The trend is your best friend in any financial trading market, as they say, and using a technical analysis chart for trend based trading is a simple method that at the same time can be very successful. Many traders over complicate the markets, especially at the beginning of their trading career. In fact simple systems can be the most effective.
Most traders use candlestick charts for this purpose, because they are so clear. Bar charts can also be used if preferred. Line charts would not be used.
The first thing to consider is whether the market is rising or falling. This should be visible at a glance, especially if we check several time periods. Use an indicator like Bollinger Bands to make sure that a rising market is not overbought, or a falling market oversold. Once we have this information, which should just take a few seconds to verify, we can begin to draw trend lines on our technical analysis chart. Here's how.
First, draw a straight line through the highest highs and another through the lowest lows.
1. Bullish market
If the two lines are approximately parallel and heading upward, there is an upward trend. The two trend lines can be used as support and resistance lines, which means that we assume the price will remain within the area between the two lines while the trend continues.
So if the price hits the lower line, you could buy on the assumption that it would soon rise again. First of course you would check against another indicator such as the Bollinger Bands and perhaps check in another time period to make sure that there are no signs that the trend is ending.
Some forex traders would also open a trade to sell the currency pair when the price hits the upper line, on the assumption that a retracement is due. This bucks the trend so requires extra care, but can be a profitable strategy.
2. Bearish market
If the two lines are approximately parallel and heading downward, then you have the opposite situation. The trend is downward. Again the lines act as support and resistance lines. This time you would be acting in line with the trend by selling when the price hits the upper line. Buying when it hits the lower line would be bucking the trend in the hope of a retracement.
3. Stable market
If the two lines on the technical analysis chart are approximately parallel and horizontal, the market is relatively stable and there is no trend. You could still trade on the basis of the support and resistance lines but most traders using trend-based systems would wait for a new trend to form.
4. Converging prices
If the two lines are not parallel but drawing closer together so that they would meet at an imaginary point in the future, sooner or later the price will break out and head in one direction or the other. Either wait for the breakout or place conditional orders so that if the price breaks above the limit of the upper line you would buy, and if it breaks below the lower line you would sell.
5. Diverging prices
If the two lines are not parallel but moving farther apart, this indicates that prices are becoming increasingly volatile. Most traders would stay out of this market.
Of course, financial trading is always risky and there are no guarantees. Always test systems thoroughly using the technical analysis chart in a demo account before risking any real money.
Showing posts with label candlestick charts. Show all posts
Showing posts with label candlestick charts. Show all posts
Thursday, March 4, 2010
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.
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.
Tuesday, February 9, 2010
How To Read A Candlestick Chart
If you do not yet know how to read a candlestick chart, do not be concerned. Everybody has to start sometime, and candlestick analysis is really very simple. The charts are easy to read at a glance. In fact, it is one of the simplest methods of financial trading analysis. Not surprisingly, it is also the most popular type of financial trading chart.
You may see these charts referred to as Japanese candlestick charts, and that is because they were invented by a Japanese commodity trader named Homma in the 18th century. Before that date, traders had relied only upon simple line charts that tracked only the closing prices. Bar charts were developed to show the open, high and low as well as the close, but Homma's candlesticks did the same thing in a much more visual way.
Homma was a phenomenally successful trader and this meant that his candlestick analysis chart was soon copied by other traders in Japan. Charles Dow, who founded the Wall Street Journal and the Dow Jones Company, brought it over to the USA early in the 20th century.
The regular type of candlestick consists of a block which may be shaded, colored or blank, plus two vertical lines protruding from the top and bottom of the body, known as shadows or wicks.
Each candle represents one time period. Generally you can set this for various options, e.g. one minute, 15 minutes, one hour, one day.
The top of the upper wick is the high for the period. The bottom of the lower wick is the low.
The top and bottom of the candle body show the opening and closing prices (either way around). Traditionally, the candle would be hollow (i.e. white) if the price rose during the period, and filled (black or any color) if it fell. However, some charts now color all of the candles, so that an upward candle is green or blue and a downward candle is red. This sounds confusing but if you just use one charting service, you will soon get accustomed to the way that they show the candles.
Of course, sometimes the open, high, low and close are not all different prices. For example the price might go up and down during the period but then close at the same as the opening price. In this case there is no visible candle body, just a cross, with the upper and lower wicks crossed by a horizontal line at the open/close level. This is called a Doji pattern.
