start by looking at the OHLC of the Candlestick.  We notice that the Open and Low are both at $1, and the Close and High are both sitting at $5. Interesting...

With this information, we can derive a story from the current phase of the candle. Since the low of the market matches the open of the market, we conclude that the bulls pushed the price up as soon as the candle opened. We don't have even the slightest of wicks under the open.  With this we can conclude that the bears have not been able to exert any pressure on the bulls whatsoever.

In fact, the bulls pushed price up all the way to the $5 mark. As depicted in the image, this is the HIGH of the candlestick as well as the current "CLOSE" of the candlestick. But remember, the candlestick hasn't officially ended yet. We are watching it as it develops through the day. That being said, at it's current stage we can conclude that the bulls are in firm control 

Now let's take a look at the second phase of the Gravestone Doji pattern...

Once again, we will begin with an analysis of the OHLC of the candlestick. In this phase of the candlestick pattern, we can see that the HIGH and the CLOSE of the candle are no longer matching.  The HIGH of the candle is still $5. However, the current CLOSE of the candle is now sitting at $3. 

Gravestone Doji getting sold into

Phase 2: Bears Step In & Sell into Candlestick

What does this tell us? With this new information, what can we add to our story thus far?

Well, at this current phase of the Gravestone Candlestick pattern, the Bears seem to be finally applying some pressure on the Bulls. The Bears have managed to push the price down from the HIGH of $5 back to $3.

Keep in mind, however, that this isn't the final phase of the candlestick. Until the candle officially  "closes", the Bulls may still be able to push the price back up and re-assert their former control.  However, on the flipside, the Bears may be able to push the price down even further.

Now let's assess the final stage of the Gravestone Doji Candlestick Pattern:

Gravestone Doji upon candle close

Phase 3: Gravestone Doji Canldestick

This is where things get extremely interesting. This is a completely different picture from Phase 1 of the candlestick pattern. Recall that in the first phase of the candlestick pattern, the candlestick depicted a full bodied candle. The full-body candle in the first phase of the candlestick indicated Bull-strength. However, in this final stage we have a different picture to the story. 

Let's perform an OHLC analysis of the candlestick.  We can see the In this stage of the candlestick pattern, the bears have pushed the price down all the way to the OPEN of the candlestick. In fact,  the OPEN, the CLOSE and the LOW are all at the same price of $1.

Essentially, the candlestick Opened and Closed at the same price, despite the magnitude of the initial bullish effort. Such price action usually renders a Gravestone Doji Pattern.  The key points to note are the following:

1. The Bears were able to push the price back down all the way to the initial OPEN of the candlestick.
2. The Bulls were able to defend the OPEN of the candlestick.

The second point is often ignored, but it's extremely important. The Bears were able to step up and put a lot of pressure on the Bulls, and that is definitely a good show of Bear-strength.  However, a good trader should not ignore the fact that the Bears were not able to push the candlestick under the OPEN of the candlestick pattern. This information can be crucial when determining your trades within a bigger context. For example, a gravestone doji in an uptrend may be treated very differently from a gravestone doji in a downtrend. 

Gravestone Doji in an Uptrend

As mentioned earlier in the article, a smart trader will always consider the contextual environment of the Gravestone Doji. A Gravestone Doji in an uptrend will have different trade opportunities compared to that of a Gravestone Doji in a downtrend. In this section we will provide examples of how to trade a Gravestone in an uptrend.

The following image is an illustration of an uptrend leading to a Gravestone Doji:

Gravestone Doji Candlestick Pattern

Gravestone Doji in an Uptrend

The image also indicates an uptrend that preceded the Gravestone Doji. This is important contextual information that a trader should take into consideration when putting on a trade.

For example, a more cautious trader would not be in a rush to put on a short position on the close of the Gravestone Doji candlestick. Why? Because the bulls still have the trend in their favour. 

You might be asking, however: "Isn't a Gravestone Doji supposed to be bearish?" Indeed, the bears have definitely applied some pressure on the bulls. But recall from the previous section of this article, that we should not ignore this key point: The Bulls were able to defend the OPEN of the candlestick.

Gravestone Doji In Uptrend Leading To Downtrend

Gravestone Doji In Uptrend Leading To Downtrend

Since the bears were not able to demonstrate their ability to push the price underneath the open, a smart trader would instead wait for confirmation of bear strength. A trade opportunity would trigger toward the downtrend once the next candlestick took out the low of the Gravestone Doji candlestick (as illustrated in the image above).  

