3 Tools to Help You Spot a Reentry point After a Strong FX Move

Spotting An Outsize Move – Breaking Resistance

Meeting The Tools – Fib Resistance, Ichimoku, Pivots

What’s Next If Focal Prices Are Hit – Price Action & Reaction

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It was never my thinking that made the big money for me. It was always my sitting. Go that? My sitting tight! ... I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”

-Jesse Livermore

Acting in haste hurts. From a trading perspective, trading in haste or hurry is often known as chasing price. Chasing price often shows itself when you’ve finally talked yourself into a trade only to see it react against your entry shortly after your entry.

Learn Forex: Big Moves Are Exciting But Approach with Caution

Presented by FXCM’s Marketscope Charts

Spotting an Outsize Move

An outsized move can often be seen without any indicators or chart tools. In simple terms, an outsized move like the one seen recently in GBPAUD or GBPJPY will likely take out multiple levels of resistance. When resistance or a prior price ceiling is broken, you have clear indication that the current group of buyers are more confident or holding onto more conviction than they have had in the past when they backed off the move and a correction began.

In addition to multiple levels of resistance breaking, you’ll often notice a series of very bullish candles where price consistently closes near the session high over and over again. In an uptrend, this type of moves shows you that buyers are holding this and have little conviction to let off the pressure against the sellers.

Of course, spotting the outsized move is the easy part. The difficulty comes in having the emotional strength to fight off the fear of missing out and waiting for a decent and appropriate level of entry. The ability to wait and identify these points is a key mark of a mature or professional trader.

Meet the Tools – Fibonacci Retracements, Ichimoku, and Pivots

Fibonacci is a sequence of numbers found throughout nature that applies to everything from the atomic structure & DNA molecules to formation of a cyclone or hurricane’s eye that gives the formation its strength. The value often found in the Fibonacci sequence to traders is the ratio between these numbers which show up in and outside of the markets. More often than most believe, a move will correct down to a Fibonacci percentage such at 38.2%, 50% or 61.8% of the prior move.

Learn Forex: GBPAUD recently retraced down to Fib Levels before Bouncing

Presented by FXCM’s Marketscope Charts

Another key tool that many traders are getting more accustomed to is Ichimoku. Ichimoku is a technical or chart based trend trading system that illustrates support and resistance values in a simplified form and is considered a complement to candlestick trading. Looking to Ichimoku Cloud as a method to identify trend entries is still in use today and can be used in both bullish (rising) and bearish (falling) markets. This dynamic indicator can be used on the time frame of your preference and was voted Best Technical Indicator 9 Consecutive Years in Tokyo’s Nikkei newspaper.

Learn Forex: Ichimoku’s Cloud Shows a Nice Entry on GBPAUD Developing

Presented by FXCM’s Marketscope Charts

As you are likely seeing, it is important to keep an eye out for a confluence of signals showing a correction or retracement may have ended and that you may be approaching an opportunity for reentry. Another tool that can help you see dynamic corrections within an unfolding trend are pivot points. Pivot points are based on recent price action and can help you build a directional bias when price corrects down to the pivot level before resuming the overall trend.

Learn Forex: This Fib Window of 1.7600 -1.7330 Will Be a Focal Point for Reentry

Presented by FXCM’s Marketscope Charts

If you’re unaware of the key levels that are included in Pivot Points, they are the High, Low & Close. Those three critical prices are divided by 3 and that price gives you the pivot for a specific time frame. Therefore, a daily pivot for today would take yesterday’s high, low & close divided by 3 and similarly for weekly pivots.

What’s Next If Focal Prices Are Hit? Price Action & Reaction

On the chart above, we’ve located a few technical indicators that provide potential support on GBPAUD between 1.7330 & 1.7600. Beyond the indicators, you’ll notice that the prior price action high aligns with the current 50% Fibonacci retracement at 1.7415. Also, the August high of 1.7483 is near the current 38.2% retracement, so there could be key moves off those levels. Therefore, this range presents prices where you can look for price action signals like a bullish engulfing pattern that shows the trend could begin its resumption.

Big Picture of GBPAUD Potential: Bull Flag Opportunity

Presented by FXCM’s Marketscope Charts

 

 

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The Definitive Guide to Trading Trends with Ichimoku Cloud

Many traders are asked what indicator they would wish to never do without. My answer has never wavered as there is one indicator that clearly illustrates the current trend, helps you time entries, displays support and resistance, clarifies momentum, and shows you when a trend has likely reversed. That indicator is Ichimoku Kinko Hyo or more casually known as Ichimoku.

