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Forex Chart Basics

If EUR/USD Buying is High, Does That Affect the Fluctuation/Swing in the Chart?

The EUR-USD cross is an intriguing one. With a total of 9.6 million traders in the world, approximately 37% of all volume at the global level is held by this currency pair alone. In fact, not only are the EUR and the USD two of the most traded currencies individually but they also comprise the most liquid pair.

Traders from all corners of the planet seem to love the EUR-USD because of tighter spreads and less slippage, but this currency pair is, at the same time, the Holy Grail for major players in the market.

There are no Coincidences

Forex is dominated by the Interbank Market, which is used by various financial institutions to trade currencies between themselves. Interestingly enough, 50% of this Interbank Market is controlled by the largest banks.

Out of approximately 25 000 banking institutions existing in the world, Deutsche Bank, Citi, JP Morgan Chase, and HSBC are some of the most prominent. And, you should know that their interest lies where yours does as well – profit.

How come?

Well, big banks love to manipulate the prices. Have you ever noticed how the price suddenly changed when everyone was certain that it would keep on going in the same direction? There’s the catch.

Big banks focus on the concentration of activity and they step in right where most traders are to take the cream off. To be specific, it is not just where traders are in the chart at that moment but where most of them are headed. 

How the Big Banks Interfere

It is unfortunate what sentiment can do. Many traders keep using the same tools and indicators and they, logically, end up losing. We may not know the extent of tools the big banks use to maintain control and insight, but the same information is accessible to everyone through IG Client Sentiment Indicator or FXCM SSI

While the big banks have the power to detect market activity, they cannot see your specific order. They can, however, discover if the majority of orders were long or short, based on which they can manipulate the price.

So, the more the orders push the market in a specific direction, the more likely are the banks to interfere and turn everything around.

USD is a Magnet

The choice of currencies can have an equally strong influence on the trade as well. As the USD is always in demand, it is more likely to be always on the big banks’ radar. Any news events concerning the currency will also stir up the market and set the ground for major turbulence.

The USD is, in fact, so prone to react to any news that any tweets of the previous US president, Donald Trump, caused a commotion in the market. Major US economic reports (GDP, employment, producer and consumer price index, retail sales, and trade deficit reports) are also perfect opportunities for the big banks to take their share of traders’ money.

The EUR is specific because the number of reports concerning the currency is higher due to the number of Eurozone member states. Although related economic reports (especially those of France and Germany) are valuable for traders, EUR pairs seem to do well even when they do come out. 

Since any currency combination is determined by both currencies, the EUR-USD (as the most traded and liquid pair) is that more monitored by the big banks.

The big banks’ involvement can be seen in other crosses involving this pair. For example, the EUR-USD pair has historically exhibited a high correlation with the S&P500 as they both involve the US economy. Interestingly enough, these major banking institutions have no significant dominance over precious metals, which typically dictate what will happen with the pair.

Manipulation at its Best

The number of individual orders, as we can see, does not have the power to drive the market. Individual requests cannot affect market movement per se. The only power that can create an imbalance between buying and selling orders is the big banks. 

Anyone trading the EUR-USD can see these sudden changes in prices, which leave behind many unfilled orders on the supply or the demand level. The big banks will use any opportunity to cause such friction to have their orders filled after the price returns to the zone.

These are the reasons why some forex professionals advise beginners to start trading some other currency pairs that are less susceptible to such interferences.

Indicators’ Predicting Power

Many traders use the sentiment to predict future activity in the market, which is a highly volatile and unpredictable tool. While we cannot control the big bank’s involvement, we can limit their impact by not focusing on the number of orders in the market and avoiding circumstances that these major players deem inviting. 

Any indicator is a result-oriented tool that has no power in predicting the future. News will come out and changes will occur in the world, but our task as traders is to adopt the skills that can raise us above the level of sentiment and provide us with stability.

Instead of focusing on the quantity of orders, supply levels, rather strive to determine the overall market direction and evade the banks’ radar as successfully as possible.

Own your Share of Responsibility

It is important to understand also that if big banks ever disappeared, the nature of this market would change entirely. Maybe the volume could change or forex might start to resemble the stock market. That is why it is important to shift the focus from losses and adopt an opportunistic and proactive mindset. How can you take advantage of the big banks’ existence?

The best solution to this challenge is building your own strategy and learning to trust that system. It should help you avoid the patterns the majority of traders keep repeating. This is a classic contrarian trader view of forex.

Trading currencies requires each trader to let go of the herd mentality. You need to become as independent as possible, especially when it comes to heavily monitored and liquid pairs such as EUR-USD. Your best bet is to invest in learning about trading psychology and letting go of the belief that individuals can impact the market.

Knowledge is Power

If you are still unconvinced that sentiment is not your point of reference, at least aim to use credible sources. 

Twitter, for example, offers an excellent pool of information – you can explore updates about IG Client Sentiment Index on DailyFXTeam, learn about more SSI currency pairs on FXCM_MarketData, or discover some invaluable educational materials on www.forex.academy, and build your unique way of trading. 

Finally remember that it is your skillset and toolbox that will allow you to trade the EUR-USD currency pair successfully – not the news, not the orders, and certainly not the sentiment. Use the traders’ sentiment only to see if there is enough “profit space” for you to take that contrarian trade direction. If 90% of traders are long on EUR-USD, it is hardly going to get higher, do not go into the wall. As the flow in the market is directly managed by external factors, you will primarily benefit from having a system in place that will guide you through any potential volatility caused by news events and the big banks. 

 

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Forex Chart Basics

Naked Trading? It’s Not What You Think!

If you choose to trade while naked, that’s entirely your business. Don’t let us stop you! What we’ll be talking about today, however, is a different form of naked trading – naked chart trading. When carrying out technical analysis, it is possible to make key decisions using what is referred to as a “naked” chart, but should you?

Look at the chart below:

Now, compare it with this one:

What is the main difference? – The second chart is “indicatorless“ or, in other words, indicators are not used here to analyze the trade. 

There are usually no moving averages, no ATR, no volume, or any other additional piece of information that we would normally use in technical analysis.

This, what we see in the second chart, is what we call a naked chart.

Markets: What can we trade with naked charts?

Naked chart trading or naked chart reading can be used in any trading market that involves charts (e.g. ETFs, stocks, forex, among others). 

Purpose: Why do traders use naked charts?

Naked charts are used to have a simplified and clearer view of what is happening in the market. When a chart is decluttered, traders can escape information overload and focus on what really matters – the price

Technical traders vs. naked traders: What is the difference?

Technical traders primarily rely on technical tools to obtain information from the chart. Owing to the indicators they use, these traders can see whether a certain trade would be a good opportunity to take. Naked traders, on the other hand, focus on the candles that tell them what is happening right now. They are only interested in price action signals, which is why we call this type of trading price action trading as well.

Use: How do we use naked charts?

  • To identify the market

Naked charts help traders grasp the momentum or what is going on with the price at a specific moment. Traders, thus, first need to understand the overall market direction with the help of the highs and lows. Based on this information, traders can discover important facts concerning the trade:

  • bullish trends
  • bearish trends
  • emerging trends
  • ranges between highs and lows

Support and resistance traders often rely on swings, differentiating between four different types – higher highs, higher lows, lower highs, and lower lows. These allow them to determine which of the following scenarios is currently taking place:

  • uptrend – a series of higher highs followed by higher lows
  • downtrend – a series of lower lows followed by lower highs
  • consolidation – a lack of a specific pattern 

To see how the market is moving, we can apply a simple chart analysis, without having to rely on any indicators. That is why it is easy to determine whether a market is trending. Also, when we see a bullish trend with a continuation of higher highs and lows, we know that this is a signal to buy. Bearish trends, however, will create a series of lower highs and lower lows, signaling a sell.

When a price gets trapped between two levels, both highs and lows will keep happening at the same levels. Without any specific boundaries, traders can face difficulties understanding price action. That is why neutral markets require special attention and more caution.

  • To spot reversals 

People who trade reversals often use horizontal levels, trend lines, pivot points, and Fibonacci levels. Support and resistance levels are believed to be particularly suitable for revealing the key points of reversals:

  • When the price keeps moving along major support levels which then turn around.
  • When the price retraces along with the previous support level, making it the new resistance to get reversed.

Uptrends and support and resistance levels are important areas in naked charts because those are the places where we are likely to see turning points.

  • To identify trade signals

We can identify buy and sell signals in naked charts by determining the candlestick reversal pattern. The most common signal to sell is a bearish rejection candle.

Time frames: Do time frames affect trading with naked charts?

Instead of using a daily chart, traders can actually switch to lower time frames to see what is happening with the structure more closely. Some traders ever resort to using multiple time frames to make a better decision. To generate a better approach, you can ask yourself a question such as the one below:

Is a more bullish trend indicating a greater chance of a resistance fail?

Exits: Can we get a sign to exit a trade in naked chart trading?

After the price breaks out, trades pile into the trade, often wondering if it is overbought or oversold. This question is, in fact, not important for naked chart reading because it allows traders can rely on the resistance sitting above the current run in the price. 

Resistance, or support, levels will not tell us if the price will fail to continue running, but traders should remain vigilant once the price reaches this level. Here, you should actually be attentive to what the price is doing. These are important areas because you can see from the price action what it is about to do.

Being alert and practicing the ability to read the forming structure can give you a profit exit long before everyone else rushes to the exits.

Different charts: What are their advantages and disadvantages?

Fuzzy logic: Application in trading

Traders are essentially people who are prone to making subjective evaluations. We often encumber our decision-making with notions such as intuition and emotions that obstruct clear thinking. Unfortunately, technical trading cannot sustain vague structures, so some traders need a definite yes or no to interpret signals and have a clear vision of our next step. 

The black-or-white approach will alleviate many of the challenges we face in trading because it is the gray area that makes trading susceptible to mistakes. What this means is that traders need to learn how to approach messages whose interpretation may vary. 

No indicator is 100% accurate, but we all know that, for example, the RSI below 30 is a sell and above 70 is a buy. A lot of false signals occur if we blindly follow this crisp logic. However, by combining other information about the market we could decide to open smaller or bigger positions. Our brains are used to fuzzy thinking, we feel how much we need to push the brake and how much to step on the gas, and accidents happen. Takes a lot of time to master and safeguard our portfolio.

Conclusion: Naked charts or technical analysis

Traders who are apt at interpreting naked charts are also at a significant advantage because they can understand what is happening in the market without needing to rely on any particular indicator. With the rise of automated trading (expert advisors), there seems to be a greater need for ready-made solutions, and learning how to read charts tends to be a factor that makes many people give up early. However, we must understand that the basics of interpreting any chart are also the essential items of knowledge every trader should acquire, regardless of the market or strategy he/she chooses. In the end, whether you decide to use specific tools or opt for naked chart trading, make sure that you know everything there is about your preferred style of trading to eliminate mistakes, prevent losses, and make good decisions, as these will inevitably determine how successful your trading is no matter the approach.

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Forex Chart Basics

Pivot Points in Forex Trading: What You Need to Know NOW

When you study Forex trading you may have discovered the term, pivot points. This is a collection of supports and resistors that are previously calculated to give you ideas about where to buy and sell a couple of currencies. Pivot points are not just used in Forex and in fact, have a history in futures exchanges in the United States. This brings us to the days of voice trading and before computers existed.

Unlike many other indicators you might find, pivot points are, because of their nature, predictable. Essentially, what you’re doing is seeing where the overall pivot in the market can be, and then the next three levels of support and the three levels of resistance. This indicator is quite powerful, but the same as other indicators, it must be confirmed either by the action of prices or other factors such as the previous support level.

The analysis of pivot points focuses on the relationship between the maximum point, the minimum, and the starting prices between each day of operation. In other words, the prices of the previous day are used to calculate the pivot point of the current day. The pivot point, the central axis of the indicator, is considered as “fair value” for the market. Remember, if the price is rising and is returned, it is said to have resisted. Alternatively, if the price is falling and is returned, it is said to have found support. This indicator will show what is the “fair value” of the market, and three potential areas in both directions, which are called support one, support two, support three and also resistance one, resistance two, and resistance three to make the role of guidelines.

The Calculations

The turning point of the day is exactly equal to the maximum price of the previous session plus the minimum price of the previous session and the price of the previous session’s departure. The division of these three numbers by three gives you the pivot point. Once you know the turning point then you can extrapolate the resistors and supports. S1, S2, S3, R1, R2, and R3.

Pivot point of the current session = High (previous session) + Low (previous) + Close (previous)

The other pivot points can be calculated as follows:

  • Resistance 1 = (2 x pivot point) – Minimum (previous session)
  • Support nº 1 = (2 x pivot point) – Maximum (previous session)
  • Resistance nº 2 = (pivot point – support 1) + Resistance 1
  • Support nº 2 = Pivot point -(Resistance 1 – Support 1)
  • Resistance nº 3 = (Pivot point – Support 2)+Resistance 3
  • Support nº 3 = Pivot point – (Resistance 2 – Support 2)

Statistical Probabilities

One of the main reasons why traders use pivot points is that they work statistically. For example, the EUR/USD pair has given results below support 1 almost 44% of the time. The maximum of the day has been over Resistance 1 almost 42% of the time, while the minimum has been under Support 2 17% of the time. Continuing with this, resistance 2 has been exceeded by day maxima only 17% of the time, while minima and maxima exceeding or being below support 3 and resistance 3 only occurs 3% of the time. Because of this, you may perceive how likely it is that the price will go to any of those areas. Think of it as a Gauss bell, and the standard deviation equations you learned in school. When you are beyond two standard deviations it is very rare to stay there, you can think about our three and support 3 in the same way.

