Indecision Candles for Continuation and Reversal Setups
Hello traders! Welcome to the Price Action Course and the sixth module, ‘Price Action Strategies.’ In this lesson, I’m going to teach you how to use indecision candles for continuation and reversal trade setups. And the thing about indecision candles is that you are going to learn how to read price action when it reacts to a certain level. And that’s important because we are going to read the order flow and the imbalance in the order flow between buyers and sellers, and we are going to use that information for our profit and not only for our profit but for spotting high probability setups. Indecision candles can come at the end of moves or in the middle of moves. That’s why we are going to use them for continuation and reversals. But first of all, let’s try and figure out where they can be and how to spot them.
Indecision candles are a big deal when we are reading price action. The reason is because they tell us that we have reached a balance between buyers and sellers. Price moves when there’s an imbalance between the two forces. When there are more bulls than bears price goes up and vice versa, when there are more bears than bulls price goes down. And this is because there is an imbalance between buyers and sellers. And in the case of there being more buyers than sellers, buyers are going to continually keep swiping those sales orders making the market price go up. And that’s how the market actually works, okay? And what we are going to be looking for with this indecision candle is a balance between those two sellers after a move. And this balance can mean that maybe in a up move example, the bulls have run out of steam and the bears are going to take control of the market.
It also can mean that buyers that were pushing price up and swiping those sales orders along the way have encountered a big sale order at that level. And that can mean that it’s going to take a little time before a big buyer comes and swipes it out of the market and price continues to the upside. This is why the indecision candle can mean that we might be reversing or we might be continuing in the direction of the move. The first thing we are going to do is find these candles at a key level. The imbalance that was moving price from one direction has been balanced when it encountered an opposite pressure at this level. This makes price print an indecision candle, which is a candle that has a long wick. Well, it has two long wicks, one to the upside, one to the downside and a small body. And this means that even though prices are open at a certain level, it went up to the high of the candle and it went down to the low of the candle but close near the candle open. That means that neither the buyers nor the sellers are in control, and the close was nearly open of the candle, meaning that there is little momentum to either side of the market.
Now this doesn’t mean that we are going to countertrend trade every time we encounter one of these candles. And a lot of traders out there are going to tell you that every time you encounter an indecision candle or a long dodgy at support level or a strong support level you should go long. And whenever you find an indecision candle at a resistance level, you should go short and this is wrong. Because indecision candles can also mean continuation of the move. What these candles tells us is that there is an indecision in the market between buyers and sellers at a key point.
Indecision being the key word here — price can move in any direction. The candles only grab our attention for a possible setup. And we are going to countertrend trade once we have confirmation that price has reversed. This means that when price prints a morning star at support or an evening star at resistance and if you go through our advanced technical analysis course, you are going to find what a morning star and what an evening star are. And a morning star is just a candlestick formation that prints at support and an evening star is a candlestick formation that prints at resistance. And this candlestick formation is formed by three candles. Well, let’s look at the example of a morning star. The first one is a bearish candle. The second one is an indecision candle and the third one is a bullish candle, meaning that we have confirmation that price has reversed after the indecision candle. And the evening star is the opposite. At a resistance level, we have a bullish candle, an indecision candle, and a bearish candle meaning that we have reversed to the downside.
If price continues and breaks the key level after the indecision candle, we are going to trend trade, meaning that after the indecision candle, the main force that was driving price up or down has continued to rule the market and that we are going to trade with the trend. The important thing about this lesson is learn how to read price actions reacting to these key levels. And indecision candles can also be found in the middle of move which almost always means we are going to continue with it. And if we are already in the trade, this candle will help us hold to our winning positions. Now let’s go through a Euro/GBP chart and let’s try to find some indecision candles at key point. All right traders, so here’s the Euro/GBP one-hour chart and let’s go and thicken these candles out, okay? Now the first thing we are going to do is we are going to try to find an indecision candle. You can see that we have one indecision candle right here. Now let me just use a rectangle to show you where the indecision candle is at and you can see that we are actually an up move from this low to this high. We have moved 118 pips which is a very good up move. I mean we have had a small correction to the downside but we have encountered a very strong indecision candle at a key level.