Learn Forex: After a Quick Lesson, Ichimoku Clearly Displays Trading Opportunities

Presented by FXCM’s Marketscope Charts

Ichimoku is a technical or chart indicator that is also a trend trading system in and of itself. The creator of the indicator, Goichi Hosada, introduced Ichimoku as a “one glance” indicator so that in a few seconds you are able to determine whether a tradable trend is present or if you should wait for a better set-up on a specific pair.

 

Before we break down the components of the indicator in a clear and relatable manner, there are a few helpful things to understand. Ichimoku can be used in both rising and falling markets and can be used in all time frames for any liquid trading instrument. The only time to not use Ichimoku is when no clear trend is present.

Meet the 5 Members of the Ichimoku Family

Always Start With the Cloud

The cloud is composed of two dynamic lines that are meant to serve multiple functions. However, the primary purpose of the cloud is to help you identify the trend of current price in relation to past price action. Given that protecting your capital is the main battle every trader must face, the cloud helps you to place stops and recognize when you should be bullish or bearish. Many traders will focus on candlesticks or price action analysis around the cloud to see if a decisive reversal or continuation pattern is taking shape.

Learn Forex: The Cloud Alone Can Help Provide Direction

Presented by FXCM’s Marketscope Charts

In the simplest terms, traders who utilize Ichimoku should look for buying entries when price is above the cloud. When price is below the cloud, traders should be looking for temporary corrections higher to enter a sell order in the direction of the trend. The cloud is the cornerstone of all Ichimoku analysis and as such it is the most vital aspect to the indicator.

Time Entries with the Trigger & Base Line

Once you have built a bias of whether to look for buy or sell signals with the cloud, you can then turn to the two unique moving averages provided by Ichimoku. The fast moving average is a 9 period moving average and the slow moving average is a 26 period moving average by default. What is unique about these moving averages is that unlike their western counterparts, the calculation is built on mid-prices as opposed to closing prices. I often refer to the fast moving average as the trigger line and the slow moving average as the base line.

Learn Forex: Look for the Trigger Crossing the Base In Favor of the Trend

Presented by FXCM’s Marketscope Charts

The Ichimoku components are introduced in a specific order because that is how you should analyze or trade the market. Once you’ve confirmed the trend by recognizing price as being below or above the cloud, you can move to the moving averages. If price is above the cloud and the trigger crosses above the base line you have the makings of a buy signal. If price is below the cloud and the trigger crosses below the base line you have the makings of a sell signal.

Confirm Entries with the Mysterious Lagging Line

In addition to the mystery of the cloud, the lagging line often confuses traders. This shouldn’t be the case as it’s a very simple line that is the close of the current candle pushed back 26 periods. When studying Ichimoku, I found that this line was considered by most traditional Japanese traders who utilize mainly Ichimoku as one of the most important components of the indicator.

Learn Forex: The Lagging Line Displays Momentum of the Move

Presented by FXCM’s Marketscope Charts

Once price has broken above or below the cloud and the trigger line is crossing the base line with the trend, you can look to the lagging line as confirmation. The lagging line can best confirm the trade by breaking either above the cloud in a new uptrend or below the cloud in a developing downtrend. Looking above, you can see that the trend often gathers steam nicely after the lagging line breaks through the cloud. Another benefit of using the lagging line as a confirmation indicator is that the lagging line can build patience and discipline in your trading because you won’t be chasing the initial thrust but rather waiting for the correction to play out before entering in the direction of the overall trend.

Trading With Ichimoku Checklist

Now that you know the components of Ichimoku here is a checklist that you can print off or use to keep the main components of this dynamic trend following system:

Ichimoku Checklist:

1.Where is Price in Relation to the Cloud?

• Above the cloud -filtered for buy only signals
• In the Cloud - be cautious but ready to jump in on the prior trend or finesse a current position. what the candle stick formations heavily
• Below the cloud - filtered for short only trades

2. Is price consistently on one side of the cloud or is price whipping around on both sides consistently?

• Ichimoku is best used with clear trends and should be set aside during ranging markets.

3. Which level of the Ichimoku would like to use to place your stop?

• If you use Ichimoku to place stops as well, you can either use the cloud or the base line.

