Candlesticks for currencies .II

PART II

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RECOGNISING THE REVERSAL SIGNALS

Throw a baseball straight up into air.As the ball approaches the top of its projectable path it will decelerate to a speed of zero, and then reverse downward picking up speed as it approaches the ground.

Now imagine yourself  drilling into a piece of wood.You suddenly hit a hard spot in the wood at which time bear down with all your might to overcome the temporary resistance created by the knot in the wood.When you penetrate the knot you surge forward and quickly poke through the other side.These are two analogies to help explain the patterns of currency pairs as they transition between one move and the next move.

When a currency pair is completing a move, it experiences a period of, deceleration, which is referred to by chartists as price consolidation.Consolidation is one of the most important signals that the currency pair is about to begin a new move.The move can be continuation in the same direction, or it can be a reversal  in the opposite direction.The area of consolidation represents a battle zone where the bears are at war with the bulls.The outcome of the battle often defines the direction of the next move.

As short term traders, it is important to identify these areas of consolidation and enter a trade just as the new move is beginning.During the consolidation period or 'battle zone', traders both long and short are patiently waiting on the sidelines watching to learn the outcome of the battle.As these winners emerge, there is often a scramble of traders jumping in with the winning team.

The candlestic patterns gives the trader excellent clues on when these move is about to take place, and helps the trader time his entry so that he can get in at the very beginning.

There are four different consolidation patterns experienced by currency pairs.

They are 1) Bearish continuation 2)Bullish continuation 3)Bearish Reversal  4) Bullish Reversal. 

1) The bearish continuation consolidation Pattern using candle stick charts.

Several strong bearish candlesticks precede the bearish continuation pattern where the bears are clearly in control.The bears and bulls then bigin to battle by pushing the currency pair up and down in price in a tightly formed consolidation zone.

 

 The narrowing size of the candlesticks toward a line of support indicates that the bears are winning the battle.The bulls finally weaken and allow the bears to penetrate the line of support, at which time the bears quickly conquer new territory by taking the currency pair to lower prices.   

By recognizing the consolidation pattern the trader is able to short the currency pair just after the currency pair breaks the line of support, and profit from the sharp move downward.

The cause of the sharp sell off is fueled by the emotions of the traders watching for the outcome of the battle.The traders who bought the currency pair in the area of consolidation in hope of a rally off of support, are now scrambling to exit their long positions.

Traders who are short from the period before the area of consolidation are realising that their original entries were correct and are adding to their winning positions.

2) The bullish continuation consolidation pattern using candlestick charts.

Several strong bullish candlesticks precede the Bullish Continuarion Consolidation Pattern where the bulls are clearly in control.The bears and bulls then begin to battle by pushing the currency pair up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line of resistance indicates that the bulls are winning the battle.The bears finally weaken and allow the bulls to penetrate the line of resistance, at which time the bulls quickly conquer new territory by taking the currency pair to higher prices.

By recognizing the consolidation pattern the trader is able to buy the currency pair just after the currency pair breaks the line of resistance, and profit from the sharp move upward.The cause of the sharp sell off is fueled by the emotions of the traders watching for the outcome of the battle.

Traders, who shorted the currency pair in the area of consolidation, are now scrambling to exit their losing positions.Traders who are long from the period before the area of consolidation are realizing that their original entries were correct and are adding to their winning positions.

3)The bearish reversal consolidation pattern using candlestick charts.

Several strong bullish candlesticks precedes the bearish reversal consolidation pattern where the  bulls are clearly in control.The bears and bulls then begin to battle by pushing the currency pair up and down in price in a tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line of support indicates that the bears are winning the battle.The bulls finally weaken and allow the bears to penetrate through the line of support, at which time the bears quickly conquer  new territory by taking the currency pair to lower prices.

By recognizing the consolidation pattern the trader is able to sell short the currency pair just after the currency pair breaks the line of support, and profit from the sharp spike downward.

