Drawing trend lines

• Drawing trend lines is an art form that can take awhile to master. That's because everyone has their own unique way of drawing them! There is no perfect way to draw them and it seems that no one can agree on the best way!
• The purpose of drawing trend lines is to identify where possible reversals will take place. They can also signal that a change in trend may occur.
• In a uptrend, draw the line along the lowest points in the trend without letting the line cross through prices. You need at least two touches of the trend line.

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Foreign Exchange Market

Foreign Exchange Market

        The Foreign Market is a large, growing and liquid financial market that operates 24 hours a day. It is not a market in the traditional sense because there is no central trading location or exchange. Most of the trading is conducted by telephone or through electronic trading networks. The primary market for currencies is the Interbank Market where banks,insurance companies, large corporations and other large financial institutions manage the risks associated with fluctuations in currency rates.

Exchange Rate
       The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3040(today), 1 Euro is worth US$1.3040

Currency Pair
The two currencies that make up an exchange rate, When one is bought, the other is sold, and vice versa.

Base Currency
The first currency in the pair. Also the currency your account is denominated in.

Counter Currency
The second currency in the pair. Also known as the terms currency.

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Three Candlestick Patterns

Three candlestick patterns are some of the most respected patterns in all of technical analysis. When patterns made up of three important candlesticks appear (a rare event compared to single-candlestick patterns) you should be ready to play an upcoming trend, breakout, or reversal in the current currency prices.

We’ll kick off this section with one of the best three candlestick patterns to trade.

Morning Star, Evening Star

The morning and evening star patterns are the most bearish and bullish patterns known to candlestick traders. When they form, the movement can be large, quick, and continue for a very long time thanks to strong momentum.

Morning Star

The morning star is a bullish pattern that is formed by three candlesticks, two of which must be bearish and bullish. The first candlestick should be bearish, the second can be up or down, but most importantly, it must be small to indicate indecision. (When a doji is the second candlestick, the morning star is called a morning doji star.) The third candlestick should have a long bullish body.

Evening Star

The evening star is a bearish pattern formed also by three candlesticks. Leading into the candlestick pattern should be a long bullish candle followed by an indecision candlestick (sometimes a doji, as mentioned above) and another bearish candlestick. The two outer candlesticks should be very large; when the outer candlesticks are longer, we know that a strong reversal has happened, which is confirmed by the indecision star in the middle of the candlestick pattern.

Three Soldiers

The three soldiers candlestick pattern is easy to spot—just look for three large advancing candlesticks. The three white soldiers should each close at or near their high price for the period. Here’s an example of the three white soldiers pattern:

It should be fairly obvious that the three soldiers is a bullish pattern. Sometimes, a series of three white soldiers will advance directly into resistance, at which point you might find the above evening star pattern. From there, you can play the reversal against the three soldiers for profits on a dip.

Three Crows

The three black crows candlestick pattern is also very easy to see on a forex chart—look for three major down candlesticks. In the opposite of the three soldiers, the three black crows should each close at or near their highs for the period.

The three black crows candlestick pattern is bearish. It shows strength and momentum in pushing the price down, and future drops are likely. You’re most likely to spot three black crows after a strong reversal pattern like the morning star pattern, or after a break of a strong support line.

You have completed this chapter on candlestick analysis. Now that you have explored trend lines, basic chart patterns, and Japanese candlesticks, the next stop is technical indicators. Take a breather to think about what we just covered, and get ready for the next chapter in our comprehensive forex tutorial.

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Double Candlestick Patterns

In making use of candlestick charts, traders should familiarize themselves with double candlestick patterns for better analysis. Here are a few you should know:

Engulfing Candlesticks

The bullish and bearish engulfing candlesticks are made up of two opposite moving candlesticks. In a bullish engulfing pattern, the first candlestick is a smaller bearish candlestick followed by a much larger second bullish candlestick.

The second candlestick body needs to be larger than the first candlestick body to “engulf” the first candlestick.

In a bearish engulfing candlestick pattern, the first candlestick should be a bullish candlestick, while the second should be a bearish candlestick. The second candlestick should have a body large enough that it engulfs the whole body of the first candlestick.

Note that each is a reversal pattern. When they appear, expect the market to rise or fall quickly after the candlestick is confirmed.

Tweezer Tops and Bottoms

A tweezer candlestick pattern is made up of two opposite bullish and bearish candlesticks. In a bearish tweezer top formation, the bullish candlestick is matched with a bearish candlestick equal in size. The opposite is true for tweezer bottoms.

The two wicks on the candlesticks should be equal in length, or very close to equal. This helps us confirm a top and bottom, because the two candlesticks that are part of the pattern indicate a touch to support or resistance, and then a reversal in the trend.

Double Doji

A double doji pattern is made up of two simple doji. Whereas a single doji indicates indecision, two doji indicate increasing volatility. When volatility increases and a currency pair picks a direction, get on and hold on! The double doji is known for putting some power behind breakouts and common chart patterns like the pennant formation.

Now that you have learned about all the double candlestick chart patterns, it’s time to move onto the triple candlestick patterns. The triple candlestick patterns are what you’ve been waiting for—the most powerful patterns for making big profits with forex!

