Forex traders use a multitude of different strategies to attempt to get an upper hand on the markets. To achieve this forex trader may utilize both fundamental as well as technical analysis/charts and indicator tools to help increase their odds of succeeding. Forex traders have relied on technical analysis for years and there are numerous different technical tools offered by forex brokers to utilize to help them get a leg up on the competition. In addition, it is important for traders to research and fully understand technical analysis prior to utilizing this tool. There are numerous articles as well as programs which can help forex traders understand and capitalize on charting.
When a trader is reviewing different technical charts that are available through their broker, they should be aware of how to utilize these charts to convert winning trading strategies. There are specific terms used in the forex trading industry to describe the use of technical trading which should not scare off those traders who are looking at multiple avenues to obtain better trading positions. The term ‘paralysis by analysis’ is thrown around quite frequently to describe what happens to a trader who becomes overwhelmed by the overload of technical information while looking at their monitor.
Again, there are numerous technical indicators that the trader may use to make better trading decisions. One of the most popular technical chart types are candlestick charts which gains its origin from Japan during the eighteenth century.
When utilizing candlestick, the charts indicate similar information that a bar chart would represent but visually represent a more graphical format that is more detailed and is more attuned to price action. When utilizing a candlestick chart the forex trader can see through the chart the supply and demand that is being represented to better understand the pull between the bulls and bears.
What is the anatomy of a candle? Candlesticks take into consideration the price distance between the opening bell and the close. The distance between the price at the open and the high for the period is defined as the upper shadow which is also known as the upper wick. The price paid at the pinnacle for a specified period is typically marked by the high of the upper shadow. The distance between the price at the close and the low for the period defined is considered the lower shadow and is sometimes referred to as the lower wick.
When reviewing Japanese long white candlesticks the forex trader will typically notice strong buying pressure. Usually, the longer the white candlestick means the greater the period within the trading session is between the closing above the open. What this means is that prices have increased a great deal from the beginning of the session to the close of the session and buyers were somewhat aggressive. When viewing long black candlesticks this represents a great deal of selling pressure. Most of the time the longer the black candlestick represents the further the close of the session is below the open. What this indicates is that pricing has taken a nose dive from the open and sellers are more likely than not to have been aggressive.
Shadows associated to Japanese candlesticks reveal crucial clues about the trading session. What this mean is that upper shadows represent the session peak while lower shadows represent the session low.
There are several different names associated to Japanese candlestick patterns. Some of these pattern names are Spinning Tops, Marubozu, White Marubozu, Black Marubozu and Doji Candlesticks. Spinning tops are those candlestick patterns which have a long upper shadow along with a long lower shadow. The Spinning Tops represents the indecision between buyers and sellers. It is important to note that if a spinning top happens to form during a market uptrend, this is an indicator that there is not a good deal of buyers left and that there could be a reversal in direction. Also, if a spinning top happens to form during a market downtrend, this is an indicator that there is not a good deal of sellers remaining and a reversal in direction is possible.
Marubozu means that there are zero shadows formed from the bodies of the candlestick. There are two types of Marubozu which consist of White Marubozu and Black Marubozu. A White Marubozu consists of a long white body with zero shadows. Usually, the open price is equivalent to the lower price and the close price is equivalent to the highest price. The Black Marubozu typically contains a long black body with zero shadows. The Black Marubozu is considered a bearish candle and means that there could be bearish continuation and or a bearish reversal.
The Doji Candlesticks typically have identical open along with close price and their bodies are usually very short. The form of the doji has a small body that appears as a thin line. What the Doji candle represents is trading indecision or a struggle between buyers along with sellers. Prices will move above as well as below the open price during the market session but will close at or near the open price.
In closing, the forex trader has many weapons they may utilize to increase their arsenal for trading strategies. The trader should educate themselves to better understand the practice of utilizing technical analysis and the different types of charts which are available to help them in their trading. Candlestick charts provide a clearer picture of price action than what a trader might normnally see from standard bar charts.