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Develop Your Forex Strategy: Every Candle Tells A Story
Your forex strategy will be greatly enhanced by a thorough understanding of candlesticks.
Used by Japanese traders for centuries, the Western world has only recently (since around 1991) become aware of their value due to the work of Steve Nison.
Candlestick charts are now the preferred medium for probably the majority of traders due to their visual impact. Like bar charts, candlestick charts are based on four main pieces of information relating to the timeframe of the chart (15 minute, 1 hour, 4 hour, daily, etc.) - the open and close prices for the timeframe, plus the high and low points during that period.
However, by representing this information graphically, in the shape of a candle, the trader is able to absorb a glut of information about a single trading period with just a glance.
So learn to read candles well - your forex strategy will be more solid as a result.
What you can read from a single candlestick?
Certainly not enough to base a trade upon. However, a distinctive single candlestick in conjunction with other indicators can be very significant.
When reading candlesticks it helps to think of the battle constantly going on in the market place between the bulls and the bears. A candlestick will tell you how the battle went during any given period.
Take for example a candlestick on the hourly chart which has a long solid body and very small shadows if any. If the color of the candle is green, or whatever color your charting package uses when a candle closes higher than when it opened, it means either the bulls are in firm control or there was little or no interest from sellers.
If the candle is red, or whatever color your charting package uses when a candle closes lower than when it opened, it means either the bears are in firm control, or there is little or no interest from buyers.
If the
solid body of the candle is small but there is a long upper shadow and a long lower shadow, it means during that 1 hour period, the bears took the trade to the lowest point, the bulls took the price to the highest point, but neither could maintain the position so the end of the period is close to where it was at the beginning.
Get a series of those candles and the market is obviously in an indecisive state, or reconciled to trading within a range for the foreseeable future, until a further stimulus comes along, such as a fundamental announcement, to cause price to break out of the channel.
Candles come in all shapes and sizes with very distinctive names such as spinning tops, doji, hammers, etc.
Learning to read candles in conjunction with understanding other technicals such as pivot points and support/resistance lines, Fibonacci retracements and trendlines can add real power to your forex strategy.
Remember, when browsing your charts, every candle tells a story. It`s up to you to decipher and interpret the significance.
Michael A. Jones is a writer and webmaster with over 10 years experience who also trades the forex regularly. For illustrated examples of how to read candlesticks go to this page:
http://www.vitalstop.com/Forex/forex-strategy-read-candles.html
Click here for his advice for absolute beginners:
http://www.vitalstop.com/Forex/learn-to-trade-the-forex.html
Michael has also put together a list of key free resources which he finds invaluable:
http://www.vitalstop.com/Forex/forex-directory-free-resources.html
Written By: Michael A. Jones
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