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Single Candlestick Analysis

Single Candlestick Analysis

Single candlesticks are the easiest candlesticks to analyze because we have to look for only one candlestick in a chart.

Below, we’ll name the several different types of single candlestick indicators, and how you can analyze them for trading success.

Be sure to bookmark this page (and the following candlestick analysis pages) for easy reference. Knowledge is power when it comes to analyzing the foreign exchange markets!

Spinning Tops 

Spinning tops are the easiest to recognize of all candlesticks. A spinning top has a small body of movement. Note that with a spinning top, the size of the wicks or shadows does not matter for analyzing a chart.

A spinning top is a neutral indicator, however, it may mark a point of strong support or resistance as the open and closing price for a particular timeframe are very close.

Doji

There are four types of doji candlesticks: doji, dragonfly doji, gravestone doji, and long-legged doji.

The basic doji appears when the opening and closing price for a given timeframe are the same. The price moved up and down during the period, but the currency pair failed to keep any of its gains or losses at market close. A doji marks indecision in the market.

A dragonfly doji is shaped like a dragonfly with a longer bottom shadow, and an equal open and closing price. The dragonfly doji shows that a reversal may soon come in a currency pair’s trend, especially after large up or down trends.

Gravestone doji appear when after the currency pair advances during a trading period, but closes at a price equal to the open price. This is a bearish indicator, as the price rose before finding strong resistance. The strength of the bearish indication is affected by the upper shadow—the longer the shadow, the more bearish the signal.

Long legged doji are formed when the currency pair moves wildly during a trading period, but closes at the same price as it opened. This doji marks indecision in the market, and may indicate a reversal which can be confirmed with other indicators.

Hammers

There are two different hammers: a normal hammer candlestick, and an inverted hammer.

A normal hammer is made up of a small real body, bullish or bearish. Beneath this body is the handle of the hammer, a shadow that makes the candlestick look like its namesake. After a significant downtrend, the normal hammer is a bullish indicator. If it appears after an uptrend, it is known as a “hanging man.”

The inverted hammer is the opposite of a normal hammer candlestick pattern. The inverted hammer forms when the price moves up or down from the open price, and leaves a long shadow above the body. The inverted hammer marks a bottom reversal, and a developing bullish trend.

Single candlesticks

It is important to remember the single candlesticks because they also appear in later double and triple candlestick patterns. Take some time to study the single candlesticks, and see if you can spot them in a chart.

Now that you have the basic candlesticks out of the way, let’s proceed to the double candlestick patterns. Pay special attention here, as you’ll see single candlesticks that appear in a double candlestick pattern.

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Making Use of Candlesticks in Forex Trading

In our primer on candlestick charts we showed you how to see long-term candlestick charts for what they are. However, to use candlestick analysis techniques in the currency markets, you need to know how to hone in on parts of a candlestick that are easily ignored.

Candlestick Bodies

The candlestick has two major dimensions. First, a candlestick is made up of a body, which can be positive or negative in its movement. This diagram should help explain the body of a candlestick:

We can describe a candlestick as being either long or short. A long candlestick is one in which the body is longer than most other candlesticks within the immediate view. You’ll know it when you see a long candlestick, as it will stick out like a sore thumb on a forex chart.

Short candlesticks appear frequently on forex charts as well. Short candlesticks have a small real body, which shows us the size of the price movement during the time period that the candlestick represents. When small candlesticks appear, you know that the forex pair was either inactive, or it appeared at a price at which bullish and bearish traders are equally interested in the market. When there is a lot of buying and selling pressure at a certain time and price, the real body of a candlestick is smaller.

You can think of this as bulls and bears “squeezing” the price into a small candlestick. The pressure is equalized.

Candlestick Wicks

You should also begin to focus on the “wicks” of a candlestick. The wick shows us how high or how low the price moved during the time-period the candlestick represents. This is made more clear with the following diagram:

As you can see, the candlestick circled on the chart has very long wicks. In reading this chart, we know that the price moved down and up before closing up.

The wicks are also known as “shadows.” The word shadow means that the price moved up or down, but did not hold. Think of it like a ghost. The price was there, but now it isn’t. Even still, we can see where the price moved.

Wicks or shadows can be short or long. In terms of being short or long, the size is relative to the real body of the candlestick, and also to other candlesticks. Look at the candlestick diagram below:

From this diagram, we see that the real body of the first candlestick is small and the wicks are large, since the wicks are larger than the real body. The second candlestick, however, is made up of a large body relative to the wicks, and thus the body is large and the wicks are small.

Got it? Great! Let’s move on to candlestick patterns made up of a single candlestick.

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Using Candlestick Analysis

Using Candlestick Analysis

Candlestick pattern trading has been around for centuries. Candlesticks were first adopted by Japanese rice traders to find future movements in the price of rice futures.

Today, candlesticks are still used. The candlestick chart is one of the best available to traders as it showcases more information than any other chart. In the 1990s, during the early days of online trading, candlesticks became popular again, with a man named Steve Nison publishing methods for candlestick analysis.

Now we’re going to show you how to make the most of candlestick analysis. By following through the next chapter, you’ll learn how to adopt candlestick trading into your trading arsenal to generate buy and sell points, and make high accuracy trading decisions.

Ready to get started? Of course you are! Proceed to the first article on the makeup of candlesticks.

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