Think about it this way; if the resistance level 1 is only exceeded 42% of the time, in this way that means that if you are on the market for a short term, the odds are in your favor if you put the loss cut over the resistance 1. Obviously, there are many possible combinations here. Luckily, most trading platforms now include pivot points, so you won’t need to know how to calculate them.

An Example in Action

Have a look at any graph of the AUD/USD pair with an hourly timeframe that has the pivot point indicator built-in. At this point, I would like to point out that not all Metatrader platforms come with it, but there are free downloads available online on a multitude of schemes. In this particular situation, the pivot point of the previous day is the yellow line while the support levels are blue and the resistance levels are red. As you look at this chart, notice that the market started the day at a point much lower than the pivot. The central pivot line, the yellow one, should be considered as a potential “fair value” for the market. Instead of starting there, we started at $1, and we started seeing support. You can clearly see that initially, we moved towards the pivot point but then you overcame it. You’ll notice we stopped at Resistance 1, which is where we closed the day.

You can see the importance of those levels in this table because even when they are surpassed the next level will begin to show its influence. What I have not pointed out in this graph is that the central pivot is at the level of 0.73, an area that has been in support and resistance more than once. It is therefore not a great surprise to see that the market suddenly closed at that level and did not deviate from it. If you decided to stay in the market above $1 you would probably have made a profit near the pivot point. Beyond that, if we deviate outward as it happened, then I could well see the area below the pivot point to put a stop loss. While it is not itself a trading system, the pivot points are based on statistical probability, something on which much quantitative trading is based. Keep in mind that many machines sell and buy currencies today, so those ratios and formulas can be relevant. Then using pivot points and Forex trading you add some quantitative trading to your strategy.

Pivot points are typically used for short-term trading, however, there are pivot points that are used in monthly installments in the same way. When calculating these, simply replace the maximum, the minimum, closing values of the previous sessions with one of the previous month. It works the same way, any time frame.

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Forex Chart Basics

The Ultimate Guide To Correlations: From Basics to Opinions

Individuals eager to enter the world of trading usually feel perplexed when they start analyzing the charts, not fully understanding the movement of prices and what causes it. After a while, they typically start making connections between different factors in the market, beginning to grasp this association. Correlations, the implication that connections can be drawn between the behaviors of two distinct things, are one of the inherent parts of different trading markets. Nowadays we can see how various events affect the changes we see in a specific market and how different markets can impact one another, providing proof for the existence of both inter- and intra-connectedness in terms of market cause-and-effect relation. We can now see and understand how correlations work and the way they cause things to move. Often we find how pulling one string affects other parts of the web, which is why it is necessary to see the extent of this impact and whether it can have practical applications for traders. Today we are reviewing different types of correlations, finding real-life market implications, and evaluating their effectiveness.

Correlation Degrees

Correlations can either be positive or negative and together these two polarities form a spectrum consisting of several different degrees of correlation. As can be seen from the table below, both positive and negative correlation can be either perfect, high, or low. With the positive (left) side, we understand that two things are moving exactly the same, unlike for the negative (right side of the table). With similar indices, we can often detect a positive correlation, such as the case of the SPX and the SPY (ETF) which, due to their similarity, do not only have a positive correlation but a number of correlations as well. On the other hand, examples such as the correlation between DIA (diamonds) and DOG (inverse ETF) reflect a negative correlation owing to the fact that they move exactly opposite to each other. Therefore, we can conclude that a positive correlation is the one where two things are moving together, while the negative one implies that two items are moving in the opposite directions, as portrayed in the graphs below.

Many traders assume that, since there are two extreme points at both ends of the spectrum, the middle stands for a perfect balance between the two. However, as correlations simply work differently, the mid-point actually signals something completely different. For example, in the stock market, there is a number called beta, which essentially stands for a measure of volatility. In this respect, the S&P 500 is esteemed 1, so if anything is considered to be 2, it would signify a two times higher degree of volatility in comparison to the afore-mentioned index. Hence, if anything was measured to be 0.5, it would imply that it is half as volatile as the S&P 500. In the early 2000s, Netflix had a negative beta and, as it went down each time the S&P 500 went up and vice versa, it was impossible to measure volatility in relation to this index because Netflix never followed what the other was doing. In statistics, there is a term called R-value which reveals how things are correlated and, going back to the previous table, we can see that there are two perfect correlations on each side, positive and negative, but the middle, however, shows no correlation. This further means that there is no perfect balance in between the two extremes, yet that there is a void where no correlation exists just like the previous example involving Netflix shows. 

In terms of positive correlations, we can find many examples of stocks correlating with the S&P500. One example where there is an indication of a similar movement is displayed below. Although the correlation between Goldman Sachs and Morgan Stanley (both of which are in the same line of business – brokers, trading, and asset management, among others) is not a perfect one, we can definitely find proof of it being a positive correlation despite the existing differences. Although these differences are obvious, we see that these two similar companies also have a tendency to move in a similar fashion.

Although most stocks are said to have a positive correlation with the S&P 500, there is still evidence of some with a negative correlation. The example below shows exactly that type of correlation, where we can see how FAS and FAZ are inversely or negatively correlated. The chart below is very close to a perfect negative correlation where the movements go in almost entirely opposite directions. Where we see the FAS going up, the FAZ is going down and vice versa. This almost perfect opposite behavior is completely understandable since FAS stands for a financial ETFx3 to the upside, whereas FAZ represents a financial ETFx3 to the downside (Direxion Financials).

Major Correlation Causes

Many sources claim that correlation does not equal causation, implying that things that are correlated need not be the cause of each other’s existence, yet there is proof that certain factors lead to specific occurrences in different markets. We recognize three of such determining factors where correlation is quite vivid and, consequently, undeniable: 1) market correlations, which is the most prominent in the currency market; 2) commodity correlations due to which specific commodities affect certain currencies; and, 3) currency correlations where one currency is likely to go down because the other one goes up for example.

Market Correlations

Whenever the topic of market correlations comes up, it is necessary to bring up the measure between risk and reward as well. Today we understand how some assets are considered to be very safe, while others are seen as risky. These projections stem from the analysis of volatility and risk of loss, so we can call an asset risky whenever it is likely to lead to a loss. Those assets which are perceived as safe always entail some form of security, e.g. government bonds that are both paid and guaranteed by the US government and that come with a 3—10% return on a 30-year bond. With such assets, people feel certain that the money in which they have invested is guaranteed and they typically leave a sense of stability overall (as in the example of the US government, which is unlikely to run out of business, that poses as a sign of security for the bonds). Stocks, on the other hand, can easily increase by 30—40% and drop the same percentage immediately afterward, which is why they are considered to be riskier assets. 

In the world of bonds and stocks, people have always used the ability to allocate their funds from one to the other. As bonds come with a greater percentage return whenever things are going well and a significantly lower percentage return when things are not so well, people turn to them whenever the circumstances seem to be unsafe. Therefore, each time people see that the economy is booming, they will invest in stocks and not in bonds, which eventually leads to an increase in stock prices and a decrease in bond prices. However, the moment people feel concerned due to some external factors or events, they will immediately sell their risky assets and allocate their money to safe assets. People will then be piling money in bank deposits, bonds, or utility stocks, which are considered to be less risky, and this is the one reason why assets’ value increases. These surges and reductions in prices almost always stem from people’s decision where to invest their money, which is noticeable in the currency market as well.

When the COVID-19 pandemic started, the US and world economies shut down and we have witnessed major GDP drops across the globe. It is interesting to note how the JPY, the official currency of Japan, skyrocketed by 11.6% in just 4 weeks. To make a comparison, forex traders are more than satisfied with a half a pip growth in one week, so this sudden change had a message to convey. The only cause of such a rise was people looking to buy the currency in question, which seemed like a wise decision in times of crisis and unpredictability. This was an example of a risk-off move where people are eager to buy safe investments for the sake of exiting the riskier assets. Such conversions always affect currency prices, so if people are willing to buy US government bonds as a safe investment, the money will flow into the US and the USD as well. Aside from the US government bonds, ranked the first owing to the US economy is the largest one in the world, China’s and Japan’s bonds are also considered to be the safest assets and respectively hold the second and the third place in terms of their economies. People will always look to invest in these countries’ assets because they are believed to be the least likely to collapse, making people’s investments as secure as possible. Australia, for example, may not be able to pay off all the bonds due to a lack of money or wealth, which is what people may feel worried about when choosing where to invest their money.

Risk On/Risk Off

From the perspective of history, the JPY, the USD, and the CHF have traditionally been viewed as currencies of safety, while the NZD, the AUD, and the CAD are considered to be risky currencies. The shapes below explain how the purchase of currencies works in different situations. A typical risk-off move occurs when people look to buy stability and sell what is risky. Whenever people are buying stocks, economies are growing, and there seems to be less worry about risk overall, we are seeing a risk-on move where growth currencies boom. They are called growth currencies because their economies are much smaller, so they can achieve much higher growth rates during times of prosperity. During these times, currencies such as the USD, the JPY, and the CHF, which are representative of their strong economies, would normally not do so well. The EUR and the GBP are usually always somewhere in the middle, more or less unaffected by the same factors as other currencies.

These moves and changes in currency preferences, however, need not always play out as we expect them to. Theory and real-life applications often differ in the world of trading, so traders need to have in mind that textbooks should only serve as guidance rather than absolute truth. The same discrepancy can be seen in any other line of business, where people often claim to not have been prepared for everything they encountered until they started building a business. Any resource we get hold of is meant to tell us how things are supposed to unravel, yet these prescribed scenarios should never be seen as carved in stone. For example, whenever there is panic in the market, the EUR is always found in the middle and the CHF is always perceived as a currency of strength. However, when the Eurozone was on the verge of collapse in 2012/2013, these two currencies were found in a completely different set-up.

The Eurozone attempted to take countries of different economies, currencies, and histories and blend them into one. Before any of these changes, the event of one currency dropping in value was able to affect that country alone, which allowed them to export their goods and services more easily due to them being cheaper and thus more appealing to other countries. When different European countries agreed to come together in 1998, many were doing exceptionally well, pouring money into the Eurozone. When Greece and other countries showed less preparedness to provide the same, the member countries with stronger economies began to complain, not wishing to keep funding the underperforming economies. At that time, the Eurozone did not have a functioning measure that would tackle these issues, so many people started to raise questions regarding the future of the EUR, which consequently became the riskiest currency. Then this worry affected the financial markets and the EUR lost its previous status.

The CHF, the usual currency of safety, which is also located right in the middle of the Eurozone, made people feel worried about what would happen to Switzerland and its official currency despite its long-held favorable status. The unsettled issues and rising concern made the currency fall from grace, leaving a need to allocate large sums of money in some other direction. Unexpectedly and suddenly, people showed interest in New Zealand and the NZD became the currency of favor for a while. As the Eurozone was affected by its internal troubles, people desired to look outside the continent and this is an excellent example of how external factors play a big part in how events play out. Therefore, stories, news, and history in the making are going to affect currencies and make them move outside their usual patterns. Today we see the USD as the currency of stability and safety, but this may too change because of the risk-on and risk-off moves people make. This is an extremely important correlation and traders should always acknowledge its impact. In addition, it is vital to remember that the decision on which currencies to pair in the event of equity markets going down is easy to make when there is knowledge on which currencies act as the currencies of safety.

Commodity Correlations

Canada is an excellent example of a resource risk economy, which further entails that a great proportion of its economy is dependent on its resources. Due to this reason, the price of resources is an extremely important factor for this country. Oil, in which Canada is abundant, is known to have affected their economy through history. For example, in 2005 when the price of oil shifted to $150/barrel only to go back down and up again impacted Canada to a great extent. Such price alterations meant that the country had to close down oil production and put a lot of people out of work, which increased unemployment levels, decreased taxes the government could collect, and ultimately made their bonds a lot riskier. This story exemplifies how relevant these commodity correlations are, as commodity prices inevitably influence people’s buying preferences and the entire strength of an economy. It is, however, interesting to note that, while there always seem to be high correlations between the CAD and the price of oil, between 1986 and 1991, the price of oil increased while the CAD remained unchanged, which only points to a conclusion that these correlations are not always present.