Alternatively, you may see candles that are all body and no wick. In this case, the price moved in one direction from open to close, without exceeding either the opening or the closing price. This is called a marubozu pattern.
The colors and thick bodies of the candlestick chart make it easy to read, cutting down on errors. This is crucial in the fast moving trading environment. Knowing how to read a candlestick chart is important for any trader.
You may see these charts referred to as Japanese candlestick charts, and that is because they were invented by a Japanese commodity trader named Homma in the 18th century. Before that date, traders had relied only upon simple line charts that tracked only the closing prices. Bar charts were developed to show the open, high and low as well as the close, but Homma's candlesticks did the same thing in a much more visual way.
Homma was a phenomenally successful trader and this meant that his candlestick analysis chart was soon copied by other traders in Japan. Charles Dow, who founded the Wall Street Journal and the Dow Jones Company, brought it over to the USA early in the 20th century.
The regular type of candlestick consists of a block which may be shaded, colored or blank, plus two vertical lines protruding from the top and bottom of the body, known as shadows or wicks.
Each candle represents one time period. Generally you can set this for various options, e.g. one minute, 15 minutes, one hour, one day.
The top of the upper wick is the high for the period. The bottom of the lower wick is the low.
The top and bottom of the candle body show the opening and closing prices (either way around). Traditionally, the candle would be hollow (i.e. white) if the price rose during the period, and filled (black or any color) if it fell. However, some charts now color all of the candles, so that an upward candle is green or blue and a downward candle is red. This sounds confusing but if you just use one charting service, you will soon get accustomed to the way that they show the candles.
Of course, sometimes the open, high, low and close are not all different prices. For example the price might go up and down during the period but then close at the same as the opening price. In this case there is no visible candle body, just a cross, with the upper and lower wicks crossed by a horizontal line at the open/close level. This is called a Doji pattern.
Alternatively, you may see candles that are all body and no wick. In this case, the price moved in one direction from open to close, without exceeding either the opening or the closing price. This is called a marubozu pattern.
The colors and thick bodies of the candlestick chart make it easy to read, cutting down on errors. This is crucial in the fast moving trading environment. Knowing how to read a candlestick chart is important for any trader.
Monday, June 15, 2009
Candlestick Charts used in Forex Trading
Among the many types of technical analysis available to forex traders, the single most useful and popular are probably candlestick charts. These were originally developed in Japan during the 18th century by a prominent commodity trader who used them to chart the fluctuations in the price of rice. For this reason they are often known as Japanese candlestick charts, and many of the patterns that they form have Japanese names.
Simple line graphs plotting the price of a commodity at regular intervals in time had been used for centuries, but traders were in need of something that could plot more variables within a two dimensional graph. The bar chart showing the opening, high, low and closing prices of a commodity was useful and helped traders to predict future price movements in a more reliable way than line charts, but candlestick charts were even better.
They were introduced to the American stock market and from there to the worldwide financial markets by Charles Dow at the beginning of the 20th century. Dow was the founder of the Wall Street Journal and co-founder of the Dow Jones company.
Candlestick Formation
The chart is made up of a series of 'candlesticks' which typically have a chunky body with vertical lines stretching up from the top (the upper shadow or wick) and bottom (the lower shadow or wick). The different points measure the differential in prices over a certain period of time, which might be 5 minutes, 15 minutes or longer.
The top of the wick is the highest point reached during the time period and the lowest point of the lower wick is the low. The top and bottom of the body are the opening and closing prices. If price rose during the period the body will be white (or green or blue if colored). The bottom of the body marks the opening price and its top marks the close. If the price fell during the period the prices are the other way around and to show this at a glance the body will be black (or red if colored).
How To Use Candlestick Charts In Forex Trading
A chart showing 5 or 15 minute candles over a period of several hours can provide the forex trader with many patterns on which he can base a system for determining when a trend is developing. For example, when the candle body is white or green and higher than the preceding candles, it indicates that buyers are very bullish. When it is black or red and lower than the preceding candles, it indicates that buyers are very bearish.
Being able to see these implications at a glance is vital in the fast moving forex markets where trading decisions often need to be made in a split second. So candlestick charts are one of the most useful visual aids for any forex trader.
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