Monday, February 22, 2010

Profitable Candlestick Trading

Profitable candlestick trading is a great way to make money from forex trading. It follows the 'keep it simple' rule which many traders consider to be the first golden rule of currency trading. You do not have to understand a lot of maths or do any complicated analysis.

Simple candlestick trading is often known as price action trading. This type of analysis relies only upon the price chart itself for trading signals. It does not involve use of any indicators based on moving averages such as MACD or stochastic indicator.

Many forex trading systems are built around these indicators and they may be successful in many cases, but the fact remains that they are lagging indicators. This means that they describe what was happening in the market in the past, not now. Profitable candlestick trading is based upon looking at the most recent markers possible.

For this method, bar charts can be used, since they give the same information as candlesticks. However, most traders find the visual clarity of the candles makes it much simpler to look at the candlestick chart. In some cases you may draw trend lines or support and resistance lines, but sometimes a trading signal may be taken from just one or two candles.

A simple system may be based around following either a bullish market (rising price) or bearish market (falling price). In a bullish market you would open a trade to buy the currency pair, and in a bearish market you would open a trade to sell it. We will take the bullish market as an example.

In a bullish market you would expect to see a white (unfilled) candle. If your system uses green/red or blue/red candles, the candle would be either green or blue respectively. This means that the close price was higher than the opening price. In addition, you would expect the close price to be fairly close to the high: that is, within around the top third of the full range from the low to the high. In visual terms, this will mean that the candle has a short upper wick. In some cases of course there may be no wick at all.

That situation suggests that the next period will see a test or an improvement on that closing price. So while the next period may not close higher, the high of the next period is likely to be above that closing price, other things being equal. This is how a trading signal can be taken from just one candle.

Often however, a trader would check the signal before going ahead and opening a trade. You could do this by looking at a longer period or by requiring that the previous candle also reflected an upward price movement.

As you can see, this is a simple system that is very quick to apply. Speed can be important in short term trading where a few seconds spent checking lagging indicators could mean that you miss out on the profit potential.

If you want to put this system into practice, keep in mind that it is always best to practice your skills in a demo account before going live. A bullish candle does not guarantee that the price will go higher and there is always a possibility of loss in currency trading. So be sure that you know what you are doing and are comfortable with the system before using real money. That way you can reduce your risk with profitable candlestick trading.

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