Trading A Gravestone Doji in an Uptrend

There are multiple methods that a trader can employ to initiate a trade on a Gravestone Doji in an uptrend. In this section we will discuss three possible methods:

a) Price ticks under the OPEN of the Gravestone Doji in an uptrend
b) Price closes under the low of the Gravestone Doji candlestick in an uptrend
c) Price closes under the low of the Gravestone Doji and offers a "retest" in the direction of the uptrend.

Gravestone Doji Uptrend to Downtrend How To Trade

Three Possible Methods to trade a Gravestone Doji in an Uptrend

a) Price ticks under the OPEN of the Gravestone DojiI

In this secnario, the trader would look to enter the trade as soon as the next candle ticks under the low of the Gravestone Doji that preceded it. Price ticking under the low of the Gravestone Doji would be enough confirmation to the trader that the Bulls have lost control of the uptrend and the bears were able to push the price further down.

b) Price closes under the OPEN of the Gravestone Doji

This scenario is an extension to the previous scenario where the trader adds a bit more caution to his trade setup.  In this scenario, the trader would wait for the following candle after the Gravestone Doji candle to officially close underneath the open of the Gravestone Doji. This will give the trade more confirmation of the bears applying pressure on the uptrend.

Essentially, he would not enter his trade until the candlestick that followed the Gravestone Doji has fully confirmed its close under the open of the Gravestone candlestick pattern. This is a more cautious and conservative approach where the trader is defending against the possibility of the uptrend continuation.

However,  there is always a trade off. Sometimes, waiting for a candle close underneath the Gravestone Doji may lead to a trade-entry that is further away from the ideal entry that a trade may want. Depending on the traders overall strategy, he may want either he may choose to either enter the trade anyway or wait for price to retrace or "retest" the Gravestone Doji on the next candle.

This leads us to the third scenario:

c)  Price closes under the low of the Gravestone Doji and offers a "retest"

In this scenario, the trader would wait for the following candle after the Gravestone Doji candle to officially close underneath the open of the Gravestone Doji. But if the price closes too far away from the open/close of the Gravestone Doji the trader may decide to wait for price to retrace upwards a bit before taking a short position. This will allow the trader to milk out more profits while still maintaining the same risk parameters.

Trading The Gravestone Doji

A gravestone doji could be found under different market contexts. Such as during bull rallies, market consolidations, as well in market dumps. Regardless of context, the Gravestone Doji remains a bearish candlestick.

The Gravestone Doji is analyzed as such when found under the following context:

  1. Bull Rally - It takes conviction from the bulls to sustain a rally. However, a gravestone doji in a bull rally suggests the bears won out. Hence, conviction from the bulls are wearing off. The doji is viewed as a potential reversal candle in this context.
  1. Bear Dump - Severe price dumps tend to cause panic selling. Wherein, retailers are looking for the next best opportunity to sell their bags. Hence, when price bounces even slightly, traders sell into it. This price action is likely to render a gravestone doji, and is a sign of continuation.
  2. Market Consolidation - This isn’t always common. However when it occurs, it implies strong bearish market sentiment. The gravestone doji is viewed a sign of bearish sentiment and dominance.

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Bitcoin Analysis. Short-Mid Term Price Action, Feb 2021.

By Olley / February 16, 2021

Looking at this formation here with three potential scenarios. In my eyes, this is an ascending triangle breakout, the same one that Shawn and many other members in the Grove have posted about recently.

I am looking for upwards continuation based on other indicators all in agreement on multiple time frames (I am talking about the higher time frames like the 2D, 3D, 4D & Weekly here). Volatility has been really low on many time frames and is starting to expand now, which means we will probably see the resolution of this formation up or down in the next 1-3 days at most.

I have a target of at least 53k from the measured move of the formation, but I would aim for 58-60k based on other Fibonacci extension levels.

If BTC loses this blue horizontal zone between $48700-49000 I think a move to at least that rising trend line and likely back down to purple box ($46600-47000). BTC would probably continue some ranging between these zones.

Break below purple support box will change my bullish bias, to more medium-term ‘bearish’. But would look for the marked levels around ($43,000 – 44,000) to bounce, which would likely line up with the Daily 21EMA as well.