Some other correlations are vivid in the gold market, especially in connection with the three currencies that are highly correlated with the price of gold: the CHF, the AUD, and the NZD. Today, the CHF is the only remaining currency still pegged to the gold standard, which means that any desire of the Swiss government to increase wealth needs to be carried out through the acquirement of more gold. Whenever a country buys great quantities of gold, whose price increases around the same period of time, the country in question immediately becomes that much richer and is much more likely to be able to pay up on its bonds. This has a direct impact on the way the currency and the country are perceived by people, who are then increasingly more likely to see them as stable and safe and are, thus, more willing to purchase their bonds. Alike the CHF that is backed up by gold, Australia is also closely connected to gold due to its mining. Furthermore, the NZD which is tightly connected to the AUD is then also likely to be impacted by any changes occurring with the price of gold and the AUD. Therefore, should the AUD go up as a result of the changes in the price of gold, the odds of the NZD changing are higher and vice versa. The AUD, the NZD, and the CHF all have a positive correlation with the price of gold, which further entails that they will typically rise when the price of gold does as well.

We can find these correlations with other currencies as well, for example, the South African rand and the Swedish krona have both demonstrated high correlations with the price of gold although we typically do not trade them. The USD also shows proof of such correlation with gold, although a negative one, which signifies that the price of the USD will generally fall whenever the price of gold rises. Moreover, whenever we consider the prices of oil and gold, we are able to develop an insight into what is happening with the CAD, the AUD, and the CHF. Some websites even offer tables with information on different correlations, so as the table below suggests, copper is mildly correlated with the EUR.

Currency Correlations

When we discussed another type of correlation above, we explained how the AUD is highly positively correlated to the NZD because of the close proximity, which also means that the two will be each other’s greatest trading partners. Another example of geographic closeness is that of Canada and the United States of America, and such ties will always imply that whatever happens to one country is probably going to affect the other one as well. With Australia and New Zealand, it is interesting that their common trading partner apart from one another is China, which is a very big part of their GDP and export. Again, if anything occurs in China that should impact its economy, both Australia and New Zealand will feel the reverberation of these events. 

As the Eurozone is a very peculiar unit, when the coronavirus took over the world by storm, the entire union took on a meticulous plan on how to tackle the challenge. There were signs of problems in Italy and Spain early on, yet the effort to shut everything down and make everyone comply with the rules led to lasting changes for the better. Unlike the US, they crushed their economy right on the start only to come out later on even stronger. With the United States, the economy was always semi-closed, so the number of people affected by the virus kept rising while no effective change was recorded. Since the Eurozone’s economy improved after they had it closed off, this also helped the neighboring countries and their currencies – the CHF and the GBP, which are all going to be positively correlated, moving together in the same direction. 

Examples of such currency correlations are numerous, so for example the EUR and the USD have often shown signs of negative correlations, meaning that when one goes down, the other one will go up and vice versa. Traders can find information on these currency correlations on different websites and even check for various time frames to draw more advanced conclusions (see the table below). Nevertheless, apart from such correlations calculators, it is important to mention how certain experts loudly criticize the general approach of different educational sources to currency correlations due to the difficulty and impracticality of their application in real trading. 

While many assume that a currency that is currently strong will be equally strong against many other currencies and not just one, some forex experts claim that such knowledge is impossible to use in everyday trading. These individuals also find it hard to believe that several currencies moving in the same direction can be taken as a predicament of some future movement. They claim how traders are keen to receive a signal that would warn them about some market changes but how these signals are unlikely to be found in currency correlations themselves. Therefore, whenever traders find two currencies moving together in a correlating fashion in the chart, they are prone to assuming that they will also change direction at the same time due to this inter-connectedness. However, since they are moving exactly the same, the chances of traders receiving the early entry signal they may be eager to get are probably very slim. What is more, this group of experts insists that there are no two charts that show true correlations, which is why they are inviting all traders to compare any two charts they believe are correlating and assess them candle by candle. They argue that all traders will be able to see a different picture details as well as understand that the two currencies are not truly correlating once they start considering all (ponder on the following two images). 

It is paramount that traders understand that many a time what they see in a chart is not an indication of any correlation but a special circumstance where one strong currency is leading the pair. What often happens is that one currency has greater importance than the other one in terms of how this currency controls whether the pair moves up or down. The examples above show how the GBP just mattered more and, whenever this happens in real trading, you will see two charts that look very similar and think that currencies may correlate as a result. Out of the eight major currencies, the EUR and the JPY are the easiest to spot whenever they are in such a position of power. These circumstances cause many charts involving the two currencies to look the same, but it does not mean that they are correlating. What traders can do in such situations is check another related chart; so, if the EUR/AUD and the EUR/NZD pairs appear to be the same, traders should look up the AUD/NZD chart. It is, therefore, crucial that we look into matters more deeply and analytically so as to prevent ourselves from taking currency correlations literally.

While some forex expert traders claim that currency correlation is a phenomenon that simply does not exist, they admit to pairs being able to run together. What they do contribute to this statement is that pairs, however, need not run together at all times. If currencies could be controlled, everyone would have been using this information by now and, since we have no tangible proof of currency correlations, the best approach to take is to work on individual trading systems that are sure to bring traders the signals and trades that can weather through any market despite the natural market oscillations and changes. 

Conclusion

The excitement over correlation varies from trader to trader although it is impossible to deny how different external factors have a tendency to impact various markets. What traders need not focus on is any specific currency; however, the knowledge on risk-on and risk-off moves are rather important because they determine various market movements. If you are eager to get a good trade, simply consider the risk you are leveraging and understand how specific correlations with related markets can assist your trading. Nevertheless, besides connecting these dots, the only thing you can truly feel you can trust and the only thing you can test both backward and forward is your own system. Traders often exhaust themselves looking for information outside their systems, when in fact it is the algorithm and individual set of values and skills that will determine one’s success. Anything else has a much higher chance of sabotaging your efforts and your system, taking you away from something that can work well. Therefore, if your system is telling you to make a specific move and enter a trade, do not go against it just because of the idea that some presupposed correlation is going to lead to a better or worse scenario. Rely on the entire knowledge of markets and the histories of countries and currencies but always trust your system on how to manage your trades and all market ebbs and flows.

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Forex Chart Basics

What Are Forex Price Gaps?

Price gaps are not something that many traders want to see, they do not happen every single day but they are a pretty easy concept to understand. A price gap is simply an empty area on the charts, thymus the name of a gap. They take place when the opening price of a candlestick is not the same as the price of the previous closing candlestick. They aren’t as common on the forex markets as they are on the stock markets, but they do still happen, mainly due to the reason that the forex markets close over the weekends but is still active of operations by international banks, having said that, they can happen in the middle of the trading day when volatility is really hitting the high levels.

Gaps in the markets are something that every single trader will experience at some point in their trading career. As we mentioned they occur when the opening price of a candle differs from the closing one prior to it. Over the weekends, when the price moves up or down but our retail clients to do an update over the weekend, so when they open once again on Sunday evening (UK time) then the opening candlestick will differ to the one that closed on Friday evening, this is especially prevalent when there has been a significant even in the world or news over the weekend.

We mentioned that they can also happen in the middle of the trading day and not just at the weekends, this can happen when a significant news event takes place which brings in a lot of interest from traders, this large spike can widen the bid and the ask spread wide enough for there to be a gap on the next opening of a trade. Price gaps can give you a good idea as to what the market sentiment is from other traders, if the markets gap uup, then it can be an indication that people do not want to sell and when it gaps down it will show that traders do not want to buy, they can be used as an additional indicator to how the markets may behave.

There is also something known as trading the gaps, this is where people take advantage of these little gaps in order to make a little profit. Gap trading is considered to be easy, reliable, and pretty profitable by a number of traders, or very risky by others.

So let’s take a quick look at what the different gaps are, there are four main ones that we will be looking at now.

The Breakaway Gap:

The breakaway gap occurs when a price action comes to an end and when a new trend begins. This type of gap indicates that the price has broken out and then starts moving up or down leaving a gap. This sort of movement is often caused by a news event or breaking news, hence the name breakout gap. This process often causes a new trend and is then considered as not very trade-friendly. 

The Runaway Gap:

The runaway gap is a formation that can form within a trend and they often indicate that the trend is continuing in the same direction. Runaway gaps are considered to be quite tradable and are one of the safest ways to trade with gaps due to the fact that the gap is simply indicating that the trend is most likely going to continue in the same direction. They can often combine trading with runaway gaps with other price action tools to help with even safer trading conditions.

The Exhaustion Gap:

These sorts of gaps are very common on the stock markets, but they can also occur on the forex markets too, they just occur a lot less often. These sorts of gaps often form towards the ends of a previous trend and can help to indicate the final moment before the price begins to reverse. This means that you are able to trade these gaps, however, you should only do so after you have already identified them and you start trading with the new trend once it has been formed.

The Common Gap:

The common gap as it sounds is one of the most common types of gaps that you will find and is also often the most tradable type of gap and due to this is the most widely used style of the gap that is traded. These sorts of apps often appear late Sunday evening and early Monday mornings shortly after the markets have just opened and are appropriate for short term trading as they tend to be filled within a few price bars. It Is best to look for these sorts of gaps at midnight when the markets open, they can also occur after a holiday or when a major news event has been announced.

You may have come across something called filling the gap, this is basically when the price moves back to the initial level before a full gap appears  The price will always fill the ap at some point or another, the question that we need to work out is just how long it will take to do it. When the gap is filled within the same trading day it is known as fading, but this does not happen every single time with gaps. You also need to calculate just how many pips it will take to fill the gap, as it may not actually be feasible for trading if it is too large or too small, but the fact that the markets will always fill the gap at some point is what makes it so tempting and interesting for traders. It is not really that hard to work out that if the markets gap downwards then it will need to move back up in order to fill that gap, the problem with trading, especially when the markets have just opened up is that the spreads can make it not so profitable, so unless you get in and out at the right place with the right spreads, it may end up costing you even when the gap does fill.

There are of course risks when trading the gaps, so we need to work out how it is that we can minimise those risks. The primary thing to do is to simply have some sort of knowledge on trading and understanding the fundamentals behind how the markets move and how and why the gaps have been formed. A few other things that you can do are to always watch and keep up to date with a real-world event that could be affecting the markets, using an economic calendar, use a broker that has lower spreads, preferably an ECN broker which offer straight-through processing, always use a stop-loss. This should be pretty obvious but a lot of people trading the gaps forget it, and it can of course continue the wrong way before closing the gap, so be sure to add in a stop loss in order to protect your account.

So the main thing that you need to think about is whether or not you want to trade the gaps, it is not the most common thing for people to be trading. Make sure that you read up on it. If you are planning on it then make sure that you learn about the different gaps and how to trade them, ensure that you are up to date on world events, and learn the basics of both fundamental and technical trading and analysis. Use proper risk management and then practice with lower best, you may not get gaps on a demo account so may need to practice on a live one, but do so using small trade sizes in order to mitigate a bit of the risk involved.

Categories
Beginners Forex Education Forex Chart Basics

The Importance of Not Mixing Up Your Time Frames

Having the ability to look at multiple different timeframes at the same time is a blessing, but it can unfortunately also be a curse. Have you ever been analyzing the markets and found the perfect trade setup but then after the 30 minutes to an hour that you have just spent, you look up and notice that you are on the 4-hour timeframe rather than the 15-minute chart, all that work you have just done is wasted.

The majority of the time, when a strategy is created, it has been created to work with a specific timeframe, as soon as you turn onto a higher or lower timeframe, the strategy no longer functions in its optimum form. Accidently changing to a different time frame is an incredibly easy thing to do, in fact, when you open up a new chart it is often loaded on the 1-hour timeframe, so unless you remember to change it, it will remain on that while you perform the analysis for your strategy.

Different timeframes can also have an effect on your mentality and your confidence in the markets, now that may sound strange but it is true. You have a great trade setup, all the indicators on your current timeframe indicate that the markets will go up, but now you have seen people online stating how their analysis shows that the markets will go down, but they are on a higher timeframe to you, this can hit your confidence and make you second guess your own strategy and analysis, but it shouldn’t.

You need to remember that they are using a different time frame which has nothing to do with your strategy, yes the 4-hour chart may ultimately go down, but the 15-minute chart that you are using for a shorter-term trade may well still go up, you need to ignore the indications on the other charts (unless it is part of your strategy to look at them also) and concentrate on the one that you know and understand.

If we were to break down trading into just two different categories, short term trading, and long term trading. The short term traders do not have the time to analyze hundreds of factors, they use the smaller 1 minute, 5 minute or 15-minute timeframes, they look for very specific things and put in trades with the expectation to get out quickly. Long term traders use the larger timeframes, from an hour up, they have the time to analyze the markets at a much deeper level and take their time with each trade. Using a timeframe above or below what your strategy demands will cause issues and increase the chance of losses.

It is even worse for those that are kind of in the middle if you use the 30-minute timeframe, for example, the 15 minute and 1-hour time frames could counter your 30-minute analysis, but concentrating on what you know and not taking that into account can be beneficial, having a look at multiple different ones that don’t relate to our strategy can cast doubt into your mind and knock your confidence on both that trade and your overall strategy.

Let’s imagine that you have a trade on the 1-hour timeframe, it is an uptrend which is what you want, the markets look like they could be turning on the 1-hour chart, but when you look at the 4-hour chart, it makes it clear that it should continue. Bearing in mind that your strategy and trade was based on the 1-hour chart, should you get out of the trade or hold it for the 4 hours? You need to close it, your analysis was for the 1-hour chart, no matter what the 4-hour chat states, you should not take it into account as you did not when first analyzing the trade.

