The FOREX market moves in patterns that are repeatable and predictable. Price moves in these patterns because of the psychology of the markets and how traders perceive what is happening at any one time. By taking advantage of these price patterns you can become more profitable when trading FOREX.
Remember though that nothing is 100% certain in FOREX so you must trade with a risk management plan and protect your loses.
Let’s assume you are trading a daily chart.
This means that every day the market open at a price and closes at another price (sometimes the same one). During the day the price will reach a high and a low. So for each day you have four price elements;
- Daily Open
- Daily High
- Daily Low
- Daily Close
Now on the chart this is drawn as a bar or a Japanese candlestick. In my opinion candlesticks show more information so we show illustrate our points using them.
A candlestick is drawn by using a box between the Open and Close prices and a vertical line between the Open and High, and the Close and Low.
If the close price is higher than the open then the box is white and if the close price is less than the open then the box is black.
Now every day they candlesticks are drawn as price changes, and patterns begin to form.
Some example patterns.
This is where the open and close price are the same (or very close). This produces a cross like formation and when seen at the end of a trend in price can be a strong indication of a price reversal
This happens when the high and open prices are the same (or very similar). The close price is less than the open (but not a big difference) and the low price is much less than the close. In fact the difference between the close and low price should be at least double the difference between the open and close. As a result you get a small black box at the top and a long vertical line (wick) hanging down.
This is a strong reversal signal at the end of a downward trend.
This is the same as the hanging man but inverted. This is a strong reversal signal at the end of an upward trend.
This is a pattern that uses 2 candlesticks next to each other. If the body (difference between the Open and Close price) is higher and lower than the body of the preceding candlestick i.e. longer then it is said to be engulfing the body of the previous candlestick.
Now if the body of the 2nd candlestick is white and larger than the previous one then this is a bullish sign, and if the body of the 2nd candlestick is larger than the previous one and dark then this is a bearish sign.
This is just a small selection of the possible candlestick patterns that are available.
When using candlesticks always remember that this is just one indicator and before you make a trading decision you should find additional indicators that support your decision.
You can find a lot more detail about candlestick charts by clicking on the link below.
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