Additional traders who jump into short the currency pair now that its weakness  has been confirmed fuel the sharp sell off.

Traders,who are currently long the currency pair in the area of consolidation waiting in hope of a break down, are now scrambling to sell their long positions.This selling action also fuels the fire pushing the currency pair to lower prices.

4)The bullish Reversal Consolidation Pattern using candlesticks chart.

Several strong bearish candlesticks precede the bullish reversal consolidation pattern where the bears are clearly in control.The bears and bulls then begin to battle by pushing the currency pair up and down in price in tightly formed consolidation zone.

The narrowing size of the candlesticks toward a line against upward resistance indicating that the bulls are winning territory from the bears.The bears finally weaken and allow the bulls to penetrate the line of resistance, at which time the bulls quickly conquer new territory by taking the currency pair to higher prices.

By recognizing the consolidation pattern the trader is able to buy the currency pair just after the currency pair breaks the line of resistance, and profit from the sharp move upward.

The cause of the rally is fueled by the emotions of the traders watching for the outcome of the battle.Additional traders who jump into buy the currency pair now that its strength has been confirmed fuel the sharp upward move.

Traders who are currently short the currency pair in the area of consolidation waiting in hope of a break down, are now scrambling to cover their short positions.

This buying action also fuels the fire pushing the currency pair to higher prices.

The concept of the line of least resistance.

The thing to determine is the speculative line  of least resistance at the moment of trading and a trader should wait for the moment and when the line defines itself, that is his signal to get in.In other words by crossing a support or resistance the line of least resistance is established.It would not be difficult to make money from currency trading ,if a trader always stick to his speculative guns, that is waited for the line of least resistance to define itself and begin buying or selling only in the direction of the least resistance.You have to wait for the real break outs or break downs from the trading ranges to establish a line of least resistance.

INCREASING THE ODDS

The best trading opportunities present themselves just after a break through in consolidation.Not every consolidation pattern ; however is tradable.There are some additional patterns which significantly increase the odds of the trade in the desired direction.

The tools which we present are  1) Support and Resitance 2) Trends 3)Moving averages.

1) Support and Resistance.

Support and resistance are general price areas that has halted the movement of a currency pair in the past.Support lines are horizontal lines that correspond with an area where the currency pair previously bounced.Resistance lines are horizontal lines corresponding with an area where currency pair resisted moving through.Support and Resistance lines are used to help access  how much the currency price will bounce before it is halted.

There are two main types of Support & Resistance        (1) Major Price Support and Resistance (2)Minor Price support and Resistance.

(1)Major Price Support and Resistance.

Major Price Support is an artificial horizontal line representing an area where a currency pair's  downward movement was halted to give way to a new upward movement.Therefore , the price level is supporting the price of the currency pair.

Similarly,major price resistance is an artificial horizontal line representing an area where a currency price's upward movement was halted to give way to a new downward movement.Therefore, the price level is resisting the price of the currency pair.

When considering a currency pair as a trading opportunity it is important to note the location of the nearest support and resistance levels.

Currency pair near areas of support make for better buy opportunities and currency pair near areas of resistance make for better short opportunities.

In the same way, the trader should be more cautious about shorting currency pair above areas of support and buying currency pair near areas of resistance.

(2) Minor price support and resistance.

Minor support is an artificial horizontal line representing an area, which previously served as price resistance, but has now transformed to price support.Likewise minor price resistance is an artificial horizontal line representing an area, which previously served as price support , and has now transformed to price resistance.

When considering a currency pair as a trading opportunity it is important to note the location of the nearest support and resistance levels. Currency pair near areas of support make for better buy opportunities and currency pair near areas of resistance make for better short opportunities.

In the same way trader should be more cautious about shorting currency pair above area of support, and buying currency pair near areas of resistance.

This change of polarity Principle is an underutilized gem .Do not let the simplicity of the rule fool you.It works especially well when welded with candlestick patterns.