[Link]

I also like to look for confluence with CMEs (BTC1!) which look a lot more like an ascending triangle than spot price action. (Chart below).
As long as it holds the 4hr 21EMA or Dynamic for that matter the trend is still up and I lean for continuation higher.

The Mango Dynamic on CMEs 4hr chart has been really accurate for the past couple of months, and this recently flipped green and is continuing to climb & use the blue dots as great opportunities alongside the 10SMA. I look at this as a way to determine the overall trend, as long as it keeps supporting price, naturally, it will continue higher.

  • I want to see momentum oscillators like RSI, Stochs & MACD all gaining positive momentum, start to get stronger as price moves higher.
  • A high volume node will be a useful indicator for confirmation as well.

[Link]

Overall, this is looking like a bullish continuation formation, and we are highly likely going to see resolution very soon. I am leaning bullish from my own view of the indicators I see on the lower time frames, but also because the Weekly looks really strong. However, the support levels I have defined need to be held for this to happen.

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Dragonfly Doji – Types of Doji Candlestick

By Krisha A / September 15, 2019

Recall from our post on regular Doji candlesticks, the Open and Close price in a doji are the same. Suggesting a tie between bulls and bears. While this is true for all Doji’s, in some cases a stronger side is prevalent. One such case being the Dragonfly Doji. 

What Is a Dragonfly Doji? – Bullish Doji Candlestick

In a Dragonfly Doji the bulls prevail, making it a bullish candlestick. And when found under certain candlestick patterns (context), the dragonfly doji could signify price reversal. 

Opposite to the Gravestone Doji in our last post, The Dragonfly doji can be spotted as a "T" candlestick on a chart. The price breakdown of the doji suggests a complete Buy-back of a once Red Candlestick (Refer to "Low" in Image). Essentially wiping off any price decline the candlestick may have had (refer to image ).

Labeled Components of a Dragonfly Doji Candlestick

A Dragonfly Doji In Perspective

To put it into perspective, here’s a quick dissection of the Dragonfly Doji. Refer to Image 1 - You’ll notice the candle opened at $5. The bears pushed it down right off the bat to $1. A push to the downside, without as much as a tick to the upside, is quite a feat. The initial bearish momentum clearly dwarfed the bull effort. 

Phase 1 of a Dragonfly Doji

However, as the candle played out, bulls started to buy-back the asset quite heavily (Refer to Image 2). The buying pressure got to a point where the price was back to $5 - back to the Open price. The Bulls managed to support price at $5 until the candle Close (Refer to Image 3). 

Dragonfly Doji upon candle close
Phase 2 of a Dragonfly doji getting bought up

Such price action would render a Dragonfly Doji. Suggesting Bulls are the stronger force, and are in control. 

What must be noted here is that the Bulls, despite being initially dwarfed by tremendous Sell pressure, made a swooping comeback. Not only did the Bulls push price back up to the Open at $5they supported it until candle Close. 

In a dragonfly doji the momentum is with the Bulls (buyers), and price is likely to see continuation to the upside. This simple truth makes the dragonfly doji a bullish candlestick and a great price forecaster. It’s easy to pick the most profitable side of a trade (Bull/Bear), when you know where market momentum lies. 

Dragonfly Doji - A Reversal Candle?

Doji’s with strong Bullish or Bearish implications, like the dragonfly doji, often make for good reversal candles. However, this is only true when found under the right candlestick patterns (context). 

For a Dragonfly Doji to be a reversal candle, there should have been a preceding downtrend. Given the bullish implication of the dragonfly doji, it can only logically “reverse” an ongoing downtrend. 

Note that they make for better reversal candles on Overextended dumps/downtrends. If a dragonfly doji is found during the early stages of a downtrend, it may just signify a short pause, or relief before the trend continues down. 

Trading the Dragonfly Doji

While the dragonfly doji makes for a good reversal candle in a downtrend, it isn’t always found in one. Dragonfly Doji's are also found in periods of price consolidation, as well as uptrends, and are perceived as follows:

  • Bullish Uptrend - Strong sign of possible Continuation to the upside
  • Bearish (overextended) Downtrend - Sign of Possible Reversal. Depending on how overextended the dump/downtrend
  • Market Consolidation (side-ways movement) - Bullish market sentiment, likely continuation to the upside. 

