Japnanese Candlestick

What is a Japanese Candlestick?

While we briefly covered candlestick charting analysis in the previous lesson, we'll now dig in a little and discuss them more in detail. Let's do a quick review first.

What is Candlestick Trading?

Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. That's right, rice.
A westerner by the name of Steve Nison "discovered" this secret technique called "Japanese candlesticks", learning it from a fellow Japanese broker. Steve researched, studied, lived, breathed, ate candlesticks, and began to write about it. Slowly, this secret technique grew in popularity in the 90s. To make a long story short, without Steve Nison, candlestick charts might have remained a buried secret. Steve Nison is Mr. Candlestick.

Okay, so what the heck are forex candlesticks?

The best way to explain is by using a picture:

Candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes - whatever you want! Candlesticks are used to describe the price action during the given time frame.
Candlesticks are formed using the open, high, low, and close of the chosen time period.

• If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
• If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
• The hollow or filled section of the candlestick is called the "real body" or body.
• The thin lines poking above and below the body display the high/low range and are called shadows.
• The top of the upper shadow is the "high".
• The bottom of the lower shadow is the "low".

Summary: Support and Resistance

When the market moves up and then pulls back, the highest point reached before it pulls back is now resistance.
As the market continues up again, the lowest point reached before it climbs back is now support.
One thing to remember is that horizontal support and resistance levels are not exact numbers.
To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers.
One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart.
Another thing to remember is that when price passes through a resistance level, that resistance could potentially become support. The same could also happen with a support level. If a support level is broken, it could potentially become a resistance level.

Trend Lines

In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks). There are three types of trends:

1. Uptrend (higher lows)
2. Downtrend (lower highs)
3. Sideways trends (ranging)

Channels

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley.

1. Ascending channel (higher highs and higher lows)
2. Descending channel (lower highers and lower lows)
3. Horizontal channel (ranging)

Trading support and resistance levels can be divided into two methods: the bounce and the break.
When trading the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. Instead of simply buying or selling right off the bat, wait for it to bounce first before entering. By doing this, you avoid those moments where price moves so fast that it slices through support and resistance levels like a knife slicing through warm butter.
As for trading the break, there is the aggressive way and there is the conservative way. In the aggressive way, you simply buy or sell whenever the price passes through a support or resistance zone with ease. In the conservative way, you wait for price to make a "pullback" to the broken support or resistance level and enter after price bounces.

Trading the Lines

Now that you know the basics, it's time to apply these basic but extremely useful technical tools in your trading. Because here at BabyPips.com we want to make things easy to understand, we have divided trading support and resistance levels into two simple ideas: the Bounce and the Break.

The Bounce

As the name suggests, one method of trading support and resistance levels is right after the bounce.
Many retail traders make the error of setting their orders directly on support and resistance levels and then just waiting to for their trade to materialize. Sure, this may work at times but this kind of trading method assumes that a support or resistance level will hold without price actually getting there yet.
You might be thinking, "Why don't I just set an entry order right on the line? That way, I am assured the best possible price."
When playing the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. Instead of simply buying or selling right off the bat, wait for it to bounce first before entering. By doing this, you avoid those moments where price moves fast and break through support and resistance levels. From experience, catching a falling knife can get really bloody...

The Break

In a perfect world, support and resistance levels would hold forever, McDonalds would be healthy, and we'd all have jetpacks. In a perfect trading world, we could just jump in and out whenever price hits those major support and resistance levels and earn loads of money. The fact of the matter is that these levels break... often.
So, it's not enough to just play bounces. You should also know what to do whenever support and resistance levels give way! There are two ways to play breaks: the aggressive way or the conservative way.

The Aggressive Way

The simplest way to play breakouts is to buy or sell whenever price passes convincingly through a support or resistance zone. The key word here is convincingly because we only want to enter when price passes through a significant support or resistance level with ease.
We want the support or resistance area to act as if it just received a Chuck Norris karate chop: We want it to wilt over in pain as price breaks right through it.

