Monday, 13 March 2017

Lesson 4 – Introduction to Forex Trading - Understanding the basics - Part 2

Introduction to Candlesticks

candelstick definition

Candlestick charts make it easier to visualize Support and Resistance. Charts can be used to help visualize movements in price and understand how supply and demand is working.

Charts come in all shapes and sizes, from line to bar charts, but the particularly interesting ones are candlestick charts.

Candlestick charts are extremely powerful as they really help tell a more visual story of the Price Action and the various key order levels.

A candlestick can represent any timeframe, though this lesson will typically focus on daily and 4-hour candlesticks, as these tend to work better with swing trading in Forex.
This is how a candlestick is constructed:

Here is a candlestick chart of the AUDUSD:

AUDUSD chart

Patterns in these candlestick charts give telltale signs on what price may do in the future, and how orders are positioned in the markets.

There are lots of patterns you can look for, but this strategy focuses on one major pattern coupled with some general concepts.

How We use Trend lines to Show us The flow

The first step is to define the key component in this strategy: the concept of a trend line.

As previously mentioned, orders can create an overall trend or direction in the market. A trend line acts as a guide in determining that market direction, in defining trade entries, and also helps in deciding when and where to exit a trade. In addition, drawing trend lines can help to keep you out of riskier trades by providing a clear indication of whether a particular instrument is trending or consolidating.

You will see how the market tends to be attracted to these lines. And once they are broken, the price more often than not pulls back to retest them.

In addition to trend lines, we also have horizontal support and resistance lines.  These lines are ideal in identifying additional levels for profit-taking as well as potential trade entries.

Using these two sets of lines together will give you a formidable system, and the beauty of it is that it is that anyone can use them. It doesn’t matter whether you are a scalper, day trader, swing, or position trader; these become critical areas to watch for trades in the market.

In this lesson, basic rules and guidelines for using these key lines will be outlined, but first it is necessary to destroy some myths. There are lots of opinions out there that all trend lines are subjective, and frankly, this isn’t true. Like a lot of things in trading, drawing trend lines has clear rules to follow, and these will be covered in the next section.

Intro to Trend Lines

So now to the key question: what is a trend line?

Well, it is extremely simple. Trend lines simply join a series of two or more highs or a series of two or more lows. This might seem extremely subjective, but actually, there are a few rules for drawing trend lines that traders tend to stick to.

Firstly, a trend line cannot bisect other highs or lows. That is to say, it must stay above or below the price action. It may touch highs and lows, but not pass through them. Secondly, we will typically use a higher time frame to determine the key support and resistance zones on lower time frames. Essentially, the best way to find major trend lines is to zoom out on your charts and use higher time frame highs and lows to determine the trend.

Here are some examples:

correct plot of trend line

These major trend lines give us the overall direction of trade. We can then use sub trend lines to determine key areas to look for price action signals.

In the chart above, the horizontal trend lines have been plotted near the pivot lines to highlight the key horizontal support and resistance zones.

incorrect plot of trendline

You should always use the major moves in a currency pair (normally found by going to a higher time frame and zooming out on the chart) to determine the overall trend.

Trend lines offer lots of possibilities, but in their simplest form, they can significantly increase your odds of a successful trade if you trade in the direction of the overall trend. Going back to the old adage 'the trend is your friend' – statistically it is, however the most profit can be gained by finding turning points, and these often occur at trend line support and resistance zones, whether it is a minor support or resistance zone or a major one.

Combine those two points above and play retracement turning points, and you have an even more successful strategy. That is, taking trades in the direction of the trend, looking for price to move counter trend back to a key support level of the major trend line, then entering in the direction of the trend with a stop below the next major support level. This is a very profitable way to trade.

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