PRICE CHARTS AND PATTERNS
Traders use price charts to track and identify real-time pricing trends.
PRICE CHART STYLES
Price charts represent price action of a trading asset for analysis and decision making and come in many different forms.
LINE GRAPH
A line showing the ask price, bid price or average.
CANDLESTICKS
Candlesticks show the open, close, maximum, and minimum values for each period.
OPEN-HIGH-LOW-CLOSE BAR
The OHLC is similar to the HLC bar. In addition to showing highs and lows for each period and a tick for the closing price, it also provides a horizontal tick to the left, showing the opening mid-price for the period.
HEIKIN-ASHI CHART
Meaning “average bar” in Japanese, this is a modified candlestick chart where the open-high-low-close (OHLC) values take the previous period into account to better isolate trends.
INTERPRETING CANDLESTICK FORMATIONS
Candlesticks can pack more information into a single view than any other form of price chart. For this reason, they remain a perennial favourite with many traders. Candlesticks are similar to bar charts and provide opening and closing values, current direction trends, and the high and low price for each reporting period.
The body length of the candlestick shows the relative change in the open and close rates for the reporting period – the longer the body, the more volatile the swing between the open and close rates. Also, the colour of the candlestick body provides key information about the directional trend.
- A hollow candlestick means that the bottom of the body represents the opening rate, while the top shows the closing price, indicating a rising trend.
- A filled candlestick, on the other hand, shows the opening rate at the top of the body and the closing rate at the bottom, and points to a decreasing trend.
HAMMER AND HANGING MAN
Both these patterns have long lower shadows, but very small bodies and a very small or no upper shadow. They both suggest price uncertainty — look for confirmation that a price reversal is imminent before acting. A hammer occurs If the pattern appears at the bottom of a downtrend (hollow body). When it appears at the top of an uptrend (filled body), it is known as a hanging man.
SHOOTING STAR
A shooting star is a strong signal that a price run-up is about to come to a crashing halt. This is the pattern you should be on the look-out for after a prolonged price increase, and is capped by a candlestick with a small solid body. This “shooting star” clearly shows the market is pausing to reflect on the current price run-up.
SPINNING TOPS
Spinning tops consist of candlesticks with a small body that can be either hollow or filled. The small bodies indicate that for the reporting period there has been very little difference between the opening and closing prices. Thus, spinning tops are seen as a sign of indecision pointing to the increased likelihood of a market reversal.
MORNING STAR
The morning star indicates that the price has reached a support level after a declining market. It appears as a small hollow-bodied candlestick that follows a declining, filled candlestick marking a turning point in the price. A third candlestick showing a dramatic price increase confirms it.
TRADING DOJI SIGNALS
ORIGINS OF THE DOJI
Rice traders – in particular the legendary Munehisa Homma – are credited with developing candlestick trading research in 17th century Japan, where the world’s first futures trading exchange was set up. In the modern era, trading candles and candlestick patterns have become an integral component of technical analysis the world over.
The doji is one of the most useful candlestick patterns found in financial trading and is especially significant because it can signal indecision in the market. It is characteristically short, reflecting a small trading range, with a virtually equal opening and closing price.
It is more important to understand the narrative the candles are telling us, than to remember the names of every shape. The key importance of the doji is in its location, because this is where it comes into its own as a key indicator of trend analysis. Non- trending markets generally reflect indecision on the part of buyers and sellers. When a doji is formed at a point where the market is over-extended, it can indicate a pullback is imminent, or vice versa. And a doji forming in the Moving Averages as a trend is developing could spark the next movement. The doji position is crucial. Note though, that traders need to look at other technical indicators to use the doji most effectively.
DOJI
The doji is one of the most useful candlestick patterns found in financial trading and is especially significant because it can signal indecision in the market. It is characteristically short, reflecting a small trading range, with a virtually equal opening and closing price.
The location of a doji within a trend can be an important signal of a trend’s momentum.
DOJI PATTERNS
The obvious identifier of a doji pattern is that it has a very narrow body, reflecting the fact that the asset’s opening and closing prices are identical or very nearly so. It can indicate neutrality and can signal a reversal in buying momentum when it is gapped above a previous bullish candle. Alternatively, when it occurs lower than a bearish candle, it can signal a reversal of a downward trend is imminent. Doji bodies reflect the range between the opening and closing price for the period, while their shadows represent the range outside of the opening and closing prices.