There are a few ways to help avoid using the wrong time frame by accident, we would suggest having a tick chart for each of your trades, at the very top you can out to check that you are on the timeframe, you would be surprised how many times we have started to analyze for 10 or 20 minutes before realizing we are on the wrong time frame. In order to avoid having others cloud your judgment, try not to look online or ask others for input while analyzing and putting on trades, this helps you to concentrate on your trading and it does not let others influence you or damage your confidence.

Having said all that, looking at multiple timeframes can help your trading, it can give you a lot more confirmations for the trade, however, it needs to be based on your strategy, stick to the way it works, if you use one or two, stick to those ones, don’t venture out onto timeframes which are not relevant to your current trading strategy.

Categories
Forex Chart Basics Forex Daily Topic

Trading the Double Top and Double Bottom Pattern

Introduction

In our previous articles, we had reviewed several technical formations that render signals for potential market-entry setups in a trend reversal context or trend continuation.

In this educational article, we will review the characteristics of the double top and double bottom pattern.

The Nature of Double Top and Bottom

The double top and double top formations are the most popular trend reversal technical patterns in financial markets. These patterns characterize themselves by developing an internal “M” and “W” structures on double tops and double bottoms respectively.

Considering the fractal nature of financial markets, the technical trader can detect these formations in any timeframe, from intraday chart to monthly range. 

The double top formation tends to be tough to identify, especially if the second peak is higher than the first one. This situation occurs because the technical trader could be waiting for the uptrend continuation or a bullish trap.

The Setup Rules

The price action will generate an entry signal if the price breaks and closes below (or above) the swing between both peaks (or valleys), as shown in the following figure.

The stop-loss order will take place above the last high (or low); this distance between the entry-level and the previous top (or bottom) is known as the swing size, as illustrated in the last figure. 

The double top/bottom pattern holds an easy way to identify the profit target level. The technical rule says that if the swing size is 50 pips, the profit target will locate at 50 pips from the entry-level.

The Behavior of the Double Top and Bottom Formation

Thomas Bulkowski, in his “Encyclopedia of Chart Patterns,” described the performance of double top and bottom considering some shape variations as a rounded peak or a spike. 

In general, Bulkowski reveals that on average, the break-even and failure rate of the double top pattern is 11.5%, while the percentage of break-even and failure of double bottom is 6.5%. However, the double top formation tends to reach its price target 71.5%, while the double bottom tends to strike its target 51.25% of times.

Bulkowski summarizes its finds stating that some variations of double top and bottom patterns with a narrow range perform better than those that show a wide one.

Conclusions

In this educational article, we reviewed the essential reversal formation known as the double top and double bottom pattern. The setup studied provides the technical trader a one to tone risk to reward ratio, which could be increased as the trade advances in favor of the trend.

In the next article, we’ll review the use of Fibonacci tools as retracements and extensions to identify trade opportunities.

Suggested Readings

  • Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).
  • Bulkowski, T.; Encyclopedia of Chart Patterns; John Wiley & Sons; 2nd Edition (2005).
Categories
Forex Chart Basics

How to Guess Support/Resistance Level Well Ahead?

In today’s example, we are going to demonstrate an example of a fundamental character of support/resistance. We know the importance of support/resistance in trading. Thus, if we get a clue about spotting support/resistance well ahead, it comes out handy. Let us find out whether it is possible or not.

This is a daily chart. The chart shows that the price heads towards the North with good bullish momentum. It makes bearish correction and keeps resuming its bullish journey. With naked eyes, we see that the price finds its support at three points. Let us investigate the chart with some drawings on it.

We have spotted out three points where the price gets rejection twice. When the price makes a bullish move, at its second wave, it finds its support at the third arrowed point. It works with a simple equation. Can you guess what that is?

Let us draw a line. We see that the price gets rejection at the same level twice. It means it is a level of resistance when the price is bearish. The price breaches the level later and finds its support at the same level. It produces a bullish reversal candle and heads towards the North. Once the price makes a bullish breakout, the buyers shall wait for the price to make a bearish correction. If the level produces a bullish reversal candle, the pair may head towards the North by offering a long entry. This is what happens here. Let us see the same chart by zooming out.

This is the same chart. We have spotted out two significant points and spotted them with two arrows. I assume this time you guess what I am going to say. Yes, the price makes a bullish breakout and finds its support at the breakout level. This is the level, which is a level of resistance in this chart. Since it gets broken and the chart produces a bullish reversal candle, the buyers may go long in the pair again. Let us draw a line here.

See how the price reacts here. Upon producing a Morning Star, the price heads towards the North with good bullish momentum. The price makes even a stronger move this time.

The plan of a buyer should be eyeing on the level to get a bullish reversal candle where the price finds its resistance when it is bearish and vice versa. This makes traders’ life easy, and in the end, it helps them make a better trading decision.

Categories
Forex Chart Basics Forex Daily Topic Forex Price-Action Strategies

Spotting Out Support/Resistance is an Art

Support/Resistance levels are one of the most important factors in trading. In today’s lesson, we are going to demonstrate an example of adjustment in determining the support/resistance level.

Forex market gets volatile from time to time. It often produces spikes. Sometimes traders have to count those spikes to determine support/resistance level, and sometimes they do not have to do that. We try to learn when we have to count, and when we do not have to count those.

This is an H1 chart. However, any chart may look like this. If we are to draw support/resistance levels here, we may find out the two most significant points where the price bounces and where it gets a rejection from. Let us proceed to the next chart with those two lines.

Look at the level of drawn support. The price bounces at the level and produces a bullish inside bar. It comes back at the level and bounces twice. At the second bounce, it produces a long lower shadow and heads towards the North. We may skip counting the spike here and draw the level of support at where the price produces a bullish inside bar and bounces twice later.

Look at the level of resistance. This is where we have counted spikes since the price reacts at the level earlier. However, we may have to adjust it later. We will be able to find this out later as far as price action is concerned.

When the price comes back down, it breaches the level of support and produces a good bullish candle. However, there is a gap, and the price goes back within the previous level of support. Thus, we may still consider the drawn level as a significant level of support.

The price heads towards the North and breaches the level of drawn resistance. The price comes back within the drawn level again. The drawn level is still a significant level of resistance since the price reacts to it. However, we have a new highest high, which must be counted.

The price heads towards the South and reacts to the level of drawn support again. Upon producing a bullish inside bar, it heads towards the North again. Here are two questions.

  1. Where would you set your take profit level as a buyer?
  2. Do you have anything else to do here?

As a buyer, you may consider taking your profit at the previously drawn level. Here we have drawn the level of resistance with a little adjustment. Have you noticed it? Yes, this is what you have to do. Spotting out significant points and monitoring price action around them are two most important things to be able to make adjustments with the support/resistance level. To be able to trade accordingly, we often need to do this. Thus, we must learn the art of adjusting the support/resistance level.

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Forex Chart Basics

How to Establish a Trading Strategy Using Trend Lines and Channels

Introduction

On financial markets, the price moves basically in three types of trends identified as bullish, bearish, and sideways. Both trend lines as channels allow the “trend following” investor to recognize if the market’s direction changed or if the price action accelerated.

In this educational article, we’ll review how trend lines and channels can help establish a trading strategy.

Trend Lines and Trend Channels

In a price chart, the trend can be described as a price variation across time in a specific and identifiable direction. A trend is said to be bullish when the price creates a succession of higher peaks and higher valleys. On the contrary, in a bear trend, the price action tends to create a sequence of lower peaks and lower valleys. If the market runs in a consolidation stage, developing an overlapped structure, the price moves in a sideways or lateral trend.

When the price action develops an uptrend, the chart analyst projects the trend line connecting the lower highs sequence. In a bearish trend, it is customary that the projection links the lower highs sequence. The following figure illustrates how to trace a trend line. 

In the above figure, the 1-2-3 sequence represents the movement developed by the price action in an uptrend (left) and downtrend (right). When price breaks below (or above) of the trend line, as shown in (4), the price action reveals the potential change in the primary trend. The confirmation of this change comes determined by the retracement that experiences the price, which here tests the trend line and continues in the new trend’s direction, making a higher high.

Trend channels could be considered as a dynamic price range that follows the rhythm of a trend; this technical formation could be bullish or bearish. To draw a trend channel, it’s necessary three points, in an uptrend, two lows and one peak. The channel baseline is the trend line that connects the origin of the movement with the second low. The upper line will be the projection of the baseline traced from the peak between two lows as exposes the following figure.

In an uptrend, the breakout after the second low completion (see figure 01) provides a confirmation signal of the bullish trend continuation. This entry setup for the third movement has its potential target located at the upper line of the channel, acting as a dynamic resistance.

Phi-Channels

Phi-channels is a different type of channel and varies from the trend channel. The main difference with trend channels is that on Phi-channels, the guideline connects the extremes from the origin of the movement with the top of the move identified as 3. Then, parallel lines are projected, creating the channel, using point 2 to trace the channel’s parallel line, as shown in the next figure. 

The resulting projection provides potential turning points, which could offer entry setups combined with other technical tools.

Conclusions

In this educational article, we have seen the use of trend lines and channels that can help establish a trading strategy based on tracking the trend.

In general, the use of trend lines and channels is aimed at seeking to take advantage of the continuity of the trend over the turn of the market’s direction. In this sense, it is convenient to recall the Dow Theory principle, which states that a trend will remain in effect until there is confirmation of its change.

In this context, the use of Phi-channels provides potential areas where the price could react to continue the course of the primary trend, although its use should be supported with other analysis tools.

In the next article, we will look at how to apply the analysis tools to create trading signals.

Suggested Readings

  • Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).
Categories
Forex Chart Basics Forex Daily Topic

Chart Combination Traders: Do Not Forget to Calculate This

In today’s lesson, we are going to demonstrate an example of the Daily-H4 chart combination, which may end up producing a trading signal. We find out soon whether it produces a trading signal or not in the end. Let us get started.

This is the daily chart. The chart shows that the price makes a strong bullish move. It seems that the price has found its resistance. The last candle comes out as a bearish engulfing candle. This suggests that the sellers in the intraday charts may get themselves engaged to look for short opportunities in the pair. Let us flip over to one of the major intraday major charts, the H4 chart.

The chart shows that the price makes a strong bearish move and produces a bullish engulfing candle followed by a bearish inside bar. However, the daily candle ends up being a bearish engulfing candle, thus the H4 sellers have an upper hand than the buyers.  Let us proceed to the next chart with some drawings in it.

The price bounces off at the red marked level. The sellers are to wait for the price to make a breakout at the level of support to go short in the pair. The last candle in this chart comes out as a bearish inside bar. The price may head towards the level of support and make the breakout. However, the sellers may have to wait since an inside bar is not a strong reversal candle. Let us find out what happens next.

The price heads towards the South and bounces off several times at the level of support. It does not make the breakout though. The last candle comes out as a bullish engulfing candle too. A bullish engulfing candle at the level of support indicates that the buyers may get themselves engaged in buying soon. Moreover, there are six H4 candles after that bearish engulfing daily candle (A trading day contains six H4 candles). The level of support has become daily support now. Thus, the H4 sellers must wait for the daily chart to produce another bearish candle before going short in the pair.

It is often seen that if an H4 candle breaks a daily support/resistance, the price does not head towards the breakout direction in a hurry. It often consolidates around the level, which sometimes makes traders lose money. The same thing shall be maintained in the H4-H1 chart combination as well. If an H1 candle does not make a breakout (after an H4 reversal candle) within next four H1 candles, the support resistance becomes H4 support/resistance. Traders shall wait for upcoming H4 candles to give them the price direction and trade.

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns V – The Morning Star and the Evening Star

The Morning Star and the Evening Star

The morning Star and the Evening Star formations are patterns made of three candlesticks. The original candlestick patterns were made on the Japanese rice futures trading and were created for daily timeframes. Thus, they could depict gaps from the previous close to the next open. The Star was a small real body – white or black – that was gaping away from a previous large body. The only place where that could occur in the Forex markets is during weekends. Thus, what is required to form a star in Forex is a small body, the smaller, the better, at the end of a large body, preferably with large shadows.

The Morning Star

The Morning Star is a three-candle formation at the bottom of a descending trend. In astronomy, Mercury is the morning star that foretells the sunrise and the arrival of the day. That was the name the Japanese gave to the formation, as they consider it to be the precursor of a new uptrend.

As said, it is formed by three candlesticks. The first one is a large and black candlestick. The session day the price starts with a gap down (or just at the close in Forex) continues moving down for a while, then it recovers and closes near the open, creating a tiny body. The third day is a white candlestick that closes near the open of the first black candlestick. The important factor in the signal is the confirmation of buyers after the star candle is formed. The close of the third day should, at least, cross the halfway up to the black candle body, as in the case of a piercing pattern. 