 

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Predicting Trendlines Using Parallel Price Channels

Price Channels are effective in creating support and resistance levels.

Traders can create new trendlines based on existing price channels.

This can provide more trading opportunities with an edge.

First off, a trendline is a line connecting two or more lows or two or more highs, with the lines projected out into the future. The creation of a price channel consists of placing two trendlines that are parallel to each other, above and below the price action on the chart. Traders then project these parallel lines out into the future to predict price moves by playing the bounces off these lines.

I've developed a nuanced way of drawing trendlines that can at times predict trendlines before they even happen, and that is what this article aims to teach. This technique can be applied on short, medium, and long term charts and on any currency pair.

Recognizing a Price Channel Break

We first want to identify a clear a price channel that exists somewhere in the last 200 bars. The width of the channel doesn't matter, but we do want to see some sort of an angle either bullish or bearish (slanting up or slanting down). We also want to see the price bounce successfully off each of the top and bottom lines in the channel at least twice to create a legitimate price channel. I've identified a price channel below on the EUR/AUD daily chart.

Learn Forex: Drawing a Price Channel

(created from FXCM Marketscope 2.0)

Once drawn, we now wait for the currency pair to break out of the price channel in either direction. There are several ways you can trade a trendline break, but this is not what we are looking to trade when using this technique. We want to wait until we see a new swing high above the price channel, or a new swing low below the price channel. In other words, we want a new high where the price then retreats for a few bars or a new low where the price then rallies for a few bars. Once seen, this is where things begin to get interesting.

Predicting the Next Trendline

Once we have identified a new swing high/low, we want to create a new trendline that is parallel to the previous price channel lines that begins at the new high/low. So this will be a 3rd line on your chart that intersects the most recent high/low. We can draw a parallel line from an original line by holding down the “Ctrl” key while clicking and dragging an existing line (on Marketscope 2.0 charting package).

Learn Forex: Predicting the Next Trendline

(created from FXCM Marketscope 2.0)

The chart above shows the 3rd line in place at the new swing high. This now gives us a level where price could face resistance. Even though this trendline has not been confirmed by a 2nd bounce, we will often times see the price bounce off this line the next time the price gets near it.

Placing the Trade

In this example, we will look to sell just below this trendline if price rallies to that level again. We will place a stop a few pips above the trendline, and our limit will be placed at least twice as far so that we have a 1:2 risk/reward ratio.

Learn Forex: Trading the New Trendline

(created from FXCM Marketscope 2.0)

We received a great entry on our trade just above the 1.50 level, and could have kept this trade open for several hundred pips had we let it run further to the down side. But, I am comfortable with using a simple 1:2 risk/reward ratio which would have easily been hit.

 

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Candle Patterns for Forex Price Reversals

Candlestick analysis can be used to spot market reversals and resumptions of trends.

The bullish engulfing pattern can spotted inside the Three Outside Up pattern.

Candles can be used as a confirmation tool, and used for Forex entries

Understanding candlestick charts and their patterns allow traders to work price action into an existing Forex trading strategy. Normally candle patterns such as the Bullish Three Outside Up can be used to confirm a change of trend, or even validate a market entry. With this idea in mind we will focus on recognizing and trading one of the markets most clear candle patterns.

The Three Outside Up

A Three Outside Up candle pattern may sound complicated at first, but it is actually a derivation of the bullish engulfing pattern. Pictured above we can see the Three Outside Up pattern is comprised of three individual candles. The first candle should close down and will depict the end of a currency pair’scurrent weakness. This first candle can close with a variety of body and wick sizes and can vary from chart to chart.While it is not directly related to the next engulfing pattern, this candle should denote the end of the markets current decline.

The second and third candles in the pattern are arguably the most important. As seen above, the second candle is expected to engulf the first with a large blue candle. This large bullish engulfing candle signifies new strength in the market as price attempts to break to higher highs. To be considered a complete bullish engulfing candle price of the second candle should close well above the high of the first candle. Lastly, candle number three is used to validate the current change in market direction. This candle should open immediately higher, creating as small a wick to the downside as possible. Upon closing above candle two, candle three will validate the new bullish market bias.

Let’s look at a current example.