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Doji Candlestick – Types of Doji Candlestick Patterns

By Krisha A / August 31, 2019

The first step toward becoming a professional technical trader, irrespective of market (cryptocurrency, forex, traditional etc), is to understand price action through Candlestick Analysis. In particular, the various types of Doji Candlestick. Knowing this would give you an edge on forecasting market reversals and market sentiment like a professional. Additionally, it will keep you on the right side of the market - the profitable side! 

Candlestick Analysis - A Beginners summary

To better grasp the different types of candlesticks, like the doji candlestick, let’s start with the basics:

The Anatomy of a Candlestick - A candlestick has 4 components (refer to Image - Candlestick Components - assume its a 1D candlestick):

  1. The Open: The price at which a crypto/stock starts the day at 
  2. The Close: The price at which  a crypto/stock ends the day at 
  3. The High: The highest price a crypto/stock hits during that day
  4. The Low: The lowest price a crypto/stock his during that day
Candlestick Analysis - How to read a candlestick

The four components of candlestick chart analysis

The Open and Close make up the thick part of the candlestick, known as the Body. Whereas the High and Low make up the thin parts, known as the Shadows (some call it the Wick). Together they form a candlestick.

Each candlestick plays out over a specific time span, depending on what timeframe you’re looking at. Example: A candlestick on the daily chart is the open, close, high and low within the last 24hours. I.e each candlestick represents ALL the price action that took place during a 1 Day time span. 

TradingView Tip: If you're wondering what time each candlestick begins, simply hover your mouse on the candle, and look out for the timestamp on your x-axis.

What is a DOJI Candlestick?

In a “Doji Candlestick”, the Open and Close price are the same (refer to image "Doji Candlestick"). If the difference in the Open and Close price are within a few ticks of each other, the candle may still be identified as a Doji. 

Logically, the doji candlestick is viewed as a tie between the bulls and bears. It's a representation of uncertainty and indecision. Hence, when a doji candlestick is printed in the middle of rally (or dump), it could signify a potential trend reversal. 

Remember, price rallies and dumps need conviction to continue, and a doji candlestick is counterintuitive to that.

4 Types Of Doji Candlesticks

There are 4 types of doji candlesticks. All of which have bullish or bearish implications. This depends on whether the doji is found in an uptrend, or downtrend. 

The 4 types of Doji's are as follows: 

  1. The Common Doji –  A Neutral Candle suggesting a tie between bulls and bears ( image 'Doji candlestick')
  2. The Gravestone Doji – A Bearish Doji Candlestick. A good reversal indicator in an overextended uptrend
  3. The Dragonfly Doji   – A Bullish Doji Candlestick. A good reversal indicator in an over-sold Bear dump/downtrend.
  4. Long Legged Doji - A Bullish or Bearish Doji Candlestick, depending on whether its found in an uptrend or downtrend. 

    Note that doji candlesticks are commonly observed as Reversal Candles when found on over extended bull rally, or an oversold downtrend.

Why are Doji's known as Reversal Candles?

Doji candles signify tired trends when found in the middle of an uptrend or downtrend. As mentioned above, rallies and dumps need conviction to continue, and a doji candlestick is counterintuitive to that. They represent a tie between bulls and bears. 

However, a tie (doji) doesn't necessarily have to imply a reversal. It could also imply a short pause in the underlying trend, or a 'soon approaching' reversal. This is where the trader heeds caution, and looks for follow-up price action to come up with an informed hypothesis. 

Usually, doji's make for good reversal indicators when found on overextended rallies, or oversold dumps. When found in the early stages of a trend, the doji candlestick is unlikely to mark a reversal. 

A good example of a Bearish Reversal Doji  was in BTC's overextended Bull Rally. A Bearish doji candlestick was spotted on the Daily BTC/USD chart on Dec 18th, 2017 (refer to image below). This was during BTC's mega bull rally to $20K back in 2017

Doji Candlestick on 1Day BTC/USD chart on December 18th 2017

A (1 Day) Doji Candlestick marking a reversal point on BTC/USD on December 18th 2017

Identifying Candlestick Patterns

Each candlestick, including a doji candlestick, is akin to one piece of a puzzle. It’s only a hint at the bigger picture. To get a better idea of the picture, you’ll need to analyze several candlesticks together. You need to identify a candlestick pattern.