And the key level being a previous level of resistance that we are going to mark with a horizontal line, and of course that we also have this level of previously tested support that we are also going to mark with a horizontal line. And you can see that we actually print an indecision candle, okay? If we thicken this out for you even more, you see that we print an indecision candle and then after the indecision candle comes a super strong bearish candle, for me what seems to be like an evening star, okay? So this is an evening star. We have a bullish candle, then a strong indecision candle, then a bearish candle meaning that we have actually come to a reverse in the market so we are going to go short at this level of strong resistance with our stops all the way up here for a 50 pip stop and of course we are going to take profit at this low, which means that our targets are going to be for around 70 pips. So this is better than a 1:1 ratio risk-to-reward ratio on a very fast trade. So let’s continue with price action and see if we can spot some more indecision candles at key levels? Okay?
Now, the thing about Euro/GBP is that it has been chopping around this level, so we are going to maybe move back a little bit to see if we can spot some of these indecision candles while we were actually trending. And right here, we have found another indecision candle and you can see that the indecision candle comes after a strong move to the downside and we have a small body with wicks to the upside and downside and after we printed this indecision candle, we have a very strong bullish candle meaning that we can have a long position when this candle closes with our stop below the actual pattern for our 14 pip stop loss. And we should take profit at these levels which are the previous lows for an excellent 60 pips, which means that we have a 1:4 risk-to-reward ratio on this trade, which is awesome when we hit this key level of support.
And as always, I wanted to show you first the completion of the pattern and the work of the indecision candle. And now I’m going to show you the actual levels that we were working from. And you can see that if we go back a little bit, this is the actual level of support and we have this as the level of support. You can see that it was just once, then it was strongly tested here and tested again right here. And you can see that we moved back and then we hit it and went up. Now if we continue, we can also look for an indecision candle that signals continuation. But let’s change and let’s go to the USD/Japanese Yen to look for… now here we have the US Dollar/Japanese Yen one-hour chart and of course the first thing you can see is that after this strong move to the upside we have one, two, three indecision candles and then a strong candle to the downside for a little correction before they move continuous to the upside. And the indecision candle that I want you to look at is this one right here. You can see that we do have an indecision candle in the middle of this up move. And the thing about this indecision candle is that it comes at the previous highs, okay?
You can see that we have hit the previous highs right here, okay? And then we print an indecision candle and then we continue to the upside. And this is what I wanted you to know it is, once you hit a very important level, okay? Some traders are going to tell you that once you hit an important level such as this one, and the price prints an indecision candle, you should go short immediately. And the thing about this is that these traders don’t know how to read price action. They just trade a pattern or a candlestick formation or in this case just one candlestick that signals indecision. And the truth is that you have to look beyond what a candle is and you have to look for what price action tells you. If price action tells you that after we hit this lows and they were retested and we started to print, buyers started to come into the market, right? And when we hit this level of previous resistance, we encounter a lot of sellers, okay? This means that buyers try to break with this level but were unable and sellers move price all the way to this low, but buyers again came in the market and made the candle close near it’s open signaling a very strong indecision in the market, but then these candle prints, okay? Let me just grab it with the rectangle, and you can see that we closed near the high of the previous candle but the high of this candle is much higher than the high of the previous candle, which means that we are in a continuation mode and we should go long with our stops at this level right here, which means that we have around a 20 pip stop loss and to pick our target we should go to the daily chart because these highs, I think, are two year high on the USD/Japanese Yen. But if I’m not mistaken, let’s just go and look at a daily to look for targets.
Okay, so this is the weekly US Dollar/Japanese Yen chart and we are trading at around the 120 level and our setup was between the 119 and 120 level, so we are going to look for these key levels that I was telling you about and you can see that we have one very strong area of resistance right here and we have another one right here. Remember that these are weekly candles so the minimum test at a resistance level is going to be very strong on the one-hour chart, okay? So here are the actual levels that we are going to use as targets, so we are going to go back to the 60-minute chart and look at the actual setup. Now here we are and like we said before, we have a very small 23 pip… well, in this case I think it is at a 20 pip stop loss, and as you can see our targets should go at this level of very strong resistance on the weekly, which is about 74 pips away from our continuation setup with an indecision candle and this is good as an example because you can see that indecision candles work a lot for continuation trades also and traders that tell you that every time you spot an indecision candle at a resistance level you should go short are wrong and you should always listen to price itself and what price is telling you with its candlesticks.