Learn Forex – GBPUSD Daily Trend

(Created using FXCM’s Marketscope 2.0 charts)

Uses in Trading

Above we can see the Bullish Three Outside Up in action on the GBPUSD currency pair. The daily graph has been in a long standing established uptrend, but notice there has been dips along the way. There have been three candle patterns, which have been highlighted in the chart, showing prices return back in the direction of the trend. The last of which signaled the August 2013 bottom for the pair, before rallying as much as 1158. So how can this be worked into a trading plan?

Traders looking to take advantage of the Bullish Three Outside Down pattern can add it into any existing trending market plan. Most traders will use it as a confirmation tool such as SSI to signal a change in market direction. If the market has a bias upward, like the GBPUSD chart above, traders can use this candle pattern to establish new buying positions.

 

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The Forex Trader’s Guide to Speculation Psychology

Trading psychology is a necessity to long-term trading success

Traders first have to learn to lose properly before they can win long-term

Keeping a positive outlook allows traders to stay on their strategy even during losing streaks

Over the past few articles, we’ve investigated the concept of Trading Psychology; because this can have a huge impact on a trader’s bottom line.

After you’ve developed a strategy, and learned the basics of the market – you have many of the tools that are needed to be successful. And when that success doesn’t come, numerous questions can swirl around inside of a trader’s head.

‘Am I trading the right strategy?’ ‘Do I really know what I’m doing?’ ‘If all these pros make it seem so easy, why does it seem so difficult?’

If you’ve thought of any of the above questions – do not worry; you’re not alone. I’ve thought them just like any other trader has thought them. The difference between a professional and an amateur is that the professional knows how to properly answer those questions and the amateur does not.

What follows are suggestions to get to where you want to be.

Risk Changes Our Behavior

The biggest psychological obstacle for traders is proper perception of losses (and the concept of losing). When traders first come to markets, they often feel that they have to ‘beat’ the market.

This is a bad idea. If you try to beat the market, it often comes back to beat you.

Most great traders are great risk managers first and foremost. Because if you’re losing more than you’re winning (even if you’re winning more often than your losing), well – then you are NOT a profitable trader.

In the article How to Lose Properly, we looked at a way in which traders can conceptualize the inevitable prospect of losing: Because you are going to lose as a trader; the big question is whether or not you are letting those losses more than offset your gains.

This is so incredibly huge because this is The Number One Mistake Forex Traders Make; taking such large losses when they are wrong and such small gains when they are right. This means that they can be winning 2 out of every 3 trades – AND STILL LOSE MONEY!

In the article, we stressed the importance of always trading with a stop; and the further importance of properly establishing your risk at the outset of a trade. This way, if the trade moves against you, you can stand confident on your original analysis. Lastly, we closed the article by suggesting the use of break-even stops in an effort to prevent those psychologically draining situations of watching a winner turn around, and come back as a loser.

The Break-Even Stop can provide comfort as initial risk is not exposed

Taken from How to Lose Properly

Learning to lose properly is a necessity for traders to find long-term success; because until you learn how to cap your losses, you always run the risk of having just one trade blow up the gains from many others.

But, even after you learn to lose, it doesn’t necessarily mean that you’ll enjoy or like it any more… Losing still stinks no matter how good you are, or how much money you can make. Because of that, it’s extremely important to be able to bring a positive mindset to the market every single day, and we looked at how to do that in the article, How to Adopt a Positive Trading Mentality.

Bring a positive mindset to the charts every day…

Since you will inevitably be taking losses in this sport of trading, it’s important to disallow those losses from ruining our outlooks or frames of mind.

What will often happen is that a trader might take a couple of stops only to get discouraged. And after they’re discouraged, they get sloppier on their analysis, or they question their own approach. The results of which can be DISASTEROUS.

Learning to be a profitable trader can be difficult enough; but once you start assigning blame for not being able to predict the future, you’ve begun to beat yourself up for something you had no control over in the first place.

In the article, we offer a way that traders can look at trading in a very similar field; entrepreneurship. We specifically used the example of a small business owner of a retail clothing store. If our small business owner wants to sell clothes, they first have to buy them – right? So, our entrepreneur needs to acquire inventory before they can ever enact a sale.

And of the acquired inventory, likely, some will sell, and some won’t. But, if the business owner is able to sell enough to offset the cost of the inventory that doesn’t sell – then they have found profit.