While there are such things as Bullish candlesticks, Bearish candlesticks, Reversal candles etc. Identifying these candles are of no significance without any context.

The context comes from recent price action around such candles. For example, "was there a preceding rally or dump?" and "was it over extended?". Such pieces of information are only derived from analyzing a set of candlesticks together - Analyzing a Candlestick Pattern for bullish or bearish signals.

Identifying a doji candlestick within a candlestick pattern can help solidify price forecast tremendously, and keep you prepared for any adverse price moves in the market. 

For the sake of brevity, we'll discuss the various types of Bullish and Bearish Candlestick patterns, as well as various Bullish and Bearish Doji Candlestick in upcoming posts.

Pieces Of The Candlestick Puzzle 

Candlestick analysis is like solving a puzzle. Identifying a Doji candlestick is like finding a piece of the puzzle that grows more pivotal to the whole picture, the more puzzles you add to it. A Candlestick Pattern is akin to solving a third of the puzzle and getting a good idea of what the end picture holds. 

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The Animal Spirits in Crypto – Irrational Exuberance & Crypto Bubbles

Three times.

Three times this week I was asked the following question:

“Why are the prices still low when the fundamentals seem so strong?”

Fortunately, there’s a two-worded answer:  Animal Spirits 

It’s not a simple answer – not by a long shot. But it is, indeed, a short answer that encompasses the intricacies of greed, fear and human behaviour.

To understand this, let’s first question if prices are really low? Or are we simply benchmarking prices at their all time high  –  prices that were guided by the animal spirits of crypto investors.

John Maynard Keynes, a famous economist, used the term “Animal Spirits” to describe the irrational decisions investors make in an uncertain environment.

But today the phrase “Animal Spirits” seems to be used primarily in environments of high confidence.  Confidence & optimism, however, aren’t the only byproducts of Animal Spirits. Fear & pessimism play an equal share in the phenomenon.

Irrational Exuberrance. Irrational Anxiety

Should it not then make sense that irrational confidence be followed by equally irrational fear? Optimism that drove prices to exuberant highs should follow with a similar anxiety that would drive prices to irrational lows. For if it does not follow, eventually at least, then perhaps the optimism was not irrational after all. In a way, this explains the driving mechanism of “bubbles” (and also why it’s claimed impossible to forecast)

Nobel Laureate winner Robert Shiller defines a ‘speculative bubble’ in his book ‘Irrational Exuberance’ as follows:

 I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, and, in the process, amplifies stories that might justify the price increase…”

Shiller akins a bubble to that of an epidemic virus – something that can “catch” and get out of control very easily. Similar to their virus counterparts, speculative epidemics can result in massive losses when culminated with doubt, fear and anxiety.

But the key question here is: Are we already past the irrational anxiety?  Or is it yet to play out?

Recurrence of Epidemics . Reflating of Bubbles.

Interestingly, Robert Shiller makes sure to emphasise that “speculative bubbles” don’t simply burst and disappear. Rather, they tend to inflate and deflate in accordance to the accepted narrative.

A viral epidemic can reappear if a new environmental factor reignites the contagion rate.

Similarly, a deflated speculative bubble can “re-inflate” if a new narrative is strong enough to ignite the animal spirits of investors.

Ah, but this poses yet another tricky question for the crypto space.  Have we already “re-inflated”? After all, prices did surge to an all-time-high of $1000 before deflating to $200.

Have we already re-inflated?!

Is it possible that we see another epidemic spark the animal spirits to a point irrational confidence?

A Great Time To Be Alive

A strong argument can be made in favour of another speculative bubble – a larger one. In his definition of a “speculative bubble”, Shiller goes on to explain what follows the price increase in a speculative bubble:

...The price increase brings in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement”

The crypto market allowed for a new class of investors to be first entrants. They consisted mostly of people who were young & technologically sophisticated. But they were by no means the “large class of investors”. Those are yet to come in mass.

Already we hear  reports of new & larger entrants into the market. Will their success draw the envy of other institutions? And will that, in turn, lead to an environment of overconfident gambling and exuberance that we have seen in the past?

Only time will tell. But one thing is certain, never before have we seen events play out at this rapid of a pace. Ahh, what a time to be alive.

