This is a bonus lecture that I decided to record and put in this course after replying to a question
from a student. We have Euro - New Zealand dollar on a 15 minute chart and you can see that in the
first part of the chart, we have a downtrend, but then we have a congestion phase, with the price ranging
between 1.7070 and 1.7170.
If we go on, we have a super-strong bearish candlestick.
Let me also zoom in,
so it will be clearer. If we analyzed the single candlestick,
we would say that it is almost a bearish Marubozu, strong sign of a continuation of the previous trend.
But this is what I call a false candlestick.
This is a candlestick on the 15 minute chart that covers 150 pips in just 15 minutes.
Definitely an unusual movement that is probably created from speculating on an important news on
the New Zealand dollar.
This is not a candlestick that can be compared to the others and
it may be a bit misleading.
Let me give you an example of what in statistics is called truncated mean or
trimmed mean. We are trying to calculate the average salary in the United States.
So I call 10 random people and ask them if they can share with me the exact figure of their salary.
Let's say that the average is $2000 per month.
I do it another time, calling other 10 random people and I happen to digit the number of Bill
Gates. This time, the average is $50000 per month.
Is this a good representation of the average salary in the United States?
Not really.
That's why in statistics they invented something called truncated mean or trimmed mean.
You call the 10 people, ask for their salary and then you cut the lowest and the highest value before
performing the average.
In this case, Bill Gates' salary is going to be cut before performing the average,
so you avoid to include this kind of exceptions in your sample.
Now here, on EURNZD, we have a candle of 150 pips, where all the others are about 10
pips.
I believe that this is a false representation of what
usually this kind of candlestick tells you. This is a fast action, probably on an important news,
it shouldn't be treated as a normal candlestick.
The question was: "should I take my profit after this candle or should I expect the downtrend to
continue?".
I would take my profit to be honest. Here,
we can't really talk about trend.
This is just speculation, pushing the price down very fast.
So I wouldn't analyze this candle to look for a sign of continuation of the downtrend.
I believe that these other candles that follow are more important to evaluate the trend.
We have several attempts by buyers to push the price back up, but we have two reactions forming two
bearish engulfing patterns.
Then we have a shooting star, with a very good upper shadow that shows that sellers are reacting on this
level,
and then another candle with another upper shadow that shows a great reaction by sellers.
I believe that this group of candlesticks is more important than this one to evaluate a possible
continuation of the downtrend.
So when you have a candlestick like this on the market, extremely different from all the others, like
15 or 20 times bigger, consider to analyze next candlesticks to evaluate the trend and don't trust a
false candlestick like this.