Chart 1 – Morning Star on the DAX-30 Index (click on it to enlarge)

Criteria for a Morning Star 
  1. The downtrend was evident
  2. The body of the first candle continues with the trend (black)
  3. The second candle is a short body figure showing indecision
  4. The third day the candle closes at least above 50 percent the body of the black candle.
  5. The larger the black and white candles, the better.
  6. A gap is desirable but doesn’t count on it on 24H markets
  7. A high volume in the first and third candles would be good signs of a selloff and consequent reversal.
Market Psychology

As in most bullish reversals, the first day, the hopeless bulls capitulate with a significant drop and substantial volume. The next day the power of the sellers stops in a short-bodied candle. The third day began bullish, touching the stops of the late short-sellers, and also caused by the close of positions of profit-takers. That fuels the price to the upside, making more short sellers close their positions -buying- and pushing up further the price. At the end of the day, buyers take control of the market action closing with a significant white candle on strong volume.

The Evening Star

The Evening star is the reciprocal of the Morning star, and even more so, when trading pairs in the Forex market, or any pair, for that matter. In this case, the Japanese linked this formation with the Venus planet, as the precursor or the night. It is created when a long white candle is followed by a small body and a large black candle.

As the case of the Morning Star, a gap up on the second small-bodied candle followed by a gap down on the third black candle is further confirmation of a reversal, but that seldom happens in the Forex Market.  Also, the third candlestick is asked to close below 50 percent of the body of the first white candle.

 

Chart 2 – Evening Star on the EURUSD Pair (click on it to enlarge)

Criteria for an Evening Star
  1.  The upward trend has been showing for some time
  2. The body of the first candle is white and large.
  3. The second candlestick shows indecision in the market
  4. On the third day, it is evident that the sellers have stepped in and closes below 50 percent of the initial white candle.
  5. The longer the white and black candles, the better
  6. A gap before and after the second candle is desirable, although not attainable in Forex.
  7. A good volume in the first and third candles is also desirable.
Market Psychology

The uptrend has attracted the buyers, and the last white candle has seen an increasing volume. In the next session, the market gapped of continue moving up for a while, catching the last stops by short-sellers, but suddenly retraces and creates a small body, with the close next to the open. The next day there is a gap down makes the stops of the long positions to be hit, adding more selling pressure to the profit takers and short-sellers. The day ends with a close that wipes most of the gains of the first white candle, that shows that the control is in the hand of sellers.

 

 


Reference: Profitable Candlestick Patterns, Stephen Bigalow

 

 

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns IV – The Hammer and The Hanging Man

 

The Hammer

The Hammer is a one-candle pattern. The Hammer is identified as a small body with a large lower shadow at the bottom of a downtrend. The result of having a small body is that the open and the close are near each other. The large lower shadow means during the session sellers could move down the price but, then, buyers stepped in and pushed the price back to the levels of the open, or, even, a bit further up. That means sellers lost the battle, and the buying activity started dominating the price action. A positive candle is needed to confirm the price action. This usually converts this candle into a Morning Star formation.

Chart 1 – Hammer in the USDCHF Pair

Criteria for Hammers

  1. The lower shadow must be at least twice the length of the body
  2. The real body is at the upper side of the range. The color does not matter much, although a white body would increase the likelihood of the reversal.
  3. There should be no upper shadow or a very tiny one.
  4. The longer the lower shadow, the better
  5. A large volume on the Hammer is a good signal, as a blob woff day might have happened.

Market Psychology

After a relatively large downtrend, the sentiment of the traders is rather bearish. The price starts moving down at the open and makes a new low. Then, buy orders to move the price up. Profit-taking activity also contributes to the upward move. Then intraday stop-loss orders come in fueling the action further up. A positive follow-up candle would confirm the control of the action by the buyers.

The Hanging Man

The Hanging Man is also a figure similar to a Hammer, with its small body and large lower shadow, but it shows up after a bullish trend. The Japanese named this figure that way because it looks like a head with the body and feet hanging.

Chart 2 – Three Hanging Man in the DOW-30 Index

Criteria for the Hanging Man

  1. The lower shadow must be at least twice the length of the body
  2. The real body is at the upper side of the range. The color does not matter much, although a white body would increase the likelihood of the reversal.
  3. There should be no upper shadow or a very tiny one.
  4. The longer the lower shadow, the better
  5. A large volume on the Hammer is a good signal, as a blowoff day might have happened.

Market Psychology

After a strong trend, the sentiment is quite positive and cheerful. On the day of the Hammer, the price moves higher just a bit, then it drops. After reaching the low of the session, the buyers step in again and push the price back up, close to the open level, at which level the session ends. This would indicate the price action is still in control of the buyers, but the considerable drop experienced in the first part of the session would mean the sellers are eager to sell at these levels, and a resistance zone was created. A lower open or a black candlestick the next day would move the control to the sell-side.


Reference.
Profitable Candlestick Patterns, Stephen Bigalow

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns III: Understanding the Harami

So far, the reversal formations we saw – the Piercing Pattern, the Dark Cloud Cover, and the Engulfing patterns, were strong reversal signals, showing that the bulls or bears had the control. The Harami is usually a less powerful signal.

The Harami is created when a short candle’s body is entirely contained inside the body of the preceding candle. The color of the second body of this pattern is unimportant, although the color of the first one follows the trend (black in downtrends and white in uptrends). The name “Harami” comes from the old Japanese word meaning “pregnant.” Japanese traders call the first candle, “the mother,” and the second one, “the baby.
The appearance of a Harami is indicative that the current trend has ended. According to Steve Nison, the Japanese say the presence of a Harami shows the market is losing its breath. They contend that, after a large healthy candle, the small inside candle shows uncertainty.
We have to say that if we look at the charts, harami-like formations appear often, but most of it was just pauses or pullbacks of the primary trend. Thus, although not good enough to call for a reversal of the trend, they could be potential signals to exit a trade or take partial profits.
Also, we have to remember that, since trading the Forex markets, and, also, intraday, there are no gaps available. This fact makes a harami quite similar to a Piercing pattern or a Dark cloud Cover if the body of the second candle surpasses half of the previous body.

Chart 1 – Several Haramis in the Cable.

As we see in chart 1, haramis and engulfing patterns are alike, with the exception of the second one.  What we can see is that be it harami or engulfing, the pattern is worth to pay attention to since most of the time signals the end of the previous leg.

Criteria for a Bullish Harami

  1. The body if the first candle is black (red) and the body of the second candle is white (green)
  2. There is evidence of a downtrend.
  3. The second candle opens higher or at the close of the first candle.
  4. Just the body needs to be inside the body of the first candle. That is unlike the inside day.
  5. A confirmation is needed for a reversal signal.
  6. The longer the black and white candles, the more powerful the signal
  7. The higher the white candle closes, the better.

Market Psychology of a Bullish Harami

After a selloff day, the next day, sellers don’t have the strength to push the prices further down. Concerned short-sellers start to take profits of just close the trade fuelling the purchases. The price finishes higher, and traders mark the double bottom as support. A strong day following the harami formation would convince the market participants that the trend has reversed.

Criteria for a Bearish Harami

  1. The body if the first candle is white (green) and the body of the second candle is black (red)
  2. There is evidence of an uptrend.
  3. The second candle opens lower or at the close of the first white candle.
  4. Just the body needs to be inside the body of the first candle. That is unlike the inside day.
  5. A confirmation is needed for a reversal signal.
  6. The longer the white and black candles, the more powerful the signal
  7. The lower the black candle closes, the better.

Chart 2- Several Haramis in the GBPAUD pair. Not all are successfully signaling a reversion of a trend

Market Psychology of a Bearish Harami

After a strong bullish trend, a long white candle emerges. In the next session, the longs cannot force more upsides. The asset began to drop, as concerned bulls are closing their positions to pocket their profits, and the day finished lower. Also, short-term traders mark the top of the white candle as a resistance level. A third day showing weakness is what is needed to convince everybody that the uptrend is over and a new leg down is starting.


References:

Profitable candlestick Patterns, Stephen Bigalow

The Candlestick Course: Steve Nison

 

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns: Refresh your Knowledge

After our last articles on candlestick reversal patterns, test your knowledge.

If you need to give a second read, these are the links:

 

 

Let’s begin

 

[wp_quiz id=”59882″]

 

 


Reference:

The Candlestick Course: Steve Nison

 

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns II: Let’s know The Engulfing Patterns

 

The engulfing pattern is a major reversal figure, and it is composed of two inverted candlesticks, as in the case of the Piercing pattern and the Dark Cloud Cover figure. Typically, this figure appears at the end of an upward or downward trend. It is common that the price pierces a significant resistance or support level, then making a gap up or down in the following session, to, suddenly, change its direction and end the day entirely covering the first candle.

The Bullish Engulfing

The bullish engulfing candle shows at the bottom of the trend. After several sessions with the price controlled by sellers, another black candle forms. The next session opens below the previous session close and closes above the last open, thus, completely covering the body of the black candle made on the previous session.

Criteria:

  1. The body of the second candlestick covers completely that of the black candle.
  2. There is evidence of a downward trend, even a short-term one.
  3. The body of the second candle is white and of the opposite color of the first candlestick. The exception is when the first candlestick is a doji or a tiny body. In this case, the color of the first candle is unimportant.
  4. The signal is enhanced if a large body engulfs a small body.
  5. a Large volume on the engulfing day also improves the signal.
  6. A body engulfing more than one previous candle shows the strength of the new direction.
  7. Engulfing also the shadows of the previous candle is also good news.
  8. In case of a gap, the larger the gap, the higher the likelihood of a significant reversal.

Market Sentiment:

After a downtrend, the next day, the price starts lower than the previous close but, after a short while, the buyers step in and move the price up. The late sellers start to worry, as they see their stops caught, adding more buying to the upward movement. As the price moves up, it finds a combination of profit-taking, stop-loss orders, and new buy orders. At the end of the day, this combination creates a strong rally that moves the price above the previous close.

 Fig 1- Bearish and Bullish engulfing patterns in the Bitcoin 4H  chart

The Bearish Engulfing

The Bearish engulfing pattern is the specular figure of a Bullish engulfing figure. And more so in the Forex market where assets are traded in pairs, making every move symmetrical.

The bearish engulfing forms after an upward trend. It is composed of two different-colored bodies, as in the above case. This time, though, the order is switched, and a bullish body is followed by a black candle. Also, the black body engulfs completely the body of the previous white candlestick. Sometimes that comes after the price piercing a key resistance, to then come back, creating a fake breakout.

Criteria:

  1. The uptrend is evident, even short-term.
  2. The body of the second day engulfs the body of the previous day.
  3. The body of the second candle is black, and the previous candle is a white candlestick, except for tiny bodies or dojis. In that case, the color of the first candlestick is unimportant.
  4. A large body engulfing a small body is an enhancement, as it confirms a change in the direction.
  5. A large volume on the engulfing day is also good for the efficacy of the signal.
  6. A body engulfing more than one previous candle shows the strength of the new direction.
  7. Engulfing also the shadows of the previous candle is also good news.
  8. In case of a gap, the larger the gap, the higher the likelihood of a substantial reversal.

Market sentiment:

After an uptrend, the price opens higher but, after a while, it reverses and moves below the previous open and below. Some stops trigger and add more fuel to the downside. The downward action accelerates on a combination of profit-taking, more stops hit, and new short orders. At the end of the day, the price closes below the open of the previous session, with the sellers in control. 

—- 

References:

The Candlestick Course: Steve Nison

Profitable candlestick Patterns, Stephen Bigalow

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns I: Overview and The Piercing Pattern

Candlestick Reversal patterns: An Overview

Candlestick reversal figures are composed mainly of bu two or three candlesticks, which in combination harness the psychological power to shift the market sentiment. 

Depending on the importance of the severity of reversal, their names vary. Japanese are very visual regarding the names they gave to them. Therefore, we can almost visualize them just by its name.

In this article, we will learn the following content:

  • Overview of the reversal candlestick patterns
  • how to identify a Bullish Piercing pattern and its specular Dark Cloud Cover pattern
  •  How important engulfing patterns are and how to recognize them
  • Experience how counterattack figures lead to swift trend reversals.

The predicting power of two candle figures is sometimes astonishing. For a sample to be statistically significant, scientists need more than 20 samples for normally distributed phenomena, sometimes more. A reversal figure only shows eight data points. 2x (OHLC), and besides that traders most of the time, the reversal figure warns about a trend reversal or at least the end of the current trend.

The typical reversal pattern is a two candle figure that begins with a topping or bottoming candle followed by an opposite candle that erases partially or totally, the price action of the first one.

Piercing pattern and Dark Cloud Cover

The Piercing Pattern and the Dark Cloud Cover are specular patterns. The Piercing Pattern warns of a reversal of the bearish trend, whereas the Dark Cloud Cover heralds the end of a bullish trend.

 Candlesticks are not always good predictors, and the Piercing Pattern is a weak signal, especially if the trend has not moved too deep yet. Of course, the most oversold is the price, the better a Piercing Pattern predicts a reversal. The Dark Cloud Cover, though, is seen to show much more predicting power.

Timeframes

The Japanese used them mostly in daily and weekly timeframes. The use of these two patterns in intraday trading must be confirmed with other signals, as, for instance, the Piercing Pattern occurring after hitting a significant support or a Dark Cloud cover as a result of a strong resistance rejection. The use of short-term oscillators such as 10-period stochastics or Williams percent R in combination with these two signals will improve the likelihood of success while trading them.

