FUNDAMENTALS OF CANDLE FORMATION

Structure of the Candle

Open Close

Red Exciting
Candle
: .. Green Exciting
Candle
➔ Body

Close Open

Red Candle: Candle closes lower from its opening price.

Green Condie : Candle closes higher from its opening price.

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TYPES OF CANDLES

Exciting Candle Formation

2
3

Green Exciting Green Red Exciting Red

Candle Exciting/Explosive Candle Exciting/Explosive
Candle Candle

Exciting candle = Body part > 50% of Range of the candle

1. Candle No.1 & 3 in above mentioned diagram has more than 50% body of overall candle which makes it
Green Exciting Condie and Red Exciting Candle respectively.
2. Candle No.2 & 4 in above mentioned diagram has same structure as candle No.1 & 3, but there is a big
difference between opening and closing price hence, it is known as Green Explosive Candle and Red
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Base Candle Formation

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Base candle = Body port < 50% of Range of the candle

1. This structure occurs when Buyers ore marginally higher than Sellers i.e. 80,000 Buyers/ 60,000 Sellers.
2. This structure occurs when Buyers ore marginally higher than Sellers i.e. 80,000 Buyers / 72,000 Sellers.
3. This structure occurs when Buyers ore marginally lower than Sellers i.e. 60,000 Buyers / 80,000 Sellers.
4. This structure reflects when there ore minor changes between opening and closing price
(No of buyers - No of sellers).

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Candle Formation

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CANOl£ (STRONG)

Base Candle

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STRENGTH OF THE ZONE (DEMAND ZONE)

NORMAL BUYING STRONG BUYING VERY STRONG BUYING I

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STRENGTH OF THE ZONE (SUPPLY ZONE)

+ +
NORMAL SELLING STRONG SELLING VERY STRONG SELLING I
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10 of 38 PATTERNS OF ZONE

1. DBR - DROP BASE RALLY 2. RBR - RALLY BASE RALLY

(REVERSAL PATTERN) (CONTINUOUS PATTERN)

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3. RBD - RALLY BASE DROP 4. 080 - DROP BASE DROP

(REVERSAL PATTERN) (CONTINUOUS PATTERN)

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ZONE MARKING

Demand Zone ( DZ )

While marking the Demand Zone Highest Green exciting candle

Body of all base and Lowest Wick of all formation takes place
base will be considered. after base candle

• Line marked at the Highest Body

of all base is called Proximal Line. Demand Zone area
of pending orders
• Line marked at the Lowest Wick
of all base is called Distal Line.

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 ZONE MARKING
13 of 38
Supply Zone area Supply Zone ( SZ )
of pending orders
While Marking the Supply Zone Lowest
Body of all base and Highest Wick of all
base will be considered.

Red exciting candle

formation takes place • Line Marked at the Lowest Body
ofter base candle of all base is called Proximal Line.

• Line Marked at the Highest Wick

of all base is called Distal Line.

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STEPS OF MARKING ZONES

Identification & Marking of Demand Zone

1. Mark a horizontal line at current market price.

2. Look left & down for an explosive upmove (green exciting candle)
3. Mark all three component of the zone ( legin, base and legout ).

Now we hove 2 ways of marking

Body to Wick Wick to Wick

Proximal Line Highest body of all base Highest wick of all base

Distal Line Lowest wick of all base Lowest wick of all base

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Identification & Marking of Supply Zone

1. Mark a horizontal line at current market price.

2. Look left & up for an explosive drop (red exciting candle)
3. Mark all three component of the zone ( legin, base and legout ).

Now we have 2 ways of marking

Body to Wick Wick to Wick

Proximal Line Lowest body of all base Lowest wick of all base

Distal Line Highest wick of all base Highest wick of all base

Initially we will focus on body to wick marking. qeT~

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Important point :

- In demand zone legout will be green while in supply zone legout will be red .
- Legin may be either green or red depending on the pattern.

Booster point:
Legout should be explosive, so we can say we have maximum pending orders in
our zone and our zone is powerful.

Trade Setup

After marking demand zone or supply zone, the trade setup needs to be marked as :

ENTRY

1. After marking the Demand Zone, entry point should be marked just above the proximal line.
2. After marking the Supply Zone, entry point should be marked just below the proximal line.