LONG-LEGGED
The long-legged doji reflects considerable indecision about the asset’s future direction. Price tends to whipsaw up and down during the period but ends up with a neutral close in the centre of the range.
NEUTRAL
As noted, on their own doji are neutral patterns that form when the opening and closing prices are virtually equal.
GRAVESTONE
This is a bearish pattern which is formed when the opening and closing prices of the asset are equal and occur at or near the low of the period. The long upper shadow tends to indicate a major turning point may be near.
DRAGONFLY
The dragonfly, a bullish doji, created when the asset’s opening and closing price are equal and occur at or near the high of the period, with supply and demand nearing equilibrium. In this case, the long lower shadow tends to suggest the trend may be nearing a major turning point.
TRADING STRATEGIES
Doji candlesticks should always be taken note of, but they do not always mean a reversal is coming. So, it is imperative that traders utilize other indicators to confirm whether or not the market has in fact been trending. A clear trend preceding the formation of the doji makes it more likely the market has reached a top or bottom.
Traders should always deepen their understanding of what the market is doing, and some possible momentum indicators such as the moving average convergence divergence (MACD), average directional index (ADX) or stochastic oscillators can be useful to clarify the strength of a trend and signal the likelihood of a change in price direction. They should also take into account whether the price is nearing a major support or resistance level by using Fibonacci, support and resistance, or pivot point indicators.
A key difference between experienced and less experienced traders is that the professionals are usually jumping out of a market as the less experienced are jumping in. Less experienced traders tend to move into a market as it is reaching the end of a run. The seasoned pro trader often has developed robust strategies that are then used to avoid making rash decisions based on just one or two technical reasons defining a trade opportunity.
One such robust strategy, with the doji at its core, is detailed below:
- Price should be in a sustained move, whether this is up or down will define the direction of the trade strategy.
- The market should be over- extended – meaning it has moved for too long in one direction and that a pullback could be imminent.
- A doji then needs to form at a price structure. A price structure could be a well-defined support or resistance level or a large psychological number – a good example of which would be parity on EUR/USD.
- Following the formation of a doji at the price structure, look for the trade opportunity in the opposite direction to the overall price trend on a lower time frame. For example, if a doji forms on a Daily chart, there may be an option to explore a counter trend on a lower Two or Four-hour chart.
Remember that in the context of a doji forming, small does not refer to a specific size, but rather to its size comparative to the candles around it. And this can only be confirmed by a visual examination of the relevant chart. For general analytical purposes, a small candle is one of average or below average size, but definitely not big. It is a valuable pointer to future market direction.
Following the daily Gravestone Doji, the following day offers a shorting opportunity on the two-hour timeframe using a resistance and Fibonacci level.
IDENTIFYING TRENDS
Trend analysis can be one of the most important tools in a trader’s tool kit. Without a clear understanding of price action trend analysis, other technical indicators can be difficult to apply.
Price rarely moves in a straight line, instead prices move in waves or cycles known as trends.
Financial markets move due to supply (sellers) and demand (buyers).
An overwhelming supply will usually result in a drop in price. Conversely, an increased demand will usually result in an increased price.
Directional trend lines, also known as uptrends and downtrends, are used by some traders to highlight an overall market direction for a currency pair. In the example above, you can see that the price has fluctuated somewhat, but overall the price is up over the past twenty-four hours.HOW TO DRAW TREND LINES
GRANULARITY
Granularity refers to the length of time for each reporting period in the chart.
In this Min/Max example, granularity is set to 1 minute. This means that at each data point, or tick, the price chart displays the pricing information for the previous period of 1 munite.
It is important to select the granularity that best matches your overall trading style. Generally, the shorter the length of time you tend to hold open positions, the shorter you should set the time intervals for your price chart.
SUPPORT AND RESISTANCE LINES
A support trend line connects the lowest price points for a currency pair and shows the recent levels to which the rate dropped before bottoming out and rebounding. This is the point at which the market supports the price.
A resistance trend line connects the highest prices a currency pair reached before falling back to lower levels. This is the point at which the market resists moving the price higher.
A trend is present on a minimum of two timeframes
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