In trading, candlesticks contain all market information.
In a series of candlestick movements, there are rapid rises, slowing down, and oscillating movements. These seemingly random movements actually imply changes in market sentiment and the direction of the main force. Therefore, by identifying the patterns of candlestick movements, we can track trend-following trades and reversal markets.
This is the angle theory in candlestick trading.
Angle, represents the continuity and trend strength of a series of candlestick movements.
For a very intuitive example, a very classic pattern in strong upward trends is called bullish arrangement, where moving averages are evenly distributed from short to long periods without any crossovers.
This pattern often indicates that it has entered an upward phase, but an acceleration occurs, with a very large angle. This indicates that market bullish sentiment is high, with more buying entering during the upward process.
We usually think that during the push-up process of buying, as the bullish chips are exhausted, the upward momentum will deplete. However, angle theory suggests that a gentle lifting process indicates that the main force's pushing power is not strong. But as the market reaches a consensus, the main force and other funds work together, the market can show accelerated upward movements.
Today, we will understand the secrets of industry trends and reversals from the perspective of candlestick trends.
1. Three types of trend angles.
In angle theory, upward trends are divided into strong upward, moderate upward, and weak upward angles.
1. Strong upward angle, which is a sharply rising trend.
Generally speaking, when the market breaks, it often returns to confirm support. However, in a strong market, due to consistent bullish sentiment, the bulls do not provide any opportunity for pullback buying, leading to this strong upward angle.
The identification method is that when a relatively stable market sees multiple candlesticks rapidly rising, forming a steep trend, it indicates that the main rising wave has appeared. At this time, there will often be an increase in volume, and the MACD's DEA and DIF will start to diverge significantly from the zero axis.
Note that this is not necessarily a divergence signal, but indicates that short-term sentiment is extremely strong. During this process, the two lines will repeatedly converge. Only when we see a high-level dead cross in the MACD and a significant increase in green bars is it a divergence turning point.
Here, we can also use trading volume to identify top signals.
Generally speaking, when the maximum trading volume in a candlestick appears at a peak, it indicates fierce competition between bulls and bears, and the resistance at this position is often very strong.
In order flow tools, the price level with the largest trading volume for each candlestick is recorded as POC. When POC appears at a peak, it indicates that the likelihood of a short-term peak at this position is very high.
Additionally, when we find in order flow tools that if a candlestick at a relatively high level has only long positions at its top and no short positions, it is usually a signal of reaching a peak, because our order matching mechanism pairs one short with one long. When there are no short positions, it indicates that the bears believe the price cannot continue to rise, so they will not choose to short at higher levels.
By combining these signal indicators, we can better identify trend continuity.
2. Moderate angle, which is a 45° angle.
A moderate angle indicates that one side does not have an absolute advantage over the other. In this process, both sides will repeatedly test each other, so it often presents oscillating upward or oscillating downward movements, very similar to the channel lines we commonly see.
This is a secondary upward pattern. The only issue is that during this process, there is always a direction choice taking place, and it may break and turn at any time. Therefore, in moderate upward movements, we generally enter when reaching the lower edge of the channel line and set a stop loss at the previous low.
3. Weak upward angle, which is a slow upward angle.
This type of upward movement usually indicates that there is no buying power to drive it, and trading volume is also synchronously decreasing, making it a very easy signal for a trend change, and not a good entry opportunity.
However, conversely, when this pattern appears, it is actually our opportunity to short, and once it breaks down, the force is often very strong. We can choose to enter near the previous low.
2. Angle combinations.
In actual trading, the three types of upward angles often convert into each other, so there are also upward angle acceleration, upward angle deceleration, and upward angle conversion.
1. Upward angle acceleration.
This indicates that the market is moving from gentle upward to strong upward. The bullish arrangement we mentioned earlier is of this type.
Despite the weak angle, we usually do not recommend trading, as weak upward movements typically cannot break previous resistance levels. However, if a sudden rise occurs and breaks through previous resistance with rapid volume, it is an effective breakout signal, and we can consider entering near the resistance line.
It is noteworthy that a significant feature of the breakthrough price level is continuous volume increase of long positions. Especially in weak angles, the previous market energy is weak, and if it wants to drive the market higher, it must increase the buying volume.
In order flow tools, the buy/sell ratio of each candlestick is counted in real-time. If buy/sell > 3 or sell/buy > 3 at a certain price level, it indicates an imbalance. The former indicates a buy-side imbalance, showing strong bullish sentiment. When a buy-side imbalance occurs three times in a row, it constitutes an imbalance accumulation, indicating that buyers are increasing their attack volume.
Order flow tools will mark the accumulation positions, forming resistance and support zones. When we notice these accumulations near the breakthrough price level, we can predict the effectiveness of the breakthrough.
2. Upward deceleration angle.
It is the opposite of upward acceleration, indicating that after a rapid rise, market momentum begins to weaken, leading to upward deceleration. But this does not mean that there are no trading opportunities in upward deceleration.
Unlike the weak upward angle, upward deceleration only means that the speed of the rise has slowed down, entering a phase of gentle upward movement, but overall remains in an upward trend.
