Long candles happen as result of a number of market situations that develop during any trading period. We will be looking at these in more detail later on. Long candles are generally a result of a big push coming from many BULL or BEAR orders entering the market. These orders normally enter the market when high volatility and activity develops as they need liquidity in the market.
It therefore makes sense to study the currencies to see when their the biggest trading activity occurs. This trading activity is what drives the price movement. Most charting systems show volumes. Below is an example of how volumes are shown by the MetaTrader4 platform (The green bars below).
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You see that most long candles occur on high or increasing volume and that is why you need to know when high volumes normally occur. I regard volume as a leading indicator because of this. High volumes naturally occur at the start and while the major markets are open. The 3 major markets impact currencies different ways. Have a look at the graphs on the next page.
These graphs show the % that a currency is traded over a 24 hour period. This information was obtained by analysing the 2008 trading volumes on the hourly charts of the above currencies. The horizontal axis reflects the time in GMT and shows the impact of the Australian, Asian, European and US market opening on the volumes traded in each particular currency.
For the latest profiles and volatility of all currencies please click on this link.
VOLATILITY CHARTS
Currency 24 hour trading profiles
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Observations one can make from the above:
The CAD has the most concentrated level of trading when the US morning market is open with an initial jump when the European market opens. One would therefore expect the longest candles to occur just before or during these times.
The EUR has peaks at the opening of a 3 major markets and is more balanced
The GBP has its biggest peak at the start of the European market. This creates some great BIG BEN type trades in this currency.
In general the biggest jump occurs at the opening of the European market.
A look at the CAD charts confirms that those are the hours when long candle can best be traded using when trading the CAD.
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As seen before, the USDJPY gives good examples of BIG bulls protecting the price of going any lower. The bull orders eventually reversed the trend. These interventions can happen at any time. The increase volumes are definite clues but a study of support and resistance will also give signals about possible bounce opportunities. These activities also obviously impact the prices of the EURJPY and GBPJPY adding to the volatility of these already volatile crosses.
image
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Volume as a transaction confirmation signal
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This chart is a bit busy and illustrates a number of areas we will cover in this course.
The MAIN POINT of this chart is to show you the importance of volume for successful and quick transactions. The actual transactions are shown on the indicator below the chart.
The GREEN transactions were the ones that were entered into on good volume and a price trend break. These resulted in a long candle with a short time. Bear in mind that this is a 30 minute chart.
The RED ones are transactions entered into using good trading signals but because there was no volume pushing these transactions they either took a very long time to move or were unsuccessful.
The volume levels are the green bars at the bottom of the price chart.
I never used to pay any attention to volume signals when trading the forex. This
was mainly due to fact that very few charting systems have good volume
information. I also regard volume as a lagging indicator or information when used
on any other chart other than
the 1 minute chart.
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In my travels I was lucky enough to spend some time with a number of corporate traders. One trader stood out as being unusual. As we discussed trading I was quite surprised to hear that he did not use charts to place his deals. Most of his trading revolved around reading the price action. He was lucky enough to have high level information regarding the order flow into the market. His technique was very simple. He watched for a slow low volume trend to start. He knew that there were large players in the market watching exactly the same information. He knew that large players could impact the market with the size of their orders. He would wait until he saw a big increase in against the trend orders. He would then climb in by placing orders against the trend and invariably the prices would make a correction and he will be in and out of the market in a flash scalping a good number of pips in the process.
This trade illustrates the concept of using increased volume as a SIGNAL that a bounce can be expected.
This trade is an example of some to the concepts we will cover later on in the course. A trendline violation triggered the entry. Supporting signals:- Increased volume, Momentum divergence, Momentum trendline violation – entry and exit. If you add the bottom 5 candles together you get a spike which is a powerful reversal formation. Momentum making 2 or more waves made a good entry and exit signal.
There are 3 opportunities that online traders could benefit by using basic volume information.
ONE: The one was to use the increased volume as a trading trigger to do quickly against the trend trades.
TWO: The other was to use the increased volume as a reversal confirmation signal giving weight to bounce transactions which we will look at later on in the course.
THREE: In general indicators and even straight line violations will not produce the same results when the signals are traded, as when there are low volumes in the market. That is why it is important to get to know when each currency is most volatile and will produce the most reliable trading signals.
The Table below shows the size of the average candle for various currencies. This also will give you an idea of the relative volatility of the currencies. Please bear in mind these are averages and the values can change depending on current market conditions
table
The charts below show the ranges achieved by various currencies since 2000. Although this is not the ideal measurement this also gives more information regarding the volatility of currencies.
Relative volatility of currencies as viewed as the range trades since 2000
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Learning Points:
Enter the market when the volumes are high and trading signals are more reliable.
The morning sessions of the European and US market are times where long candles occur
The more volatile currencies produce the biggest long candles
When the market is already trending increased volumes can signal a reversal of trend
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