Forex Lesson 3: Methods of Application

The use of candlesticks in charting applications is becoming evermore popular. Candlesticks are simple and easy to use with the colour coding making trends more obvious. Traditional traders may be more familiar with line or bar charts but will find candlesticks just as easy, if not easier to use.

Candlestick Structures

Candlesticks on charts represent the range of a trade during a specified time period. A black candlestick represents a trade that gained in value at the close of trading after a specified period, in other words the trade closed long. A red candlestick indicates that a trade decreased in value at the end of the specified time period. If the candlestick is beige this means the time period specified for the trade has not closed yet and could still go up or down.

The body of the candlestick indicates the opening and closing price of a trade. The opening price on black candlesticks will always be at the bottom of the thick body of the candlestick and the closing price will always be at the top of the thick body of the candlestick, this is because black candlesticks represent an increase in value. The opening price on red candlesticks will always be at the top of the thick body and the closing price will always be at the bottom, this is because red candlesticks represent a decrease in value. The thin lines at the top and bottom of the candlesticks are known as wicks. The wicks show us the highest and lowest points that a trade reached during the specified trading times.

Candlestick Patterns

Many traders believe that they should be able to spot patterns in candlesticks and divine massive inspiration from this pattern. There are courses dedicated to patterns in candlesticks that teach you how to spot and interpret the patterns and to trade from this. Don’t worry if you have not done a candlestick course. You can still read and interpret the charts. There are key things to note and analyse when looking at candlesticks. The most important thing to note is the general trend of the market, is it range bound with little deviation? Is it trending with fluctuating highs and lows? It is important to look at the relationships between the wicks and the bodies of the candles. Note what actions buyers take when the price goes up or down, do they buy or sell, is this something that is consistent, if not why not. What is particularly noteworthy here is the length of the wicks; tall wicks at the top of a candlestick show us that the price is not sustainable in the market. Wicks that are very short and stay close to the body of the candlesticks show us that there is very little fluctuation in price between the opening and closing of a trade. Asking these questions will help you reach informed decisions about the market in order to decide the trend and likely future course of the candlesticks.

As mentioned previously charts can represent different timescales from minutes to hours, to months and years. The longer-term charts give a good initial impression of the chart trend and the shorter-term charts give finely tuned analysis of tiny fluctuations not apparent on longer-term charts. It’s similar to weather forecasts where a yearly forecast will give us a good general impression of what the weather will do that year but to know precisely what is going to happen on a daily or hourly basis more precise forecasts need to be studied.

Sometimes there will be a significant gap in between the candlesticks where the previous day’s closing price does not correlate with the next day’s opening price. This is not as common in FOREX as it is with equities markets as FOREX is a 24-hour market. Gaps in FOREX candlesticks indicate an event with a powerful impact on global economy such as war or a natural disaster.

Lines of support and resistance can be drawn on a candlesticks chart in the usual way, joining the lowest points to form the support line and the highest points to form the line of resistance. There is no hard or fast rule that determines whether the lines are drawn from the wicks or the bodies of the candlesticks, however do be aware that where you place these lines will affect the point at which you are stopped out. Lines of support and resistance drawn from the bodies of the candlesticks do not acknowledge the highs and lows of a trend and are likely to be interrupted by future changes. Lines from the bodies of the candlesticks are also more likely to be stopped out, as there is less scope for fluctuation. Lines that are drawn using the wicks for support and resistance allow for a greater range and are less likely to be stopped out. Lines drawn from wicks are also more likely to demonstrate the future pattern of the chart.

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