This isn’t too dissimilar to a trader…

We take positions in the hope of watching them become profitable; much like the clothier in our example buying inventory. Some of our trades, like some of our business owner’s inventory, will work out well, while others won’t.

The key to keeping a positive mindset in trading is to look at losses in the same way that the business owner looks at unsold inventory; simply as a cost of doing business.

Because once you’ve learned to lose properly, and then after you’ve learned to keep those losses in scope of the bigger picture – you’ve addressed biggest aspects of trading psychology. Now, we have the other end of the coin: What happens when you have TOO MUCH confidence, and we addressed this in the article Fear and Greed, The Trader’s Struggle.

Strike the delicate balance between fear and greed

These two drives can have a large bearing in the way we live our lives; and not just in trading but in other areas as well. In trading, both fear and greed can be massively detrimental, as they can cloud our judgment and promulgate bad decisions.

Most human beings will be greedy when they have a losing position; willing to hold on if only price can come back to their entry level. And when in a winning position, most human beings will begin to be fearful (what if the position comes back against me! Nobody ever went broke taking profits, right?).

This is the type of logic that leads to The Number One Mistake that Forex Traders Make… We suggested that traders should look to reverse those drives, and to be greedy when they’ve been proven right and when their trades have worked out. If fearful, you can use the breakeven stop to help alleviate the concern that your initial risk is still exposed.

And when in a losing position, when most human beings are willing to sit in the trade in the hope that it comes back; well this is when you want to be fearful. Your analysis has been proven incorrect, and you’re upside down in the trade – why in the world would you want to hang on any longer?

Take the advice of many professional traders, Warren Buffett included…

Once you’ve mastered these three topics, you have a very strong leg up on the rest of the market. The final thing for traders to focus on is a problem that many might not even know about yet… And that is the danger of over-confidence, and the risk of falling into The Confidence Trap.

Don’t let confidence get the best of you

After putting together a string of successes, its natural human nature to build up confidence around your dealings; and this can be a really good thing.

As an example, confidence can help you offset fear, as we discussed above… Confidence can also help you keep a positive mindset every day, which is also very important.

But once a trader has gone into the territory of being ‘over-confident,’ they introduce some very large risks into their approach, key of which is the willingness to bend your own rules simply because you ‘feel’ that you will be successful.

In the article The Confidence Trap, we cover this concept in depth. We share that traders should look to strike that delicate balance between being scared or fearful, and over-confident. We did this with ‘The Confidence Continuum.’

The Confidence Continuum

Taken from The Confidence Trap

Where to go from here?

After a trader has mastered the psychological aspect (which could take many, many years), it’s time to start looking at ways of improving our product knowledge about the assets that are being traded.

In the FX Market, it’s extremely important to understand how important currency values are to economies. In The Nucleus of the Forex Market, We included a fantastic example of how the nation of Japan was ravaged by a strong yen, and how hope was brought back into the equation with ‘Abenomics.’

In the FX market, we’re essentially trading large economies against each other, and macroeconomic analysis is of extreme importance. We covered this in the article How Fundamentals Move Prices in the FX Market.

We took this a step further teaching traders to include Price Action and Technical Analysis with Fundamentals in an effort to find the cleanest trading ideas possible. The article The Potent Combination of Fundamentals and Price Action teaches you to do just that; because after all, if something is going to impact your trades, shouldn’t you be looking to take that into account of your analysis? 

 

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Why You Should Target Trades based on Central Bank Policy

Why is a Central Bank’s Monetary Policy Important for Forex Traders?

Where do Central Banks Monetary Policy Currently Stand?

What Trades Are Attractive Pairings of Monetary Policy Imbalance?

Trading the Forex market places an unusual emphasis on Central Bank policy and rate announcements that isn’t as common in other markets albeit still very important. The effect that monetary policy has is paramount to currency outcomes and can be a major determinant in what trades you decide to place. Because monetary policy is the process by which a monetary authority like a central bank controls the supply of money within an economy in order to support economic goals.

 

Why is a Central Bank’s Monetary Policy Important for Forex Traders?

As a trader, it’s always important to recognize where a trade opportunity lies. One of the cleanest fundamental set-ups is when you have one central bank that is looking to tighten money supply due to an overheating economy which shows underlying strength and another economy’s central bank that is looking to loosen monetary policy which weakens the currency in order to jump start the economy.

On the other end, if you have two central banks with very similar monetary policy goals then the trade set-up may not be as clear.