SPRINGS AND UPTHRUST

Most of the time , the markets are not in a trending mode but rather in a lateral range.On such occations, the market is in a relative state of harmony with neither the bulls nor the bears in charge.When markets are in this state of "WA", they will trade in a quiet , horizontal band.At times however the bears or bulls may assault a prior high or low level.

Trading opportunities can arise in these occations. Specefically if there is an unsustained break out from either a support or resistance level, it can present an attractive trading opportunity.In such a scenario there is a strong probability  there will be return to the opposite side of the congestion band.This type of false break out is called upthrust.If the upthrust coincides with a bearish candlestick pattern it is an appealing opportunity to short.

The opposite of an upthrust is the 'spring'.The spring develops when prices break through a prior low.Then prices spring back above the broken support area.In other words new lows could not hold.Buy if prices push back above the old lows.The objective would be for a retest of the congestion zones upperband .The stop would be under the lows made on the day of the spring.

Trading upthrusts and springs is so effective because they provide a clear target(the opposite end of the trading range) and protective stop(the new high or low made with the false break out).Upthrusts and springs work very well with candlestick patterns.

2)TRENDS

Every currency pair is in one of the three states. (1). Up trend (2) Down trend (3) and sideways trend.

An up trend is defined by a series of higher highs and higher lows. A down trend is defined by a series of lower highs followed by lower lows. A sideways trend is defined by a series of relatively equal highs and lows.

Even the strongest currency pair will need a period of rest through a pull back in price or a period of marking time with little to no price movement.A strong currency pair will pull back in price as short to medium term traders take their profits off the table, and in the process, increase selling pressure, which will temporarily push the currency pair lower.

A strong currency pair, after rest will often resume its rally after these slight pull backs.The trader has better odds in his favor by playing the currency pair in the direction of the trend.For eg. the currency pair in an uptrend can be bought, and a currency pair in a down trend can be shorted.A currency pair in a sideways pattern can be either bought or shorted if the currency pair is on strong price support or resistance.

In otherwise, the trader should enter long positions only on uptrending currency pairs that have pulled back for rest  ready to resume the rally.

Likewise, the trader should enter short positions on down trending currency pairs the have pulled back for rest ready to resume the decline.

3) Moving Averages

The most basic for of moving average, and the one we recommend to all our traders is called the simple moving average.The simple moving average is the average of  closing prices for all price points used.The term 'moving' is used because, as the newest data point is added to the moving average, the oldest data point is dropped.

As a result the average is always moving as the newest data is added.Moving averages can be used as support and resistance levels.The currency pairs tend to rebound off moving averages in the same way as they rebound off major and minor support and resistance lines.

A moving average can be plotted using any period; however, the period that seems to provide strongest support and resistance  for short term trading are 10,20,50,100 and 200 MA's.


Candle stick chart Time Frames.

One beautiful attribute of a candle stick line is that the same analysis can be applied to multiple time frames.The time frame of a candle stick line is the time duration between the candle stick's opening price and closing price.For example , a daily candle stick chart would consist of candle stick lines with opening prices corresponding with the day's opening prices and closing prices corresponding with the day's closing price.

A five minute candle stick chart would have candle stick lines  with time duration of five minutes between each candle stick's opening price and closing price.

Most good computer charting software allows easy conversion from one time frame to the next.

Dissecting a candle stick.

Changing time frames when viewing candle stick patterns is a useful tool when looking for patterns leading up to good trading opportunities.For example , consider the bullish harami pattern that is manifested on the daily time frame chart.

The same currency pair plotted on a 15 minutes time frame chart shows that the currency pair is actually setting up for a bullish reversal consolidation pattern .

Using the daily chart and the 15 minutes chart together make it easier to find possible trade opportunities.For example , the trader can scan for harami set ups on the daily chart , and then pull up a 15 minutes chart to confirm the currency pair is experiencing a consolidation pattern preparing for a break out.