The Conservative Way

Imagine this hypothetical situation: you decided to go long EUR/USD hoping it would rise after bouncing from a support level. Soon after, support breaks and you are now holding on to a losing position, with your account balance slowly falling.
Do you...

1. Accept defeat, get the heck out, and liquidate your position?
OR
2. Hold on to your trade and hope price rises up again?

If your choice is the second one, then you will easily understand this type of trading method. Remember, whenever you close out a position, you take the opposite side of the trade. Closing your EUR/USD long trade at or near breakeven means you will have to short the EUR/USD by the same amount. Now, if enough selling and liquidiation of losing postions happen at the broken support level, price will reverse and start falling again. This phenomenon is the main reason why broken support levels become resistance whenever they break.
As you would've guessed, taking advantage of this phenomenon is all about being patient. Instead of entering right on the break, you wait for price to make a "pullback" to the broken support or resistance level and enter after the price bounces.

A few words of caution... THIS DOES NOT HAPPEN ALL THE TIME. "RETESTS" OF BROKEN SUPPORT AND RESISTANCE LEVELS DO NOT HAPPEN ALL THE TIME. THERE WILL BE TIMES THAT PRICE WILL JUST MOVE IN ONE DIRECTION AND LEAVE YOU BEHIND. BECAUSE OF THIS, ALWAYS USE STOP LOSS ORDERS AND NEVER EVER HOLD ON TO A TRADE JUST BECAUSE OF HOPE.
Whoops, sorry about that folks, the caps lock key got stuck.

Read more: http://www.babypips.com/school/trading-the-lines.html#ixzz1V27tfwSp

Channels

If we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel. No, we're not talking about ESPN, ABC, or Cartoon Network.
Still, this doesn't mean that you should walk away like it's a commercial break- channels can be just as exciting to watch as America's Next Top Model or Entourage!
Channels are just another tool in technical analysis which can be used to determine good places to buy or sell. Both the tops and bottoms of channels represent potential areas of support or resistance.

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.
To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.
When prices hit the bottom trend line, this may be used as a buying area. When prices hit the upper trend line, this may be used as a selling area.

Types of channels

There are three types of channels:

1. Ascending channel (higher highs and higher lows)
2. Descending channel (lower highers and lower lows)
3. Horizontal channel (ranging)

Important things to remember about trend lines:

• When constructing a channel, both trend lines must be parallel to each other.
• Generally, the bottom of channel is considered a buy zone while the top of channel is considered a sell zone.
• Like in drawing trend lines, DO NOT EVER force the price to the channels that you draw! A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at another is not correct and could lead to bad trades.

Read more: http://www.babypips.com/school/channels.html#ixzz1Ul9M41Km

Trend Lines

Trend lines are probably the most common form of technical analysis. They are probably one of the most underutilized ones as well.
If drawn correctly, they can be as accurate as any other method. Unfortunately, most traders don't draw them correctly or try to make the line fit the market instead of the other way around.
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

How do you draw trend lines?

To draw trend lines properly, all you have to do is locate two major tops or bottoms and connect them.
What's next?
Nothing.
Uhh, is that it?
Yep, it's that simple.
Here are trend lines in action! Look at those waves!

Types of Trends

There are three types of trends:

1. Uptrend (higher lows)
2. Downtrend (lower highs)
3. Sideways trends (ranging)

Here are some important things to remember about trend lines:

• It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.
• The STEEPER the trend line you draw, the less reliable it is going to be and the more likely it will break.
• Like horizontal support and resistance levels, trend lines become stronger the more times they are tested.
• And most importantly, DO NOT EVER draw trend lines by forcing them to fit the market. If they do not fit right, then that trend line isn't a valid one!

Read more: http://www.babypips.com/school/trend-lines.html#ixzz1US14gSkz

Support and Resistance

Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.
Let's take a look at the basics first.

Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.
As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse is true for the downtrend.

Plotting Support and Resistance

One thing to remember is that support and resistance levels are not exact numbers.
Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it. With candlestick charts, these "tests" of support and resistance are usually represented by the candlestick shadows.