Recognizing a Piercing Pattern

 

The bullish Piercing Pattern is composed of a large bearish body forming after a broad downtrend. The next candle begins below the low of the first black candle, and closes above the midway up, or even near the open if the preceding bearish candle. 

Criteria:
  1. The first candle shows a black body
  2. The second candle shows a white body
  3. The Downtrend is clear and for a long time
  4. The second day opens below the range of the previous day
  5. the second white candle closes beyond the 50% of the range of the last day.
  6. The longer the candles, the better their predicting power.
  7. If there is a gap down, the greater, the better
  8. The higher the white candle closes, the stronger the signal
  9. A large volume during these two candles is significant.

The Dark Cloud Cover

Apply the specular conditions to the Dark Cloud cover. We also should remember that trading forex pairs make both patterns fully symmetrical.

Criteria:
  1. The first candle shows a white body
  2. The second candle shows a black body
  3. The upward trend is clear and for a long time
  4. The second day opens above the range of the previous day
  5. the second black candle closes below the 50% of the range of the last day.
  6. The longer the candles, the better their predicting power.
  7. If there is a gap up, the greater, the better
  8. The lower the black candle closes, the stronger the signal
  9. A large volume during these two candles is significant.

 

Final words

lease note that the Forex and crypto markets rarely have gaps. Therefore, the condition that the second open being below the range of the first candle is almost impossible to satisfy. In this case, we rely solely on the relative size of both candlesticks and the closing above 50 percent of the range of the black candle. Of course, it is almost impossible to get gaps in intraday charts except for spikes due to sudden unexpected events.


 

References: 

The Candlestick Course: Steve Nison

Profitable candlestick Patterns, Stephen Bigalow

Categories
Forex Chart Basics Forex Daily Topic

Caution! A Big Round Number Ahead

In today’s lesson, we are going to demonstrate an event to find out what the price may do around the big round number. A big round number plays a significant role as far as traders’ psychology is concerned. The price usually gets volatile around a big round number. It may get tough for the traders to find out entries around the big round number. Let us now dig into USDCHF recent activities around the big round number 1.00000.

The price is heading towards the North with good bullish momentum. Look at the last candle. This is one good bullish candle, which states that the buyers are dominating the pair. Do you notice anything unusual here?

Here it is. The candle breaches through the level of 1.00000. As a trader, you must not miss such a big round number. Now that the price makes a breakout, you are to wait for the breakout confirmation and a strong bullish reversal candle to go long on the pair. This might be one of the best trades in your trading life if things go accordingly.

The price comes back in. However, it still looks all right for the buyers since if we consider the spikes at the last swing high. A bullish engulfing candle closing above the last bearish candle would be the buying signal. On the other hand, if it keeps going towards the downside, the sellers may take over the baton.

The price does not produce any bullish momentum. For the last four H4 candles, it could go either way. Traders are to wait patiently since this is the game around a massive round number.

Here it comes. It has now become sellers’ territory. The candle forms right at the level of 1.00000. The level could have been a level of support. It is now a level of resistance. The sellers on the minor charts keep going short; on this chart, they are to wait for consolidation and downside breakout to ride on the next bearish wave.

It consolidates and produces a sell signal after four H4 candles. The last H4 candle suggests it may be time for the price to consolidate again. An explicit bullish breakout at the level of 1.00000, did not work for the buyers. It could happen at any level, but when we deal with a massive round number, we happen to see it more often.

The Bottom Line

The market runs on many aspects, and traders’ psychology is one of them. Many traders set their Stop Loss and Take Profit at round numbers. Thus, the price may get extra volatility around a big round number. We may get breakout even on the H4 chart, which may turn out to be a fake breakout. We must remember this every time we see a big round number.

 

Categories
Forex Chart Basics

An Inverted Hammer at a Double Bottom

The Double Bottom is a pattern, where the buyers eagerly wait to get a bullish reversal candle at. Typically, a Bullish Engulfing Candle, a Bullish Pin Bar,  a Bullish Truck Rail are considered the strongest bullish reversal candle pattern. Usually, a Bullish Inside Bar and an Inverted Hammer are the weakest reversal pattern. In today’s lesson, we demonstrate an example of how a Daily Inverted Hammer candle offers a long entry.

This is the daily chart. It shows that the price has been roaming around within two horizontal levels. It is at the support and produces an Inverted Hammer. An Inverted Hammer is a bullish reversal candle but not a very strong one. Look at the upper shadow. It suggests that the price has a strong rejection at a level of resistance.

To some extent, it signifies intraday buyers’ less confidence. However, it is the daily chart, and the bullish reversal candle forms right at a double bottom’s support. Thus, let us flip over to the H4 chart to find out whether it offers us an entry.

The H4 chart shows that the price is on consolidation. The last candle looks ominous for the buyers. Nevertheless, traders on this chart combination are to look for long opportunities as long as the support holds the price. Let us go to the next chart to find out what happens.

The price finds its support and produces two consecutive bullish candles. One of them breaches the resistance and closes well above the resistance. A long entry may be triggered here by setting the Stop Loss below the consolidation support.

The price heads towards the North with good bullish momentum after triggering the breakout. The last candle on this chart comes out as a bearish candle with some gap. The buyers may consider closing the entry and come out with the total profit. On the other hand, some traders may want to take partial profit and ride on the wave up to the resistance. Have a look at the chart below.

The price may go up to the marked resistance level since this is the last swing high. If we consider the risk-reward, it is an amazing trade. The reward is about five times the risk. Do you remember how it started, though? It began with a Daily Inverted Hammer Candle (relatively weaker bullish reversal) at a Double Bottom’s support. Yes, this is what support of Double Bottom can do.

Categories
Forex Chart Basics

Unusual Candlestick Chart Types

In our previous article, we have seen the mainstream chart types, out of which the candlestick charts are the most prevalent in the current markets. But traders devised other ways to represent the price action in their search to get an edge over the rest of the traders. In this article, we are going to describe two popular variations of the basic candlestick chart.

Tick Charts

Tick Charts look similar to a candlestick chart, and every bar indeed is a real candlestick. But a Tick Chart does not depict a linear time scale. Instead, the chart moves to another bar every time a determined number of ticks have been reached.
And what is a tick? A tick is defined as one trade. So a 100-tick chart changes to a new candle every 100 trades, no matter its size.

Advantages of Tick charts

The main advantage of tick charts is that it allows spotting bars mostly populated by non-pro trades. Since every bar is made of the same number of trades, it is easy to detect bars with low volume, caused mainly through retail accounts. That allows pros to fade them and collect their money.

Tick charts homogenize the potential volatility on every bar because all bars represent the same number of trades. Therefore, it compresses low liquidity time segments into a few or one candlestick and expands hyperactive times into several candles. That way, amoving averages, and other indicators are more accurate. Also, the price action can be better appreciated, breakouts appear earlier, and chart cycles show up better.

 

Range Charts

Range charts are a convenient kind of chart. It also gets rid of the temporal method to move to the next bar. The idea of a range chart is to switch to a new bar once the chart has covered the assigned range. On the example supplied, the EURUSD is drawn using a 10-point range. Every candlestick covers ten pips and moves to the next bar. If the instrument is stuck inside a tight range, that candle may last for hours, until volatility comes back and the price creates a breakout.

Advantages of Range Charts

A range chart acts as a filter for ranging periods if the range size is adequately set, so trades can more easily avoid choppy market action, and only act on trendy segments.
Range charts also homogenize volatility.

Trends can be spotted more quickly as a result, and the trader can act on breakouts sooner than with regular candlestick charts. As happens with tick charts, indicators such as moving averages, MACD, and Stochastics work better with range charts.

The key to a proper range setting is to see when a relevant range starts a trend. It is easy to experiment until the adequate range hides most of the sideways action and takes away these harmful periods of inactivity. Looking at the average true range indicator on the timeframe of reference can help with the decision. The style of the trade should be taken into account. A scalping trading style calls for shorter ranges than a 4-hour trader.

To trade using range charts, we can add trend lines, averages, and other indicators. Range charts, as said, are excellent charts for the early entry of breakouts. Finally, range charts are very handy to spot momentum, so trade strategies based on volatility work better using them.

 

Categories
Forex Chart Basics

All you need to be introduced to Trading Charts – Part 1: Line, Bar, and Candlestick Charts

Why Technical Analysis?

The expression “technical analysis” originated from the belief that price action is all that is required to make sound trading decisions. Fundamental analysts believe that fundamental or structural influences are already incorporated in the history of the price. The concept of price action analysis is credited to Charles Dow, the author of the Dow theory, around 1900.

Starting from there, TA began to rise in importance to traders. The idea that price movement discounts all new information seemed rational. Concepts such as price trending, price confirmation, support, resistance, divergence, and volume confirming price started to emerge.

TA practitioners believe that the current price represents the instantaneous consensus of value. It’s the cost at which someone is ready to buy and a different person to sell. That agreement depends on the different beliefs persons hold about the prevailing market situation. A potential seller believes that odds the price continuing moving up are minimal or that it will surely go down shortly. Opposing this view, a buyer, maybe trading in a different timeframe, might think it is the right place for the asset to start an uptrend. There’s a third category of people: Traders that are expecting to detect another price level to make a decision.

Charts

Traders using technical analysis record prices in charts. Since thousands of transactions happen every minute, chartists accumulate the market action in packets called timeframes. The x-axis registers the passing of time, while the Y-axis register the prices. Usually, volume bars are added at the bottom of the graph.

When traders and investors had to draw the charts on graphical paper, the usual was to use a daily timeframe and follow the daily closings. With the advent of personal computers and dedicated charting packages, we can find charts from sub-minute timeframes to hours, days, weeks, and months. Precisely, the MetaTrader 4 platform allows timeframes of 1 min, 5 min, 15 min, 30, min, 1 hour, 2, hours, 4 hours, one day, one week and one month.

Line charts

The most basic chart is the line chart. Line charts connect the ending price of every frame with a line.

Fig 1 – Line chart of the Bitcoin in a daily timeframe.

Bar charts

Line charts are useful to see trends but lack the information about how volatile was the session. To record this kind of information, chartists decided to draw vertical bars in every time segment, showing four critical elements: The open (O), the high (H), the Low (L), and the Close(C) prices of every segment of trading activity. That’s why sometimes they are called OHLC charts.

Fig 2 –  The same Bitcoin segment of history in a daily bar chart.

As we already stated, every bar is composed of four prices. The Open price is shown as a horizontal mark on the left side of the bar. A close price is depicted as a horizontal mark on the right side of the bar. The high is the highest point of the bar, and the Low price is the lowest part of a bar. The Close is the most crucial level, followed in importance by the Open, and then the high and the low.

Fig 3 – Bar anatomy.

The most probable price path for the bar shown above is the price moving from Open to High, then descending to the Low and finally having the strength to close higher. But we don’t know for sure. It might have moved from open to low, from there to a high to descend to the closing level, finally.  What we know for sure is that the sellers had the strength to drive down the price.

Candlestick charts

Candlesticks are a relatively new way to draw charts. They were introduced to the western world by the work of Steve Nison on the Japanse charting and trading methods.

They use the same four points, OHLC, but a body of the candle is formed between the Open and the Close. The rest of the price action, beyond that range, is left as a line called wick or shadow.

Fig 4 –  The same Bitcoin segment of history in a daily candlestick chart

 Traditionally a bullish candle was drawn hollow or white, while the bearish candle is drawn in black. Now we can assign any color to it. On figure 4, the upward candlesticks are depicted in turquoise, and the red candles denote descending prices.

Candlestick charts are much more graphical, and traders can see immediately if the trend is up or down. During the uptrend seen in fig 4, the turquoise color is prevalent, while the color shifted to red in the downtrend that followed.

Fig 5 –  The candlestick Anatomy

On candlestick charts, the Open and close prices are deducted by the context. The ascending candlestick moves from a lower open to a higher close, while the descending one moves from a higher open to a lower close.

The next article will be dedicated to introducing other forms of charting, such as Renko, three-line break, and point and figure.

 

Categories
Forex Chart Basics

Why Mark Support/Resistance Zone Along with Line?

Most traders use a horizontal line on their trading chart to mark support/resistance levels. Support and Resistance lines are the most basic trading tools, which traders use to make a trading decision. However, traders often find that the price does not react right at the drawn level.  It is because of candles’ wicks and candles’ bodies. We may see that sometimes the price reacts at the level where the candles’ bodies are, and sometimes the price reacts where the wicks are. Thus, it is a good practice that we mark the support/resistance zone instead of marking the level only.

Let us demonstrate an example of that.

The price is being bullish after producing a Pin Bar. We know that a bullish Pin Bar has a long lower shadow. This means it reacts from a zone not only from a particular horizontal line.

The price is on the correction. Look at those Spinning Tops with long upper and lower wicks. Do you notice that one of the flipped support holds the bodies of the candles? However, those shadows often play an essential role, especially when the price is to confirm a breakout. We will reveal that soon.

The flipped support does not hold the price at last. The price comes towards the South further to find its support. The last bullish candle suggests it finds one strong support for sure. Do you notice that this is where the price has bounced earlier and produced spikes?