STOP LOSS
Stop Loss should be just below the distal line of the demand zone and just above the distal line
of the supply zone with some room.

TARGET:
Target should be marked, equivalent to the double of the difference between Entry point and
Stop Loss (2:1) and make sure our trade setup should permit this.

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Target Point Rs.135/-

Entry line Rs.125/-

I Rs.5

Stop Loss Rs.120/-

In the above example, Entry is marked at Rs.125/- Stop Loss is

marked as Rs.120/- and the Target is marked at Rs.135/-.

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 EXCEPTIONAL MARKING OF THE ZONE

Demand Zone (Exceptional marking for Reversal Pattern)

.L ... , PROXIMAi. LINE

- - - - - - DISTAL LINE

Distal line - lowest wick of legin

( D-B-R ) NORMAL MARKING ( D-B-R) EXCEPTIONAL MARKING LEGIN I

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Distal line - lowest wick of legout

PROXIMAi. LINE DBR - EXCEPTIONAL MARKING LEGOUT

. . __ _ _ DISTAL LINE

For Continuous Pattern

PROXIMAL LINE

PROXIMAL LINE - - - - DISTAL LINE

- - - - DtSTAL LINE

Distal line - lowest wick of legout

I (R-B-R ) NORMAL MARKING ( R-B-R ) EXCEPTIONAL MARKING LEGOUT !

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Supply Zone (Exceptional marking for Reversal Pattern)

PROXIMAi. LINE

Distal line - Highest wick of legout

I(R-B-D ) NORMAL MARKING I ( R-B-D ) EXCEPTIONAL MARKING LEGOUT

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 Distal line - highest wick of legin

( R-8-0) EXCEPTIONAL MARKING LEGIN

For Continuous Pattern

- - - - DISTAL LINE
DISTAL LINE

PAOXIMALUNf PROXIMAL LINE

Distal line - Highest wick of legout

( 0-8-0 ) NORMAL MARKING ( 0-8-0 ) EXCEPTIONAL MARKING LEGOUT I

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CANDLE BREAK DOWN AND MARKET PSYCHOLOGY

Strong Zone with less Zone is not strong because of

base candle multiple base candles

Note : A zone with minimum base candles should be considered. If we are considering
multiple base candles zone, make sure we should have a very strong legout
candle.

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LOGIC + PRICE ACTION (BEHIND THE CANDLE)

Price Origin and Closing Concepts

Price Origin

If price hit
If price hit the the zone
zone with with more
normal selling selling
pressure. pressure.

origin of the demand

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Closing Concepts

✓
legout candle should
be closed above legin

✓
legout candle should
be closed below legin

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• works like exciting candle

Another formation of

•
exciting candle base candle with gap

'
Significant gap + Bose candle = Exciting candle

s.z
If price hit the zone with
normal selling pressure

If price hit the zone with

_._ _ _ _ _ _ _ _ _ _h_ig'-h--,selling pressure

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Distribution of Buying

Closing above Selling Pressure

• origin of move

Closing below Buying Pressure

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Analyzing Trends

1. Zones help us to decide whether to be a buyer or a seller. However, trend will help us
to decide whether to go long in the demand or short in the supply.
• You should be the buyer at demand if stock is in uptrend.
• You should be the seller at supply if stock is in downtrend.

-SOSMA
12
·
....•·······..
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Betwun 12-3 • Trend up
I

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Close to 3 = Trend sideways

Vertical Line
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How to look at Trend

1. Add SO SMA on your price chart.

2. Starting from the current candle calculate 7 candles backwards.
3. Draw vertical line on the seventh candle.
4. The point where your vertical line is intersecting the 50 sma, draw a horizontal line.
5. Just imagine a clock with 12-3-6.

The Rule is

1. If your moving average is trading between 12-3 and color of the moving average is green then trend is up.
2. If your moving average is trading between 3-6 and color of the moving average is red then trend is down.
3. If your moving average is trading close to 3 and color of the moving average is red or green then trend is
sideways.