This clear imbalance or disparity between to economies central bank policies makes this an important distinction for you to be aware of for trading purposes especially when price action aligns with the fundamental imbalance. The rest of this article will break down where central banks currently stand and what opportunities lie within the imbalances.

Where do Central Bank’s Monetary Policy Currently Stand?

Federal Reserve – US DOLLAR

Presented by FXCM’s Marketscope Charts

The big stories behind the US DOLLAR and their central bank are the changing of the guard where Janet Yellen will take over from Ben Bernanke as head of the Fed as well the eventual taper of current easing efforts. Since July of this year, the USDOLLAR has weakened significantly as the underlying measures of economic health like inflation and employment have not improved enough for the Fed to confidently begin tapering their easing efforts. Also of importance, Janet Yellen, the new head of the Federal Reserve starting in 2014 has asserted that she will continue to be accommodative and work not to begin tapering, which would be US Dollar positive, until the underlying economic indicators show continuance strength.

Bottom Line: The US Dollar may continue to trade lower and retest the price channel floor or possibly break it as The US Dollar remains comparatively weak to other major currencies.

Bank of England –GBP

Presented by FXCM’s Marketscope Charts

As of last week, the Monetary Policy Committee of the Bank of England have recently upgraded their forecasts of an economic recovery in their inflation report. A few weeks earlier, BoE governor, Mark Carney, mentioned that he would be looking for an improvement in key economic indicators before they looked to tighten their current monetary policy.

Bottom Line: The inflation report upgrade last week seemed to be the signal the market wanted as the GBP is now seemingly lead other economies out of the 2008 crisis which weakened many major currencies. A break of 1.6260 would be a key technical development for further GBP Strength.

European Central Bank – Euro

Presented by FXCM’s Marketscope Charts

The market was shocked two weeks ago when the ECB decided to cut their already historically low central bank reference rate to 0.25%. This move was on the back of a paltry inflation reading which showed current inflation, which is an elementary reading of economic demand was at lows not seen since after the 2008 credit crisis and 2010 Sovereign crisis when Greece came to the forefront. This cut of interest rates has many looking to the December meeting of the ECB to provide further clarity on how weak the Euro may become.

Bottom Line: The euro faces one of its most uncertain fates in the last 3 years. It appears the sole focus of the ECB on inflation will cause them to fight the foe of disinflation which could keep the Euro under pressure for months to come.

 

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Forex Strategy Video: USDJPY, EURUSD, GBPUSD - When do We ’Buy the Rumor’

 

 

• Due to individuals' tolerance for risk and availability of data, 'buy the rumor' can be difficult

• There is a cognitive bias in which traders believe a fundamental run has begun when they learned of it

• Gauging what is 'priced in' is critical to fundamental trading in Dollar, Euro, Yen and all currencies

 

There is a saying 'buy the rumor, sell the news'. Yet, when is the rumor mainstream and therefore fully priced in? This is a timeless question for fundamental traders and investors who attempt to take advantage of asymmetrical information and probabilities. In today's Strategy Video, we discuss a cognitive and trading bias (related to the observation selection bias) whereby traders can find themselves late to a fundamental theme and ultimately late to the trade. This is a timeless and universal theme as we find yen traders assess the probability of a BoJ QE2, an ECB stimulus replacement program, a distant BoE hike and the Fed's views on the heavily debated Taper. This bias represents a critical and constant influence on markets and therefore is vital for a fundamental trader to familiarize themselves with.

 

 

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Why Trading The Forex Market Is The Only Real Solution To Today’s Economic Troubles…

This FREE Forex Trading Strategy Video will REVEAL the THREE irrefutable reasons no trading robot... or signal service can ever replace a real, flesh-and-blood trader...

WATCH IT Right Here: http://dld.bz/cTZU7

How to Read a Candle Chart

Candlestick charts are a prominent and helpful tool in the Forex Market

Open and closing prices will determine a candles body and wicks.

Multiple candles may develop patterns useful in trading.

What could possibly be more important to a technical Forex trader than their price charts? Your perception of price will ultimately help shape your opinions of trends, determine entries, and more. With this in mind it becomes absolutely critical to understand what you are seeing on your trading monitor. More often than not Forex charts are defaulted with candlestick charts which differ greatly from the more traditional bar chart and the more exotic renko charts that you may come across in your trading career. Surprisingly after learning to analyze candlesticks, traders often find they are able to quickly identify different types of price action that they could not quickly identify before with othertypes of charts.