Due to the previous rapid rise, there is not much pressure above, so the upward momentum will continue for a while, and can be used with MACD to identify the momentum of the main rising wave.
Generally speaking, during this process, MACD will repeatedly converge and diverge at high levels. As long as this process does not end, it indicates trend continuation. However, once a dead cross occurs at a high level and the previous divergence pressure is released, the market will directly enter a downward trend.
3. Angle conversion.
In addition to upward acceleration angles and upward deceleration angles, there is also a conversion of upward angles.
It is generally composed of three or more angles, which can be strong + weak + strong.
It can also be weak + strong + weak.
However, it should be noted that the transformation of patterns is not necessarily continuous. Especially after experiencing two rounds of upward movements, some people will inevitably sell part of their chips at high levels, leading to a pullback in the market.
However, if the pullback is very limited and involves a decrease in volume, it indicates that there are not many follow-up chips in the market. Once the volume increases again, the upward trend will continue.
These positions of decreasing volume can also be tracked through net order quantity. Net orders mean the difference between buy orders and sell orders, so net orders reflect the current market sentiment.
When there is a decrease in volume, the net order quantities at these positions are very small, indicating that neither the bulls nor the bears are very interested in entering, suggesting a high possibility of trend continuation.
In order flow tools, the net order quantity is counted in real-time, recorded as Delta. It is worth mentioning that the order data in order flow tools is real-time, so the Delta data is also real-time.
When Delta forms a long lower shadow bullish candlestick, it indicates that bears are encountering resistance in pushing prices down and can only sell short to buy long, thus forming this candlestick pattern, which can help us clearly confirm tops and bottoms.
3. Reverse angle.
Earlier, we discussed the angles under trend continuation.
However, when this trend suddenly stops, the market will move in the opposite direction, and the angle at this time is the reverse angle.
In an upward market, when a top signal appears, the subsequent reversal speed will determine the trend strength, which also includes three categories: strong reverse angle, moderate reverse angle, and weak reverse angle.
1. Strong reverse angle.
A strong reverse angle occurs when there is a sudden rapid drop during a weak upward trend. This indicates that the upward force in the previous phase was weak and may be a sign created by the operator to facilitate selling at high levels.
Strong reversals can come very quickly. If you cannot enter in time, consider entering when it breaks through support.
In a moderate reverse angle, upward and downward movements are almost symmetrical, indicating that the upward and downward forces of both sides are the same. This means that whatever the magnitude of the previous rise, there is a possibility of a similar magnitude of decline later, but there is not much space for larger upward or downward movements.
In a moderate reverse angle, both upward and downward movements are possible. We can refer to the breakout patterns at the tops and bottoms to confirm whether to follow up.
Additionally, we can also use the previously mentioned imbalance accumulation zone. If a selling imbalance accumulation occurs at a support position, the possibility of a breakthrough downward is very high. Conversely, if a buying imbalance accumulation occurs, it forms a resistance pattern.
3. Finally, there is a weak reverse angle.
After a rapid rise, it begins to fall. Although it looks like a signal of reaching a peak, a gentle angle indicates that the downward force is not very strong. The gentler it is, the stronger the bulls' control ability, making it likely to become a continuation signal.
It is important to note that the first pullback may be stronger. On one hand, there are indeed some selling pressures forming due to the clearing of chips, and on the other hand, the operators may wish to absorb some more chips during this opportunity, so they may induce a slight drop below the 61.8% level.
4. Original force interval and reversal interval.
When the market operates at a certain angle, it will form one interval after another.
If these interval lengths are close and the angles are the same, it constitutes a group of original force intervals. Its principle is actually similar to market fractals, where intervals of the same level are regarded as a group to judge the continuity of the trend.
As shown in the figure, the four original force intervals gradually rise, showing the continuity of the trend. However, after the fourth interval appears, the trend becomes difficult to maintain and begins to turn downward, indicating that the trend is peaking.
A very important point about the original force interval is that the time length and spatial length must be of the same cycle. If this condition is not met, effective analysis cannot be made.
Interval elevation, in addition to complying with the normal upward trend in Dow Theory, also conforms to the rules of Wyckoff trading methods. In (Wyckoff 2.0), it was mentioned that each trading interval corresponds to a high trading volume node.
Breakthroughs usually occur at low trading volume nodes. Because at high trading volume nodes, when one side decides the outcome, the losing side is exhausted of chips, and the winning side only needs a small number of chips to push prices higher.
Combined with the chip distribution in the order flow tool, we can identify the continuity of the original force interval by tracking changes in trading volume nodes.
Additionally, when the trend represented by the original force interval ends, there will usually be a turning signal, which is the reversal interval.
Reversal intervals will significantly change time and space lengths. As shown in the figure, lengths and heights are swapped, forming a horizontal interval, indicating that a direction choice must be made here.
In summary, through the patterns of candlestick combinations, we can identify the strength of trends and further predict the positions of tops and bottoms. Combined with trading volume and MACD divergence, we can more accurately predict market turning points.
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