Showing posts with label Forex Charts. Show all posts
Showing posts with label Forex Charts. Show all posts

Wednesday, March 5, 2014

Technical Analysis, Technical Indicators, Time-Frames

There are different periods in which a currency pair could be charted: monthly, weekly, daily, hourly, 30-minute, 5-minute, etc.
Each timeframe has its unique trend; this is the reason why there is no absolute trend for any currency, take the following charts for example.
EURUSD Hourly Chart
Time Frames - Hourly Chart
[Chart 30]
EURUSD Daily Chart
Time Frames - Daily Chart
[Chart 31]
In these charts, a swing trader focusing in the 1H chart could assess: well there is no trend (ranging market) right now for the EURUSD while a long-term trader could assess: the trend for the EURUSD is clearly up. Which trader is wrong? No one, both of them are correct. Both of them have effectively determined the trend in the timeframe they are focusing on.
Of course, the market condition in the 1H chart is most likely to continue for the next couple of days while the market condition in the daily chart is likely to continue for the next month or so.
The same goes when we use indicators. Sometimes the same indicator could be signalling the opposite signals on the same currency pair on different time frames.
Take for instance the following charts:

GBPJPY 15 Minute
GBPJPY 15 minute Chart
[Chart 32]
GBPJPY 4H
GBPJPY 4 Hour Chart
[Chart 33]
On the first chart (15min) the stochastics are in an oversold situation however, at the same time, in the 4H chart the stochastics did give a sell signal (crossing from the overbought territory to the neutral territory). The reason for this simple, remember all indicators go back n-periods to make a calculation, in this particular case, the 7 period stochastics in the 15 min chart went back 8 candlesticks to complete its calculation (1.75 hours). The stochastics in the 4H chart also represent 8 candlesticks but those 21 candles represent around 1.5 days worth of data. The market conditions are completely different during those periods.
Obviously, it is better to trade when many timeframes indicate the same market condition (i.e. both, the 15 min and the 4H chart indicate an oversold condition). When this happens, the probability of success of the given signal increases enormously.
Is important to realize that the longer the timeframe the more impact it will have in the market. For instance, an oversold condition in the 4H chart is more important than an overbought condition in the 15 min chart. More important because the “signaled market condition” will last for a greater time in longer time frames than in the shorter time frames.

Which timeframe should I use?
When trying to decide which timeframe to trade in we must take in consideration two important factors: the time dedicated to your trading and your personality.
How much time a day/week are we going to dedicate to our trading? Obviously if you have a day job and do not have the possibility to monitor your trades, then it would be better to focus on the 4H or 1H chart, and even daily charts can work out. If there is a possibility to monitor your trades then you can use the 30 min charts.
On the other hand, if you are a full time trader, then you have the possibility to trade shorter timeframes such as the 5 or 15 min charts.
However, we must almost consider that when you are a full time trader there is a chance that trading shorter timeframes does not fit your personality. The same goes for traders with a day job, there is a possibility that trading the longer term just will not work. I have a friend who started trading the FX market using the 1min chart. His trading wasn’t going the way he expected so he moved to the 15 min, then to the 30 min and finally to the 1H charts, where he felt most comfortable trading (and of course profits also increased).

So to summarize, you should use the time frames that better fit your personality and time requirements, and the best way to know which one fits you better is by trading as many time frames as possible, then choose the one you felt most comfortable with.

Wednesday, January 22, 2014

Technical Analysis, Important Chart Patterns Considerations

Please take into consideration the following:

1. Most technical chart patterns require confirmation in order to complete the pattern.

2. Chart patterns are present in all timeframes, from the monthly chart to the minute chart. But remember, the greater the time frame the more significant the pattern is. For instance, a rectangle can be formed in the 5-minute chart and at the same time a rectangle can also be formed in the 1-hour chart, in this case, the latter rectangle is more significant. But it doesn't mean that a pattern in a 5 minute chart is not significant, it means that if there are two patterns on different timeframes, the pattern with the longer time frame is more significant. All patterns represent the same supply and demand interaction in different time frames.

3. It is advised to use other techniques in combination with chart patterns, such as candlestick patterns, technical indicators, etc. this way we will increase the significance of every signal.