To begin with, traders need to understand exactly how to read candlesticks before adding them into an existing trading strategy. So let’s get started learning about how to read a candlestick chart!

How to Read Candles

The image below represents the design of a typical candlestick. There are three specific points (open, close, wicks) that are used in the creation of a price candle. The first points we need to consider are the candles open and close prices. These points identify where price began and concluded for a selected period and will construct the body of a candle. If you are viewing a daily chart for instance, these points will represent the daily open and close price. It is important to note the color of the body of a candlestick (red for down and blue for up). Knowing this, candlesticks can help us quickly identify if the market is trading higher or lower for a selected time frame.

Next we have the wicks of our candlesticks, which may also be referred to as the candles shadow. These points are vital as they show the extremes in price for a specific charting period. The wicks are quickly identifiable as they are visually thinner than the body of the candlestick. This is where the strength of candlesticks becomes apparent. Candlesticks can help us keep our eye on market momentum and away from the static of price extremes.

Uses in Trading

As you can now see, candlesticks are easy to read with a little bit of practice. Once you understand the basics, they have the ability to open up an array of trading opportunities. While a trader may not employ candlestick analysis alone in their strategies, Forex professionals do use them to gauge market sentiment and market direction. Now that you are familiarized with the basics your next step is to continue learning by reviewing candle patterns, such as the bullish engulfing pattern, which can be used in conjuncture with a strong trending market.

 

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Trading the GBPUSD Narrow Range Breakout Strategy

- According to Tony Crabbel, narrow range breakouts lead to resumption of the major trend

- Narrow Range breakouts can provide good risk to reward setups that are easy to identify

- GBP has been one of the strongest G-10 currencies and the uptrend is likely to continue

What is a Narrow Range Breakout?

Tony Crabbel is credited with first writing about Narrow range breakout patterns in his now out-of-print book, “Day Trading with Short Term Price Patterns & Opening Range Breakout” in 1990 some 12 years before Mark Fisher’s Logical trader book which also talks about the opening range breakout. The Narrow Range breakout patterns included the doji and spinning top Japanese candlestick patterns as these candles have small bodies illustrating the small trading range.

Forex traders can look for a breakout to the upside when prices move above the wick high of spinning top or doji candlestick pattern. A break to the downside below the low the narrow range candle signals a sell.

The Forex narrow range breakout trade is based on the typical price behavior that moves from periods of low volatility to periods of high volatility. Imagine price as a giant spring that can be compressed to a very compact and small size then when the spring is released, it expands to many times its original compressed size.

As traders, we look for these compressions as they signal that a big move is around the corner. It allows traders to predefine their risk in the trade and to also calculate possible price objectives. In addition we would look to trade these breakouts in the direction of the dominant trend.

What this means is that if the daily trend is up then we would only take topside breakouts above a narrow range candle’s previous high. In addition we would ignore sell signal. Similarly, if the daily trend is down, then we would ignore upside narrow range breakouts.

On the other hand, if the daily trend is ranging in a sideways consolidation, then either upside or downside breaks can be traded.

Learn Forex: GBPUSD Narrow Range Breakout Setup

(Created using FXCM’s Marketscope 2.0 charts)

Trading Example

The current trading setup shows a GBPUSD daily chart with a spinning top at November 14th with a high of 1.6099 and a low of 1.5987. On November 15th, a wide rage candle broke the top of the spinning top candle. Aggressive traders can buy the breakout above the previous day’s high. Next, they would place a stop 5 to 10 pips below the low of the current candle. A limit can be set just below the new level of significant resistance in the 1.6250 area.

On the other hand, more conservative traders will want to wait for the daily candle to close above the previous day’s high before entering long. A stop would be placed 5 to 10 pips below the low of the current candle. The dotted green and dotted red line mark the high and low of the range. A next day move above the high is bullish, while a next day move below the low is bearish. Since the daily trend is up we would ignore sell signals and only take buy signals as they are aligned with the trend.

In sum, traders have a great opportunity to rejoin a very strong GBPUSD uptrend using narrow range candles as a trigger. It is important to note that whipsaws and pattern failures can happen not only with this strategy but other breakout strategies. So it is important that you use stops.

 

Source: http://dld.bz/cUnjG