Caution:

Buying at demand when the stock is in downtrend and selling at supply when the stock is in
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TRADING ON DIFFERENT TIME FRAME

Higher time frame (HTF) Intermediate time frame (ITF) Lower time frame (LTF)
TRADING PURPOSE (trending time frame) (execution time frame)
( location time frame)

HOURLY INCOME 75min 15 min 5min /3min

DAILY INCOME Daily chart 75min 15 min / 10 min

WEEKLY INCOME Weekly chart Daily chart 125 min / 75 min

MONTHLY INCOME Monthly Chart Weekly chart Daily chart

Curve Analysis

• It is also known as location analysis.

• What is location???
• Location gives you an idea about how high or how low you are on the price curve.

Caution:

1. If you are buying on a strong daily demand but you are near weekly supply, Chances are
very high that your trade will get stop loss.
2. If you are selling on strong 15 min supply, but you are near to daily demand, chances are
very high that your trade will get stop loss.

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Steps in Identifying location on a price chart

1. Mark nearest fresh supply zone & nearest fresh demand zone.
2. Divide this area between supply and demand into 3 equal parts by using retracement
tool, start it from proximal line of a supply to proximal line of a demand.

PROXIMAL LINE

VERY HIGH ON THE CURVE

_ _ _

HIGH ON THE CURVE

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Retracement - - - - - - - - - - - - - - - - - - - - E q u i l i b r i u m
Tool
LOW ON THE CURVE

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RULES
1. If CMP( Current market price) is trading high on the curve or very high on the curve.
Action - SELL I at execution time frame )
2. If CMP( Current market price) is trading low on the curve or very low on the curve.
Action - BUY ( at execution time frame )
3. If CMP( Current market price) is trading in an equilibrium area .
Action - will go to trending time frame and check the trend and will plan trade according to the trend.

At Intermediate Time Frame

Trend up - BUY
Trend down - SELL
Trend sideways - IGNORE

Note:
1. If there is no fresh supply but fresh demand - Assume that stock is
trading in the equilibrium and trade with the trend.
2. If there is no fresh demand but fresh supply - Assume that stock is
trading in the equilibrium and trade with the trend. qeToqethf,
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TRADE SCORE

FRESHNESS

a. If level is fresh 3 Note:

b. If level is tested once 1.5 • If trade score is
7 will toke entry
C. If level is tested twice 0 type 1.

STRENGTH • If trade score is

5-6 will toke
a. If price leaves the level with a gap 2 entry type 2/3.

If price leaves the level with 2 exciting candle • No trade should

b. 2
be below 5.
c. If price leaves the level with only one exciting candle and no gap 1

TIME AT Tl-IE BASE

a. If we have 1- 3 base candles in the base 2

b. If we have 4 - 5 base candles in the base 1

C. If we have more than 5 base candles in the base 0

DIFFERENT TYPES OF ENTRY & CREDIBILITY

Entry Types

Entry type 1. Entry type 2.

Score 7
Set & Forget trade

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Trade Score 6

be open in same zone

ENRTYUNE

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1" Condie should be Close within the zone

and 2NO Candle should be Open within the zone.

Entry Type 3. (Confirmation Entry)

1ST Cand~ should be close within the zone and

2'"' Candle should leave ti,. zone on tho upside.

ENRTY LINE

+
Credibility

s.z
easel.

' I
If any zone is a reaction of previous
zone then It is Non - Authentic

I Non Tradoablo)
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Cose 2.

Authentic Zone (Fresh)

will buy from hare

But Trodeable because

of good closing

RISK MANAGEMENT
1 Lakh capital - 1000~ risk per trade RISK PER TRADE
1% - Beginners
Formula - Qty = Risk per trade
Entry - Stop loss
1.50% - Intermediate
2% - Pro Trader

STrgt 5 SL 6 Trgt 4 SL 7Trgt 3 SL

1% 10 K SK 12 K 4K 14K 3K
2:1 RISK
5 K NET/PNL 8 K NET/PNL 11 K NET/PNL
10 TRADES 5 Trgt 6 Trgt
5 SL 4 SL 7Trgt 3 SL
PER MONTH
2%
2:1 RISK 20 K 10 K 24 K BK 28 K 6K
10 K NET/PNL 16 K NET/PNL 22 K NET/PNL

5 Trgt 5 SL 6 Trgt 4 SL 7Trgt 3 SL

1%
3:1 15 k SK 18 k 4K 21 k 3K
RISK
10 K NET/PNL 14 K NET/PNL 18 K NET/PNL

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