Tuesday, January 21, 2014

Technical Analysis, Falling & Rising Wedge

You may wonder why is it that we have the falling and rising wedge in a separate section. The reason is simple, these patterns can be either reversal or continuation patterns. Depending on where the pattern was formed and its slope it could signal a continuation of the trend or a trend reversal. 
Let’s see each one of them.

Continuation Rising Wedge
As all wedges, this one begins wide and contracts as the market reaches new highs:
Rising Wedge Continuation Pattern
[Image 3]
Continuation rising wedges are a bearish continuation pattern. It starts out wide, but narrows as prices keep going up. The highs and the lows of the pattern form a falling wedge. Two or more touched points are required to form the converging trendlines. This pattern is completed when the price breaks through the support trendline.

What makes this wedge a continuation pattern?
The slope of the wedge is against the previous trend.

Continuation Rising Wedge in Action
Falling Wedge Continuation Pattern in Action
[Chart 6]
This rising wedge is a continuation pattern because the slope (upward) of the wedge is against the trend (downtrend). When the pattern got completed (support trendline got broken), led to further downside movements.

Continuation Falling Wedge
Falling Wedge Continuation Pattern
[Image 9]
Continuation falling wedges are a bullish continuation pattern. It starts out wide, but narrows as prices keep going down. The highs and the lows of the pattern form a falling wedge. Two or more touched points are required to form the converging trendlines. This pattern is completed when the price breaks through the resistance trendline.
What makes this wedge a continuation pattern?
The slope of the wedge is against the previous trend.

Continuation Falling Wedge in Action
Falling Wedge Continuation Pattern
[Chart 6]
This falling wedge is a continuation pattern because the slope (downward) of the wedge is against the direction of the trend (uptrend). When the market broke the support trendline and the pattern got completed, it led to further gains.

Reversal Rising Wedge
This pattern begins wide and contracts as the market keeps rising:
Rising Wedge Reversal Pattern
[Image 7]
Reversal rising wedges are a bearish reversal pattern found at the end of the uptrend. Starts out wide, and narrows as the market reaches new highs forming a rising wedge when two or more points are connected. The pattern is completed when the price breaks the support trendline.

What makes this wedge a reversal pattern?
The slope of the wedge is in direction of the trend. In this case the market was trending up and the slope of the wedge is upward.

Reversal Rising Wedge in Action
Rising Wedge Reversal Pattern
[Chart 6]
This rising wedge is a reversal pattern because the slope (upward) of the wedge is in the same direction of the trend (uptrend). The pattern is completed when the market breaks the support-trendline. Notice the reversal rising wedge here forecasts a retracement, not a trend reversal. The market movement after a wedge or any reversal pattern could produce: a trend reversal, the beginning of a retracement or a consolidation period.

Reversal Falling Wedge
Falling Wedge Reversal Pattern
[Image 7]
Reversal falling wedges are a bullish reversal pattern. It starts out wide, but narrows as prices keep going down. The highs and the lows of the pattern form a falling wedge. Two or more touched points are required to form the converging trendlines. This pattern is completed when the price breaks through the resistance trendline.

What makes this wedge a reversal pattern?
The slope of the wedge is in direction of the trend. In this case the market was trending up and the slope of the wedge is upward.

Reversal Falling Wedge in Action
Falling Wedge Reversal Pattern
[Chart 6]
This falling wedge is a reversal pattern because the slope (downward) of the wedge is in the same direction of the trend (downtrend). The pattern is not complete until the market breaks the resistance trendline.

Commonly used target for all wedges
Measure the height of the pattern (in its widest side) in terms of pips, and then subtract/sum the same amount of pips from the eventual break out level.

Friday, January 3, 2014

Technical Analysis, Major Candlestick Reversal Patterns 2

5- Engulfing Reversal Pattern
In the image below, engulfing patterns are represented by the last two candlesticks of the illustration.
Engulfing Pattern 
Formation

Engulfing patterns consist of two candlesticks. The first one is usually a small candle, and must be in direction of the prevailing trend (in an uptrend the short candlestick must be white and in a downtrend the candlestick must be black) while the second candlestick must be against the prevailing trend and is usually a long candlestick. Candles should have little or no shadows at all. The body of the second candlestick must cover or embrace the body of the first candle (shadows are not taken into consideration).