This time we have marked out the resistance zone. A bullish candle breaches the zone. The buyers need to wait for consolidation. The question is which level to hold the price as the level of support. Is it the level where the wicks are or where the bodies close or both?

Both levels hold the price as support. On this chart, the level, which is drawn on the wicks, holds the price as the support. On its smaller time frames, the level that is drawn on candles’ bodies holds the price as support. If we draw just one level here, we may get confused. Thus, we must mark out the support/resistance zone. Since the buyers are waiting for a bullish reversal candle to go long, it may be produced where the price is now. The price may as well come down at the lower level of the support zone and create a buy signal. Both are valid signals. Let us find out where the signal is produced.

The buyers may want to trigger a long entry right after the last candle closes. Assume only the red line was drawn here. Some buyers would have been confused that the signal did not come from the right level. Thus, drawing the support/resistance zone comes out handy for the traders. Support/Resistance zone helps traders take a better trading decision.

Categories
Forex Candlesticks

Ideas that can be Blended with Candlestick to Trigger Entries-Part4

In this article, we are going to demonstrate how a Morning Star offered us an entry. We know Morning Star is a strong bullish reversal candle, which is a combination of three candlesticks. There are two types of Morning Star.

  1. Morning Star
  2. Morning Doji Star

Here is how Morning Star looks like

And this is how Morning Doji Star looks like

The example we are going to demonstrate is a Morning Doji Star. Let us get started.

The price was down-trending and produced a Doji Candle on a support level where the last bearish candle closed within. Look at the very last candle. It came out as a Bullish Marubozu Candle closing above the 2nd last candle’s open. This is a typical example of Moring Star upon which buyers shall start integrating other equations to go long.

Let us have a look at those equations.

At first, we have to draw a level of resistance here. Let us draw it.

We draw the resistance line right where the candle closes. Since we do not have any down-trending Trend Line or a Double Bottom’s neckline here, thus we must wait for a trigger candle to close above the bullish candle on the trading chart.  We now have to flip over to the trigger chart. This is an H4 chart, so let’s flip over to the H1 chart to get correction/consolidation and breakout.

This is how the H1 chart looks. The first H1 candle came out as a bearish corrective candle, and the very next one closed above the bullish H4 candle’s close. A perfect trigger candle, we shall wait for. We sometimes may not get the corrective candle here. The very next H1 candle may breach the resistance line and offer us the entry.

In our previous article, we demonstrated an example of how a Bearish Engulfing Candle offered us an entry. Have you spotted out the difference between a single candlestick pattern and a combination of candlesticks pattern’s entry?

On a single candlestick entry, we had to wait for a neckline breakout (it may be trend line breakout), consolidation (on the trading chart), bearish reversal candle (on the trading chart), then the breakout (trigger chart). With Morning Star, we did not have to wait for consolidation on the trading chart. Once the combination pattern (Morning Star) was evident, we flipped over to the trigger chart; waited for a candle to make a new higher high to take an entry.

It may sound so many things to be remembered and integrated with candlesticks trading. However, once we practice and try to understand the market psychology that goes with those patterns, things will get as easy as you may like.

 

Categories
Forex Chart Basics

Ideas that can be Blended with Candlestick to Trigger Entries-Part 3

In Part 2, we learned how important a breakout is for taking an entry. Even the strongest reversal candle itself is not enough to create a new trend. In this article, we are going to learn other steps that we need to maintain for taking an entry in case of engulfing candlestick.

Let us have a look at the chart below.

After producing the engulfing candle,

  1. The price breached through a support level.
  2. The breakout candle looks very strong.

First two equations have been met. Shall we take the entry right now? The answer is “NO”. We must wait for an upward correction/consolidation. A correction/consolidation gives us another level of support/resistance (in this case resistance). It offers a better risk and reward ratio as well as a better winning percentage. Thus, correction/consolidation is considered one of the most vital components of trading.

Let us have a look at how consolidation took place here.

Pay attention to those candles after the breakout. The pair produced one more bearish candle. Many traders may think an opportunity missed here. Look at the very next candle. That came as a Doji Candle followed by a bullish one. Be very careful. The market often keeps having a correction and changes the trend even by making new higher highs. Thus, a bearish reversal candle we must wait for.

We got one and luckily, it was a bearish engulfing candle. Candle Stick Pattern is being used here again to show us selling sign. What do we have to do now?

We have to wait for another breakout. This time we have to flip over to our Trigger Chart. This is an H4 chart. Thus, our trigger chart is H1 Chart. Let us flip over to the H1 Chart.

The price came out with the last candle from the consolidation zone. A Marubozu Bearish Candle made the breakout. A less low spike indicates that the sellers are very confident. Look, Candle Stick Pattern is being used here again. Here we go. This is the point where we trigger out short (sell) entry.

Let us have a look at the chart below how our trade would play.

Wow, it played well. Though it had consolidation on the minor time frames later, however, this should not be our concern. We followed our trading chart’s trend, breakout, consolidation (H4) and the H1 breakout. By setting our Stop Loss and Take Profit, we shall forget the entry. This is another thing of trading called “Set and Forget” that need to be integrated.

In this article, we learned these are the things to be integrated as well.

  1. Consolidation/ Correction on the trading chart.
  2. Reversal candle to be formed on the trading chart.
  3. Flipping over to the trigger chart and waiting for a breakout.

In the next article, we are going to demonstrate an example of how a Morning Star offered us entry with the integration of consolidation, breakout, and breakout candle with a Morning Star. Stay tuned.

Categories
Forex Candlesticks

Ideas that can be Blended with Candlestick to Trigger Entries – Part 2

Candlestick Patterns are widely used by traders to take entries and making money out of trading. We have come to know from Part 1 that relying on a candlestick formation only is not enough for a reliable entry signal. Other things need to be integrated with candlestick formation so that traders can trade accordingly. In this article, we are going to demonstrate an example of how an entry should be taken depending mainly on an engulfing candle as well as other equations that need to be maintained by traders.

Let us have a look at the chart below.

The chart above shows that the market is up-trending. At first glance, we shall look for buying opportunities here. However, look at the last candle. This is an engulfing candle which indicates that the sellers may take over. An engulfing candle is a strong sign of a trend reversal. However, we must not get carried away, but wait for other indications. In this case, we may wait for a breakout at the last swing low. Have a look at the chart.

Pay attention to the red line. This is the last swing low where the price had a bounce and moved towards the North. Then, after finding a resistance, it produced a bearish engulfing candle; kept going down on the next candle and made a breakout with a huge bearish candle. This is now an ideal chart for the sellers to look for selling opportunities. The trend starts with an engulfing bearish candle. Candlestick pattern suggests that the sellers may take over. It has. It is pretty simple, right? Not really. Just go three candles back. Look at the same chart below.

Pay attention to the arrowed candle. This is a bearish engulfing candle as well. That could have changed the trend and the price could have headed towards the South. However, that did not happen. The price kept going towards the North for three more candles then came down. Do you spot out the difference? The price did not make any downside breakout. In this case, if it had made a breakout at the nearest swing low, it might have come down from right there. Look at the chart below to get a better idea of which level I am talking about.

The drawn red level was the last swing low. If the price continued to go down and made a breakout at that level, it would have been a different ball game.

In this lesson, we have learned that Candlestick Pattern is a sign. In fact, is the first sign of a trend reversal. However, we need at least two more things to integrate with Candle Stick Pattern for taking an entry. These are:

  1. A Breakout at a significant level of support or resistance.
  2. The breakout is to have good momentum meaning the breakout candle is to be a good-looking bullish or bearish candle.

 

Stay tuned to get to know more about candlestick and integration in Part-3.

Categories
Forex Candlesticks

Ideas that can be Blended with Candlestick to Trigger Entries-Part 1

Candlesticks are considered one of the strongest components to take an entry. However, this is not the only thing that a trader shall consider before taking an entry. An Engulfing Candle or a Pin Bar is a strong reversal candle. If the price is down-trending and we get a bullish engulfing candle, we may want to go long on the pair. No doubt, a bullish engulfing candle is a strong reversal candle, but there are other factors we must consider before taking an entry.

Let us find more about it from the charts below.

I have chosen a chart which was down-trending and produced a Bullish Pin Bar. The price then changed its direction and headed toward the North. Let us have a look at the chart.

The arrowed candle is one good-looking bullish Pin Bar. A Pin Bar like this attracts the buyers to go long. We see the consequence; the price headed towards the North with good buying pressure. Does this mean whenever we see a Bullish Pin Bar, we go long or vice versa? The answer is no. We must consider other factors such as Support/Resistance zone, Double Top/Bottom, Neckline Breakout, Trend Line breakout, Breakout Candle.

Let us have a look at the chart again.

See where the Pin Bar was formed. It was formed right at a zone where the price had several bounces. Ideally, this is a level where the sellers want to come out with their profit. Thus, a strong bullish reversal candle such as a Bullish Pin Bar shall attract the buyers to concentrate on the chart to go long. Now that we have found a strong support level what else to look for?

The price was down-trending by following a Trend Line. Can you spot that?

Have a look at this.

A down-trending Trend Line can be drawn. Buyers must wait for a breakout there. See the breakout candle. That was a strong bullish candle which was followed by another one. Moreover, the price came back and touched the Trend line after the breakout. Many buyers may have taken their entry there. This is not a bad idea. You may want to go long right after the second candle closes.

However, some buyers may want to go long at the neckline breakout. Have a look at the chart below.

To be very safe, some traders love to set a pending buy order and go long above the neckline level. It is a safer option for sure, but it has some disadvantages as well. We will talk about this later. Meanwhile, concentrate on what we have learned from this article.

  1. Candlestick or Candlestick pattern is to be formed at a value area.
  2. The existent trend is to be collapsed.
  3. Double Bottom or Double Top is to be evident.
  4. Breakout Candle is to be a strong commanding candle.

 

 

Categories
Forex Candlesticks

Morning Star: A Strong Bullish Reversal Candlestick Pattern

The Morning Star is a bullish reversal pattern that occurs at the bottom of a downtrend. A Morning Star is a combination of three candlesticks: The first candle shows the continuation of the downtrend. The second candle shows the weakness, and the third candle shows the strength of the bull.

There are two types of Morning Star:

  1. Morning Star
  2. Morning Doji Star

 

Morning Star

The Morning Star starts with a strong bearish candle followed by a gap down. The star candle may have a little bullish or bearish body. However, the third candle is to be a strong bullish candle closes at the above of the first candle’s open.

Have a look at this.

See the first candle, which is a strong bearish candle. The next candle starts with a gap closing as a little bearish candle. This one may have a small bullish body in some cases. The third candle starts with another upside gap. It is to be a strong bullish candle closing at the above of the first candles’ open. This states that the bull has taken control of the bear.

 

Morning Doji Star

 

Let us have a look at the Morning Doji Star

In this case, the star candle comes out as a Doji candlestick. The first candle comes as usual as a strong bearish candle. The third candle opens right at the support level and finishes above the first candle’s open. It states that buyers have started dominating the market.

 

In both cases, the first and third candles’ attributes are the same. The second candle varies. However, both types explain the psychology of the market, showing that the existent downtrend has come to an end, and an uptrend has been formed.

The Morning star is a visual pattern that is spotted out by the traders easily. It is the preferred pattern among all kinds of traders from price action traders to traders based on indicators.

How Traders Based on Indicators/Price Action Use the Morning Star

Traders based on indicators may use the Morning Star when it is produced at the Supply/Support zone. Moving Average, RSI, Bollinger Band, Parabolic SAR indicate Supply/ Support zone. If a Morning Star is produced at the zone that is a supply/support zone of those indicators, an entry may be triggered at the close of the third candle.

The price action traders may use horizontal, Trend Line, Fibonacci Support/Supply zone to take en entry on the Morning Star. If a Morning Star is produced at the supply/support zone of a horizontal/Trend Line/ Fibonacci levels, an entry may be triggered right after the close of the third candle.

 

 

 

 

Categories
Forex Daily Topic Forex Range

Hidden Wisdom Behind Range Measures

People coming to the Forex markets usually learned new vocabulary. The first special words they learn maybe are, margin, profit, risk-reward, and candlestick. Perhaps, afterward, they learn new concepts such as Volatility. Also, along with other technical indicators, they get to know one study called Average True Range. However, later, they forget about it since they usually consider it unimportant.

The Average True Range (ATR) is one way to measure Volatility. Volatility is, as we know, a measure of risk. Therefore, ATR can be used as an estimate of our risk. This measurement is essential for us as traders, especially if we are trading on margin. And I’ll explain why.

 

What tells the Range?

A range is a measure of the price variation over a period of time. It is measured between the High and the Low of a bar or candlestick. For instance, the range of figure 1 below (a 4H chart) is 357.9 points. If each point/lot were worth $1, a short position started at the Low of the bar would have lost $357.9 in four hours on every lot traded. Conversely, a long position would get this amount of profit.

True Range

True range is similar to a normal Range, but it takes into consideration possible gaps between bars. That happens a lot in assets that do not trade all day. Not always the close of a session matches the open of the next one. A gap may form. A True range accounts for that by considering gaps as part of the range of the bar if the gap is not engulfed by the range.

