Book SummaryTrades Bible for Candlesticks, by Ted O. Wise

1-Page Summary1-Page Book Summary of Trades Bible for Candlesticks

The Basics of Candlestick Charts

Comprehending Candlestick Structure and Mental Processes

This section provides the base understanding of candlestick charts as a visual representation of market activity. You will learn to recognize essential information regarding opening, high, low, and closing prices, giving you insights into market trends and price fluctuations. Wise emphasizes that candlestick analysis can reveal changing human behaviors like fear and greed by showing interactions between those purchasing and selling.

Candlestick Bodies, Shadows, and Their Significance

Wise defines candlesticks as representations of a specific time period's prices at open, close, highest, and lowest points. A bullish candle, often white, forms when the closing price exceeds the opening price, indicating upward market momentum. Conversely, a bearish candle, generally black, forms when the opening price surpasses the final price, signifying downward market pressure.

The "real body" is the filled section of the candlestick, representing the price difference between the opening and closing prices. Thin lines extending beyond the upper and lower body, known as shadows or tails, indicate the session's high and low, respectively. Long bodies indicate strong buying or selling pressure, with longer bodies associated with greater momentum. Conversely, narrow bodies signify less activity and market indecision. Finally, long shadows show price action extending above or below the opening and closing, indicating potential price rejection at those points.

Context

• While traditionally white and black, modern charts often use green for bullish and red for bearish candles to enhance visual clarity.
• The formation of a bullish candle can influence trader psychology, potentially leading to increased buying activity as traders anticipate further price increases.
• The length of the real body can provide insights into the strength of the price movement; a longer body suggests a more decisive move in the direction of the candle (upward for bullish, downward for bearish).
• Shadows can reflect the psychological battle between buyers and sellers, with long shadows indicating a struggle and potential shifts in market control.
• Low trading volume often accompanies narrow bodies, indicating that fewer market participants are involved, which can contribute to the lack of decisive price movement.
• Price rejection occurs when the market tests a certain price level but fails to maintain it, often due to a lack of buying or selling interest at that level, leading to a reversal or pause in the price movement.

Identifying Bullish, Bearish, Neutral Candlestick Patterns and Their Value

Wise explains that upward candlestick patterns often show buying pressure overcoming selling pressure, leading to likely price increases. Examples include the hammer, engulfing formations, and morning star setups. Meanwhile, bearish patterns often indicate selling forces surpassing demand, suggesting potential price drops. Examples include the pin bar with a bearish signal, bearish engulfing patterns, and evening stars.

Neutral formations show a balance between buying and selling, reflecting market indecision. These can signal a consolidation phase or a potential change in momentum, depending on the context. The Doji serves as the primary example of a neutral pattern. Wise stresses that understanding these patterns enables traders to interpret market sentiment and potential price direction.

Context

• This pattern typically forms at the bottom of a downtrend and is characterized by a small body with a long lower wick, indicating that sellers pushed prices lower during the session, but buyers managed to overcome this pressure by the close.
• An evening star is a three-candle pattern that typically appears at the top of an uptrend. It consists of a large bullish candle, followed by a small-bodied candle (which can be bullish or bearish), and then a large bearish candle. This pattern suggests a peak in buying pressure and the beginning of a downtrend.
• There are several...

Trades Bible for Candlesticks Summary Evaluating and Structuring Markets

Differentiating Between Trending, Ranging, and Volatile Market Conditions

Here, Wise underscores the importance of understanding different market states to use the right trading tactics. He describes three core market types: trending, channeling, and volatile, each with distinct characteristics, and highlights the need for adapting trade tactics to suit the prevailing market environment.

Market Characteristics and Strategies

Markets with Trends: Wise explains that markets experiencing trends have sustained increases or decreases in their prices. Uptrends consist of increasingly higher peaks and troughs, while downtrends show a pattern of lower highs and lower lows. The author emphasizes that trading with the trend is key in these conditions, seeking buy opportunities when the market is rising and sell opportunities in a downtrend.

Range-bound Markets: The author describes range-bound markets as periods of price consolidation, where prices oscillate between well-defined support and resistance levels without showing a clear directional bias. Here, Wise advises traders to consider buying near support and selling near resistance or entering breakouts from the...

Trades Bible for Candlesticks Summary Price Action Trading Strategies

Using the Hammering Candlestick Formation in Reversals

Here, Wise introduces the pin bar (hammer) candlestick pattern, highlighting its power in identifying potential trend reversals. He emphasizes that these patterns signal price rejection, indicating a potential shift in momentum.

Recognizing Pin Bar Patterns Likely to Succeed With the Trend

Wise explains that a pin bar, also called a hammer, is characterized by a small real body and a long shadow or tail. A sharp price rejection is indicated by an extended wick opposite to the real body. He explains that pin bars with longer tails and smaller bodies are considered stronger signals as they represent more vigorous rejection.

Wise explains that a bullish hammer candlestick typically has a long lower shadow, indicating a sharp downward price rejection followed by a strong close near the opening price, signaling potential buying pressure. It’s seen as most reliable when a downtrend hits its lowest point. Conversely, a downward pin bar contains a long upper shadow, reflecting an upward price rejection followed by a close close to the open. Pin candles indicating bearishness are most reliable at the peak of an upward...

Trades Bible for Candlesticks Summary Money Management and Risk Control

Wise concludes the book by focusing on money management, which he argues separates profitable traders from unprofitable ones. He emphasizes that even with effective strategies, failing to manage risk properly can lead to devastating losses.

Position Sizing by Account Size and Risk Tolerance

In this section, Wise emphasizes that position sizing, meaning the lot quantity traded in a particular position, should align directly with the trader's account size and risk tolerance. He stresses that using the smallest lot size is ideal for beginners since it represents the smallest trade size offered by most brokers.

Wise calculates pip value according to lot size. For instance, when you trade a single standard lot, equivalent to 100,000 units, it results in a pip value of roughly $10 for currency pairs where the USD is the quote currency. A micro-lot, representing 1,000 units, amounts to a pip value of around $0.10. He explains that understanding pip value is crucial for calculating potential profits and losses based on your choices in trading.

Sizing Lots to Fit Your Appetite for Risk

Wise, therefore, recommends determining position size based on dollar exposure instead of...