Psychology behind the Shooting Star and Examples
In a downtrend or downside movement where bulls have control over the markets, a bullish engulfing pattern indicates that bulls finally took total control over prices, they were attracted by the lower prices (and intend to sell back at higher prices) and pushed the market up above the open price. This could signal a trend reversal, a correction or a consolidation period.
In an uptrend or upside movement where bulls have control over prices, a bearish engulfing pattern indicates that bears finally took total control over the market; they were attracted by the higher prices and pushed the market down below the open price. This might signal a short-term reversal pattern as clearly bears or sellers have taken control of the market. .
Bullish Engulfing Patterns are signals to go long!
Bearish Engulfing Patterns are signals to go short!

Bullish Engulfing in Action
Bullish Engulfing in Action


In the 5 min EURJPY chart a bullish engulfing pattern appears at the bottom of the range signaling a possible change in direction. The market goes up because of the bullish sentiment at lower prices. Bears notice bulls are really confident at those levels.
Bearish Engulfing in Action
Bearish Engulfing Pattern in Action


In the AUDUSD 5 min chart, an engulfing pattern appears at the top of the range signaling a “change in direction”. Remember that reversal pattern not always forecast trend reversals, correction or consolidation periods are always a possibility.

6- Piercing Reversal Patterns
In the image below, piercing patterns are represented by the last two candlesticks of the illustration.
Piercing Pattern


* The bearish piercing pattern is also called “Dark Cloud Cover”. For the sake of simplicity, in this course we will always refer to this pattern as bearish piercing pattern.
Formation
Piercing patterns, as engulfing patterns, are also made from two candlesticks. Both candlesticks should have long bodies and small or no shadows. The first candlestick must be in direction of the prevailing trend and the second against it. The further the second candle goes against the trend the more significant the pattern is. Candlesticks could have small or no shadows at all.

Psychology behind Piercing Patterns and Examples
In a downtrend or downside movement where buyers have control over the markets, a bullish piercing pattern indicates that buyers finally took total control over prices, they were attracted by the lower prices and pushed the market up near the highs of the day. This could signal a trend reversal, a correction or a consolidation period.
A bearish piercing pattern, or most commonly called dark cloud cover indicates that bears liked to sell on those higher prices, gaining temporary control. If the move is strong enough, bulls will close their longs making the price sell off. The close price of the second candle must be below the midpoint of the first candle body.
Bullish Piercing Patterns are signals to go long!
Bearish Piercing Patterns are signals to go short!
Bullish Piercing in Action
Bullish Engulfing Pattern


Hey, forget about the red box! We will get to that a few lines below. The bullish piercing pattern at the yellow box illustrates what the balance of supply and demand in this scenario: bears make a final push down, but bulls take command of the market pushing them up again.

What’s the red box?
It was the result of the Interest rate announcement from Canada. Consensus was no change but the Bank of Canada decided to cut .25%, it’s a 100 pip 5 min candlestick.
Bearish Piercing in Action
Bearish Piercing in Action


This is a valid bearish piercing pattern at the GBPUSD 30 min chart. Small shadows, first candle in direction of the movement and second candles against it. This pattern marks the end of the retracement. 

7- Morning Star & Evening Star
In the image below, morning and evening stars are represented by the last three candlesticks of each illustration.
Evening and Morning Star



Formation
Morning and evening stars are made from three candlesticks. The first candlestick is always in the direction of the trend or current direction, the second candlestick could be a black or white one while the third must be against the prevailing trend or direction. Usually candlesticks in these formations have small or no shadows at all.