Notice how the shadows of the candles tested the 1.4700 support level. At those times it seemed like the market was "breaking" support. In hindsight we can see that the market was merely testing that level.

So how do we truly know if support and resistance was broken?

There is no definite answer to this question. Some argue that a support or resistance level is broken if the market can actually close past that level. However, you will find that this is not always the case.
Let's take our same example from above and see what happened when the price actually closed past the 1.4700 support level.

In this case, price had closed below the 1.4700 support level but ended up rising back up above it.
If you had believed that this was a real breakout and sold this pair, you would've been seriously hurtin'!
Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger.
To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers.
One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.
These highs and lows can be misleading because often times they are just the "knee-jerk" reactions of the market. It's like when someone is doing something really strange, but when asked about it, he or she simply replies, "Sorry, it's just a reflex."
When plotting support and resistance, you don't want the reflexes of the market. You only want to plot its intentional movements.
Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.

Other interesting tidbits about support and resistance:

• When the price passes through resistance, that resistance could potentially become support.
• The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
• When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.

With a little practice, you'll be able to spot potential support and resistance areas easily. In the next lesson, we'll teach you how to trade diagonal support and resistance lines, otherwise known as trend lines.

Read more: http://www.babypips.com/school/support-and-resistance.html#ixzz1U09FmMiF

Types of Charts

Let's take a look at the three most popular types of charts:

1. Line chart
2. Bar chart
3. Candlestick chart

Now, we'll explain each of the charts, and let you know what you should know about each of them.

Line Charts

A simple line chart draws a line from one closing price to the next closing price. When strung together with a line, we can see the general price movement of a currency pair over a period of time.
Here is an example of a line chart for EUR/USD:

Bar Charts

A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.
The vertical bar itself indicates the currency pair's trading range as a whole.
The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.
Here is an example of a bar chart for EUR/USD:


Take note, throughout our lessons, you will see the word "bar" in reference to a single piece of data on a chart.
A bar is simply one segment of time, whether it is one day, one week, or one hour. When you see the word 'bar' going forward, be sure to understand what time frame it is referencing.
Bar charts are also called "OHLC" charts, because they indicate the Open, the High, the Low, and the Close for that particular currency. Here's an example of a price bar:

Open: The little horizontal line on the left is the opening price
High: The top of the vertical line defines the highest price of the time period
Low: The bottom of the vertical line defines the lowest price of the time period
Close: The little horizontal line on the right is the closing price

Candlesticks Charts

Candlestick chart show the same information as a bar chart, but in a prettier, graphic format.
Candlestick bars still indicate the high-to-low range with a vertical line.
However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. Traditionally, if the block in the middle is filled or colored in, then the currency closed lower than it opened.
In the following example, the 'filled color' is black. For our 'filled' blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be "white" or hollow or unfilled.

Here at BabyPips.com, we don't like to use the traditional black and white candlesticks. They just look so unappealing. And since we spend so much time looking at charts, we feel it's easier to look at a chart that's colored.
A color television is much better than a black and white television, so why not splash some color in those candlestick charts?
We simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green.
If the price closed lower than it opened, the candlestick would be red.
In our later lessons, you will see how using green and red candles will allow you to "see" things on the charts much faster, such as uptrend/downtrends and possible reversal points.
For now, just remember that we use red and green candlesticks instead of black and white and we will be using these colors from now on.
Check out these candlesticks...BabyPips.com style! Awww yeeaaah! You know you like that!

Here is an example of a candlestick chart for EUR/USD. Isn't it pretty?


The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:

• Candlesticks are easy to interpret, and are a good place for beginners to start figuring out chart analysis.
• Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help in studying, it might help with trading as well!
• Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
• Candlesticks are good at identifying marketing turning points - reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later.

Now that you know why candlesticks are so cool, it's time to let you know that we will be using candlestick charts for most, if not all of chart examples on this site.

Read more: http://www.babypips.com/school/types-of-charts.html#ixzz1ToGyahyl