This is the first resistance level out of those three.

There is a touch of the

resistance trend line made by that big bullish green candle. After this price
makes three very small candles that tell us this level of price is a key level
where buyers have a very hard time trying to push the price further up. This
type of candles represents indecision in the market, represents equilibrium.
From the beginning of the retest, buyers had no problem pushing the price up
which you can clearly see by those big consecutive bullish green candles. When
price got the resistance level, the situation changed. As the main trend was
down, sellers were in control of this pair and they were just waiting for a more
advantageous level to sell again this pair and resume the downtrend. These
advantageous levels are always situated at a support or resistance level. It can
be horizontal support/resistance, it can be diagonal like the ones we are
discussing, it can be a Fibonacci retracement level, which also acts as support
and resistance, it can be the 200 period moving average on the daily chart or it
can be a combination of some or all of the above. The important thing to
remember is that these are logical points in the market where buyers or sellers
are most likely to step in and resume the main trend.
Okay, after those three small candles that tell us the buyers are losing their
power, comes a big red bearish candle, much bigger than the preceding three.
This candle has a big body compared to the preceding candles and also closes
near its low. This candle is the footprint of the sellers coming into the market to
push the price back down and resume the trend. The close of this candle is the
level where you would have to sell this pair. When looking after big candles to
enter the market after a retest of support/resistance it is important to always
compare that candle with the preceding 2-3-4 candles. The entry candle always
has to be bigger than the preceding ones, has to have a big body and close at
or near the low if it is bearish or at or near its high if it is a bullish big candle
that signifies the uptrend will resume. You might think that I am exaggerating
the importance of this entry candle. Well, to help you realize what it really
means and why I say it is the footprint of the sellers coming into the market (in
this downtrend example) you must think of these 4h candles from a time
perspective. Before this big red candle in the example above there were three
very small 4h candles that did not push the price up or down, it just traded
there in a very small range. When the big candle emerges, we see that the
price pushed down and away from that small range. This signal candle is bigger
than all of the preceding three combined and it was formed in 4 hours. The last
three took 12 hours to form. This is what shows us the sellers have entered the
market. In only 4 hours, they managed to move the price down more than they
did in the last 12 hours. Let us see the second example:

In this second example, you can see that after the retest of the resistance
trend line there are three bearish candles with decent body size, which would
imply that sellers have stepped into the market again. However, the first candle
of these three is preceded by a huge bullish green candle. This is not our signal
to sell. The second one is bigger than the first and also has no big candles
preceding it. However, you can see that it does not close at or near its low, it
has a big wick there, price has retraced from the low of this candle and closed
almost at its middle. This does not give us the momentum we want when
entering a trade. Finally, the third candle meets our requirements; therefore, we
enter the short trade at the close of this candle.

This third example is a very interesting one because it brings up an important

point about retest movements of support and resistance levels. You see here
that after price breaks the trend line to the downside, it comes back up very
quickly to retest it, a trend line that has now turned into resistance, and then it
makes a bearish red candle that could mean sellers have entered the market.
However, this is the 4h chart, this resistance line holds great significance, it
took quite some time to develop, and a lot of 4h candles, the retest absolutely
has to be bigger than two 4h candles. This is why you would have to disregard
that first red candle as a signal to sell candle. It comes way too early, the
retest has to be bigger two candles. If this would have been the 5 minutes or
the 15 minutes chart, and the resistance level developed in 3 hours or so then
yes, the retest could have been composed of just two candles. Still, this is a
very important resistance on the 4h chart that took days to develop; the retest
will more than likely be bigger than two candles.
After this red candle, we see that there are additional candles that just
stagnate around that area completing the retest of the resistance level. Finally,
we have a valid signal candle that indeed pushes the price way down.
Stop loss management and take profit levels
Now that you know how and when to enter a trade let us discuss about where
to set your stop loss levels, how to trail them manually, and how to determine
your ideal take profit levels. The initial stop loss level that you set when entering
the trade has to always be set at above or below the level where the retest of
the support/resistance ends. After this, when price goes in your favor you trail
manually your stop loss above or below every swing/turning point/minor support
or resistance price makes. In addition to this, you will also be determining your
take profit level before you actually enter the trade. This is very important from
the money management perspective because there will be some rare
occasions when after calculating your take profit and stop loss level before
entering the trade you will find that the risk you will be taking with that trade is
greater than the potential reward. Otherwise said, you would have to risk losing
more pips than you could potentially win with that particular trade. The risk-
reward ratio in this case is not a satisfactory one. When you find trades like
this…DO NOT TRADE. Wait for the next opportunity. Money management
makes you profitable in the long run; always keep this in mind. Be very
disciplined when analyzing charts and entering trades. Always treat trading as a
business and not as a game. Let us see an example of how to manage the
stop loss and take profit levels.
This is that first resistance level we talked about. Before entering the trade at
the close of the signal red candle, you predetermine your take profit level in the
following way: join with the trend line two points, the first swing of the
resistance trend line and the point where the retest movement started. The first
swing of the resistance is the upper black circle in this chart and the start of the
retest is the second black circle. After this, extend this trend line down, and
where the future price action will touch it, that is your take profit and the level
where you exit the trade. The stop loss will be set initially where the retest
finished like show in this chart and after this, as price progresses down it gives
you logical turning points in the market where you can trail the stop loss like in
this chart. Also in this example, you can see before entering the trade that the
risk is far less than the reward. This was a 420 pips winning trade.

In this second example, the trend line for the take profit level extends far out of
reach for the price action, but as long as the reward is greater than the risk and
it is, you will have no problem in entering the trade and trailing your stop loss
above every turning point until it finally gets hit. This trade actually went more in
favor than this chart shows and gave 550 pips of profit.