Psychology behind Evening and Morning Stars and Examples
The morning star pattern begins with a long bearish candlestick or big sell off (in direction of the prevailing trend). At the second candle, the bears are not sure anymore about the downtrend continuing its path. At this point, the buyers feel a little stronger than before. Buyers take total control of prices on the next candle making the market rally. The closer the candlestick closes from the first candlestick open price, the stronger the pattern.
Evening stars begin with a long white candlestick in direction of the prevailing trend. At this point, the bulls are still confident about the uptrend. At the next candle though, the bears start selling attracted by the higher prices. This candle represents a short period of indecision or a fierce battle between bulls and bears. On the third candlestick, bears take total control of the situation making the price sell off. The larger the third candle is, the stronger the reversal.
Morning Stars are long signals.
Evening Stars are short signals.
Morning Star in Action
Morning Star


In this USDCHF 1 min chart we see two morning stars patters that finally capped the downside movements. The trend wasn’t reversed, at least there some support is found around those levels.
Evening Star in Action
Evening Star in Action


GBPJPY 1 min chart, the evening star at the beginning of the chart makes the market head down to reach lower levels. Bearish pressure is self evident: bears start selling and bulls take profits (sell back), this makes the market drop like a rock.

8- Harami Reversal Patterns
In the image below, Harami patters are represented by the last two candlesticks of each illustration.
Harami Pattern



Formation
Both, bearish and bullish harami are made from two candlesticks. The first one is always a large candlestick in direction of the trend or current move and the second one against the direction of the trend or current move. Candlesticks could have small or no shadow at all. The body of the second candlestick must be inside the body of the first one.
Although the size of the body of the second candlestick is smaller than the size of the first one, it should be “larger” than usual.

Psychology behind Bearish and Bullish Harami and Examples
In the bullish harami, bulls stop bear dominance and take temporary control over the market. The first candlestick of the bullish harami is the final push of bears while the second one means bears are feeling more confident about further upside movements.
In the bearish harami, bears step in after a high volume bull push. Prices are high enough to start opening their short positions. The closer the second candlestick closes to the open of the first one, the stronger the short sentiment.
Bullish Harami are long signals
Bearish Harami are short signals
Bullish Harami in Action
Bearish Harami in Action


As we have mentioned before, reversal patterns not only signal trend reversals, they also signal possible retracements and consolidation periods. In this case, the harami pattern signals a correction period. Now, take in consideration this is a weekly chart, from the top of the pattern to the bottom of the retracement there are around 500 pips.

Bearish Harami in Action
Bearish Harami in Action


In the USDCHF 4H chart above, a bearish harami pattern appears after the retracement. It could signal the end of the retracement; traders could resume their short positions.

Wednesday, December 4, 2013

Technical Analysis - Types of Forex Charts

Charts are prices, plotted over one specific timeframe. Vertical axes represent the price of one given instrument, while the horizontal axis represents the time horizon.
The most common types of charts used by technical analysts are:
  • Line chart
  • Bar chart
  • Candlestick chart

Line Chart
The line chart consists of dots connected by a line. These dots usually record the closing prices of currencies on one determined timeframe. 

Line Chart



The line charts are commonly used by traders whose main focus is to study only closing prices.

Bar Chart
The bar chart gives us more information regarding price at any given moment. It records the high, low, open and close price of one security during any given period.
Bar Chart




The high and the low are represented by the top (high) and the bottom (low) of the vertical line. The open price is represented by the short horizontal line on the left, while the close price is represented by the short horizontal line on the right

Bar Chart




On the chart above, every bar represents 30 minutes of price action. The top and bottom of each bar represent the highest and the lowest price of every period (30 minutes). The horizontal lines represent the open and the close of each 30 minutes bar

Candlestick Charts
Candlestick charts are very similar to the bar charts, they also record the open, close, high and low price of every period. The only difference is that candlesticks have a body on each bar.
Candlestick




Every “white” (or hollow) candlestick indicates that the price closed higher than where it opened. Thus the open price is the bottom of the body (not the whole candlestick), and the close price is the top of the body. In contrast, every black candlestick indicates that the price closed lower than where it opened. Thus the open price is the top of the body and the close price is at the bottom of the body.
The wicks above and below the body of the candlestick are called “shadows” or “wicks”, they represent the highest (upper wick) and the lowest (lower wick) price printed for each period. 

Candlestick Chart




Candlestick charting has become very popular for traders. The main reason for this is because it is easier to read and study the relationship of prices (and investor’s psychology) on this type of charting.
Later in our courses we will see more about candlesticks, we will learn what each one of them represent as well as other patterns that could help us make a better trading decision. We will get to that!