Monday, February 1, 2010

Develop Your Forex Strategy - Every Candle Tells A Story

Ignore candlesticks at your peril when developing your Forex strategy. Candlesticks contain a huge amount of information about the market. Learn to read candlesticks like a book and greatly enhance the profitability of your Forex strategy.

Used by Japanese traders for centuries, the Western world has only recently (since around 1991) become aware of their value due to the work of Steve Nison.

Candlestick charts are now the preferred medium for probably the majority of traders due to their visual impact. Like bar charts, candlestick charts are based on four main pieces of information relating to the timeframe of the chart (15 minute, 1 hour, 4 hour, daily, etc.) - the open and close prices for the timeframe, plus the high and low points during that period:

  • High
  • Low
  • Open
  • Close

However, by representing this information graphically, in the shape of a candle, the trader is able to absorb a glut of information about a single trading period with just a glance.

So learn to read candles well - your Forex strategy will be more solid as a result.

What's In A Candlestick?

What you can read from a single candlestick?

Certainly not enough to base a trade upon. However, a distinctive single candlestick in conjunction with other indicators can be very significant.

When reading candlesticks it helps to think of the battle constantly going on in the market place between the bulls and the bears. A candlestick will tell you how the battle went during any given period.

Take for example a candlestick on the hourly chart which has a long solid body and very small shadows if any. If the color of the candle is green, or whatever color your charting package uses when a candle closes higher than when it opened, it means either the bulls are in firm control or there was little or no interest from sellers.

If the candle is red, or whatever color your charting package uses when a candle closes lower than when it opened, it means either the bears are in firm control, or there is little or no interest from buyers.

If the solid body of the candle is small but there is a long upper shadow and a long lower shadow, it means during that 1 hour period, the bears took the trade to the lowest point, the bulls took the price to the highest point, but neither could maintain the position so the end of the period is close to where it was at the beginning.

Get a series of those candles and the market is obviously in an indecisive state, or reconciled to trading within a range for the foreseeable future, until a further stimulus comes along, such as a fundamental announcement, to cause price to break out of the channel.

Distinctive Candles You Should Know

Candles come in all shapes and sizes with very distinctive names such as spinning tops, doji, hammers, etc.

Learning to read candles in conjunction with understanding other technicals such as pivot points and support/resistance lines, Fibonacci retracements and trendlines can add real power to your Forex strategy.

Remember, when browsing your charts, every candle tells a story. It's up to you to decipher and interpret the significance. The level of skill you develop in doing so will be a major factor in developing a profitable Forex strategy.

For screen shots illustrating the candlestick examples referred to in this article click here:

For a free candle & chart pattern recognition reference tool click here:

For the best free economic calendars plus a free pivot point calculator and Fibonacci calculator click here:

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