Related Readings:

The Myth Of The Rational Market - A history of risk, reward & delusion by Justin Fox

Irrational Exuberance by Robert J Shiller

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3 Reasons Why You’re Getting Wrecked In Crypto & How To Fix It

Why Am I Writing This?

I usually refrain from posts like these. But recent discussions have made me wonder if there's a increasing lack of maturity in our community. I'm seeing a lot of posts on how much money people have lost and how they are "out" etc etc. To each their own – but I figured I'd share some of things I've learned in my journey thus far. 

1) You’re a victim and you don’t know it

We are ruled by our emotions. Almost every single buying decision we make is an emotional one. News sites, advertisers, salesmen and pro-traders all understand this very well –– and they use it against us. The question is: Do you understand this about yourself?

Last week the narrative was:
“Ethereum scaling issues, ICOs are dumping etc etc”.

This week there was a push for
“Breakthrough in Ethereum Scaling! Novo calling the bottom!”

I hope you see a pattern here. Think back to last year:  
“BTC mempool, BTC can’t get their shit together, China banning exchanges!”

A  good salesman uses emotion to make a great sale. Similarly, a good trader will use emotion to make a good buy (at the bottom). He’ll then use emotion to make a good sell (at the top). 

In a way, you can’t help but appreciate the art of it all. But do not be a victim to this. Your emotion is the sword they wield when they attack. But it’s your sword. You can keep in check.

​​​​How To Fix It:  Know thy enemy & know thyself.

I spend most of my time on the fundamentals/technology in this space. But that hasn’t stopped me from learning about how traders think & how market cycles work. I have read over 10 books on market psychology, trading mindset and market cycles/crashes. Does this make me a pro-trader? Absolutely not – but it does arm me with knowledge that keeps me from making bad decisions. 

So pick up some books/tutorials on the trading psychology, market cycles etc. If you have money invested, you owe it to yourself to spend time learning some of the basics. This doesn’t mean you have to become a trader yourself. This will simply help you become more aware of what’s happening around you

2) You’re trading and you don't even know it 

Many of us think that we are “investing” – but in truth, our behaviour leans closer to that of a trader.

“Woah..woah… I hate Technical Analysis! I don’t believe in that crap”

News Flash: You don’t need to be using TA to be trading. Here are some signs that suggest you are trading without realising: Are you making your buying & selling decisions based mainly on the price?  Are you trying to time the tops & bottoms to increase your stack? Yes? You’re a trader.

We’ve all heard the saying: “96% Of Traders Lose Their Money”. So the odds are already against you – but imagine being a trader and not even knowing you are one.  It’s like walking into a Ice Rink with soccer sneakers.

The truth is that most of us in this space behave like traders – and we don't even know it.

To be an investor, you need to speculate on the direction, fundamentals & adoption of the technology.

A trader on the other hand, mainly speculates on the direction of the price (and may use short-term fundamentals to strengthen his thesis) But since very few of us understand the fundamentals, it’s easier to speculate on the price.

How To fix this?

  1. If you’re not interested in trading – and “in it for the technology” – then it’s time to start living up to the claim. Before you invest your money, invest your time to learn the underlying fundamentals. You don’t need to learn it all. Start with Bitcoin & Ethereum.  ​You can refer to my Blockchain Analogies page for simple explanation to various concepts
  2.  Realise and accept that you’re trading – and it’s what you enjoy. Trading is a competition/game. You’re going to keep losing if you don’t even know you’re playing. Learn “how” to trade – start with the basics, and start small.
     

Again, I understand that it’s a struggle to find good resources, so let me know you need help to find something specific. I’ve read a lot of great books, and a lot of shitty ones as well.

3) You are forgetting what this space is all about

It seems like we’re rapidly diverging from the ideology that gave birth to this space: Decentralisation. Most of us are focussed on the upcoming ETFs and the scaling issues of Bitcoin and Ethereum. Are we really excited for a financial tool that will allow for further centralisation and possible manipulation? Isn’t that precisely what we wanted to get away from?

“Oh but we don’t scale enough yet for adoption, we need this asap”

How To Fix It?  
Think back to why you really entered this space. Was it the ideology? Or the money? Make your decisions accordingly. But try not to get caught on the fence.

Final Thoughts

I'll end my rant here, but the takeaway is this: If you're playing the game, it's important to know that you're playing. And if you're playing – you better get good at it. If not, just stay in the sidelines (aka: buy & hodl)

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