Average True Range

As we can see, in the figure above, every bar’s range varies depending on the particular price action on the bar. Some bars are impulsive and move considerably. Other bars are corrective, and their range is short.

Therefore, to measure the average price range an average is taken, usually, the 14-period, although traders can change it. Below we show the 10-bar ATR of the Bitcoin.

On this figure, we see that the ATR gets quite high at some point on the left of the figure, and it slowly decreases in waves. That is normal. Assets move in a series of increasing and decreasing volatility waves, which describes the interests and power of buyers and sellers.

Average True Range and Risk.

Retail traders usually have small pockets. The first measure a retail trader should know is how much his account would endure in the event of an adverse excursion.

As an example, let’s examine the EURUSD daily chart. Observing the 10-ATR indicator in the chart below, we see that the maximum level on the chart is 0.01053 and the minimum value is 0.00664. Since we want to assess risk, we are only interested in the maximum value.

Let’s assume that we wanted to trade long one EURUSD contract at $1.1288 and that, on average, our trade takes one day to complete. How much can we assume the price would move in a single day?

If we take the 0.01053 as its daily range value and multiply it by the value of a lot ($100K) we see that the EURUSD price is expected to move about $1,053 per day. We don’t know if that will be in our favor or not, but from the risk perspective, we can see that to be on the safe side we would need at least $1,053 of available margin for every lot traded.

If the average trade, takes 4 or 8 hours instead, we should set the timframe to 4H or 8H and proceed as we did with the daily range.

For not standard durations, we could use the following rule: For each doubling in time, the average range grows by a factor of the square root of 2.

That is handy also to compute the right trade size. Maybe we do not have the required margin level, but just one fourth. Thus, if we still wanted to trade the asset, we should trim down our bet size to one-quarter of the lot.

How much time our stop-loss will endure?

Based on ATR figures, we could assess the validity of a stop-loss level. If the stop-loss size is too short compared to the ATR, it might be wrongly set.

What profits to expect?

We could assess that as well, on average, of course. If the dollar range of an asset is $1,000 in a 4-hour span, we can expect that amount on average in four hours, and $1.410 (√2 * $1,000) on an 8-hour lapse.

Deciding which asset to trade

We could use the True Range to assess which asset is best for trading. Let’s suppose, for instance, that you are undecided about trading Gold (XAU) and Platinum (XPT). So let’s examine them.

Gold:

Spread: 3.2

$Spread cost: $32

Digits: 2

contract size: 100

MAX Daily ATR: 16, $ATR: $1600

Spread cost as Percent of the daily range: 2%

Platinum:

Spread: 12.9

$Spread cost: $129

Digits:2

Contract Size: 100

Max Daily ATR: 22, $ATR $2,200

Spread cost as Percent of the daily range: 5.86%

After these calculations, we can see that it is much wiser to trade Gold, since the costs slice only 2% of the daily range, while Platinum takes almost 5% of the range as costs before break even.

 

Categories
Forex Candlesticks

Types of Bullish Candlesticks

In this article, we are going to get acquainted with some of the Bullish Candlesticks that the financial markets produce. Let’s get started.

 

Bullish Trackrail

Bullish Trackrail candlestick indicates that the market has been dominated strongly by the buyers. It is a combination of two candlesticks. The second candle is to be bullish and the length is very similar to the first candle. Both candles are with a long and solid body having tiny spikes or no spike at all.

Image: Bullish Trackrail

Bullish Engulfing

Bullish Engulfing Candle is formed with a combination of two candles. The second candle is to engulf and close above the first candle to be considered as a Bullish Engulfing candle. Some analysts/traders do not want to take first candle’s wick into account. However, if the second candle closes above the first candle’s wick, that is one good Bullish Engulfing Candle. A Bullish Engulfing Candle is considered as the strongest bullish reversal candle.

 

Image: Bullish Engulfing

Bullish Hammer

Bullish Hammer Candle is created when a candle closes with a small body with a long lower shadow. The body has to be tiny and it can be bullish or bearish. However, a little bullish body instead of a bearish body is more preferable among the buyers.

Image: Bullish Hammer

Spinning Top      

Spinning Top has a short body found in the middle with upper and lower wicks. The body can be bullish or bearish.

Image: Spinning Top

Bullish Pin Bar

Bullish Pin Bar is similar to Bullish Hammer. The only difference is a Bullish Pin Bar does not have any real body whereas a Bullish Hammer has a tiny body. Since a Pin Bar does not have a body, it has more rejection from the downside. Thus, Bullish Pin Bar is considered one of the most powerful bullish reversal candlesticks in the financial market.

Image: Bullish Pin Bar

Bullish Inside Bar

Bullish Inside Bar is produced with a combination of two candles. The second candle is to be bullish but shorter than the first candle. It is just the opposite of Bullish Engulfing Candlestick. A Bullish Inside Bar is considered the weakest bullish reversal candlestick.

Image: Bullish Inside Bar

Doji

A Doji Candle is formed where the price finishes very close to the same level. Thus, the candle has no body or a very tiny body. A Doji Candle itself is not a strong bullish reversal candle. However, if it is produced at a strong level of support, the market often reverses and goes towards the North.

 

 

Image: Doji

Bullish Spinning Top and Doji look very similar to the Bearish Spinning Top and Doji. The only difference between a Bullish Doji and Bearish Doji is a Bullish Doji is produced at a Support Level whereas a Bearish Doji is produced at a resistance level. The same goes for Spinning Top as well. All other bullish reversal candles’ are to be formed at a significant level of support as well. Their appearance is very different than the bearish reversal candles. Stay tuned with us to learn more about Candlestick.

 

 

Categories
Forex Candlesticks Forex Daily Topic

Three Facts about Candlesticks you Never Knew About

Candlesticks are great because it makes trends visual at first glance. But most candlestick users stay just with that trait and don’t go more in-depth.

Of course, everybody knows some candlestick patterns such as Morning and Evening Stars, Haramis, Dojis and Shooting stars, but what’ is hiding inside the candlestick?. How to extract market sentiment from its shape or pattern?

So, let’s begin!

1 – Unwrapping a Candlestick

A candlestick is condensed information of the price action within its timeframe. The corollary is that if we go to a shorter timeframe, the candlestick now is a pattern of several candlesticks.

In the chart here we see the unwrapping of a 4H candle into 30-min parts

Three Facts about Candlesticks you Never Knew About

Chart 1 – 4H Hammer Candlestick unwrapped into 30-min candles.

 

We notice that the candle has one segment dominated by sellers and the other part controlled by buyers.

Which sentiment dominates in sellers at the bottom?

  • To the first class belong those traders who could no longer hold the pain of being long and close their position.
  • The second class is made of those who came late to the trend and sold believing the trend will last forever, or quite so.

Which sentiment dominates in the way back up?

  • Late sellers realized that they were in the losing side, so they needed to close their shorts. That meant, they have to buy, adding to the bullish fuel
  • Longs that were taken out of their position see frustrated how the price moves up without them. Hence, some of them retake their longs, while others don’t dare, afraid this is going to be another bull squeeze.

2.- Impulse or correction?

There are only two stages in the market: Impulses and corrections of previous impulses. So how to spot the price is in an impulsive or corrective phase?

Three Facts about Candlesticks you Never Knew About II

Chart 2 – Candlesticks: impulses and corrections.

Impulses break resistances and move with a clear direction. Impulses are what make trends. Corrections move in ranges, lack direction, and usually retraces some or all the advances of the previous impulse.  People usually think in trends as composed by many candlesticks or bars, but we now know that a single candlestick is composed by many shorter-timeframe candlesticks. Therefore, we cannot be surprised if we state that a trend can be made of a single candlestick. That applies also to corrective movements. A corrective movement can be summarised in a single candlestick.

How to know if a candle is impulsive or corrective?

To spot an impulse look for a candlestick with a large body and almost no wicks or shadows. To spot a corrective movement look for small-bodied candles with or without wicks ( usually with wicks).  Sometimes we find both characteristics in a candlestick. That may mean it is a combination of impulse and correction. That is ok since there is no law that forbids the start of a correction or impulse in the middle of the timeframe of a candle. Sorry, the universe is not perfect!

3.- Who is in control?

Once we know facts 1 and 2, we are in the position to spot who controls the price action: buyers or sellers.

One clue is, of course how the candlestick closes, but the other clue is where are and how long are wicks. If we spot several candlesticks with large lower wicks we could reason that the buyers are pushing the price above the bottom of the candlesticks. If wicks happen on top we could deduct the opposite: Sellers selling the rally.

Three Facts about Candlesticks you Never Knew About III

Chart 3 – Candlesticks: Wicks show who controls the price action

A downward trend with a lot of lower wicks is weak. That applies to an upward trend with lots of upper wicks.  Therefore, we can detect the market sentiment by just observing the wick appearance on the candlesticks.

 

Final words

So now we know that there is much more than just fancy colors and trend visualization. We have to inspect and pay attention to body and wicks, also called shadows by Steve Nison. The information provided by a single or a group or candlesticks is worth the time spent.

 

Categories
Forex Chart Basics

Candlestick Charts and Its Advantages in Financial Trading

With the advancement of technology, retail trading in the financial markets has become popular among investors. Since unnumbered traders from all over the world invest in the financial markets, they use so many of strategies, indicators, and EAs to make money out of trading. Also, many things with the financial markets have been changing as well. However, certain basic things have no, and they may never change. One of the things is the usage of Candlestick charts.

Before getting into this, lets us summarize the different types of charts available for traders. Typically, there are three types of charts that are mostly used in trading.

  • Line Chart
  • Bar Chart
  • Candle Stick Chart

Line Chart

Let us have a look at a line chart.

The line chart is generated by using the closing price of the bars. It does not represent the highest high, lowest low or the opening price. Thus, it gets tough for traders to find out the sentiment of other traders. The price may go towards the upside and has a strong rejection from a level of resistance. But the line chart does not show that rejection. Thus, a trader may think the market is bullish whereas the price has had a strong rejection and it may be time for the sellers to take over.

Let us flip over the same chart to a Bar Chart.

The Bar Chart is more informative than the Line Chart. It shows the opening price, closing price, highest high and lowest low of the period it has tracked. It certainly gives us a clearer picture than the Line chart. An experienced trader may not have any problem to find out the trend, rejections, market psychology by using the Bar Chart. However, we may have a better option. Do you know what that is? It is the Candle Stick Chart.

Here it comes.

A picture is worth a thousand words. Does not give us the clearest picture of market psychology? It does because it represents the market with color including closing price, opening price, the highest high and lowest low. Moreover, it shows us rejection or bounce (upper shadow/lower shadow) as well. Candlestick charting is one of the most important tools in modern days trading.

There are other things to be integrated with Candlestick Chart such as Support, Resistance, Fibonacci Levels, Pivot Points, Trend Line, and Channels, etc to be able to trade effectively. To be a long racehorse in trading, a trader must have a good understanding with all those. We will get more acquainted with Candlesticks, Candlestick Patterns and their usage, integration with other trading factors in our fore coming articles. Be with us. See you in our next article.

Categories
Forex Chart Basics

Dissection of a Candlestick

A candlestick is a type of price that financial markets’ charts use to display the high, low, opening, and closing prices for a particular period. It is the most commonly used price chart among financial traders nowadays. It does not only show the high, low, opening, and closing prices but also represents the true psychology of the traders. This is the main reason for the candlestick/candlestick chart being the most popular chart in the financial markets.

Let us demonstrate two typical types of candlesticks to find out how they look and how they are formed.

Let us start with a Bullish Candlestick.

In a Bullish Candlestick, the price opens at the downside; goes down and goes up again. This is what creates the lower shadow. The price continues to go upwards and goes all the way up to where the upper shadow ends. It comes down and closes at the Closing Price. This is what creates the Upper Shadow. Eventually, Opening Price and Closing Price creates Bullish Body. A Bullish Candlestick is usually represented by Green or White color.

Let’s have a look at a typical bullish market in Candlestick Chart.

The chart shows that the market is bullish. Most of the candles are bullish candlesticks. Thus the price heads towards the North. However, not all of them have Upper Shadow, Lower Shadow, or a thick Body that we have demonstrated in this lesson earlier. The market produces several types of Candlesticks, and they convey different messages to the traders.

A Bearish Candlestick is just the opposite. Let us have a look at that.

As we see here, that the price opens at the upside. Goes up and comes down to create the Upper Shadow. Comes all the way down and closes the price a bit further up. This is what creates the Lower Shadow. Difference between the Opening and Closing Price creates the Bearish Body.

Let us have a look at a bearish market in Candlestick Chart.

Same goes here. Not all the candlesticks are as typical as we have demonstrated in our lesson. However, the message is clear here. The price is bearish because of the dominance of Bearish Candles.

Not all the candles with a bearish body (or bullish body) declare the supremacy of the bearish market (or bullish market). By being able to read them well, traders can predict the market’s trend, trend continuation, and trend reversal.

In our fore coming articles, we will learn different types of candlesticks that the market produces; how they look like; what message they convey to the traders; how to read and make a profit out of them.