candle stick 2 - spike and reversal

Candlestick II: Spikes Days

Apart from the popular patterns described in the previous articles, there are other patterns that are indicative of the market's psychology that are worth to take a look.
A spike high is a period whose high is sharply above both the high of the previous period as well as the high of the following period. Conversely, a spike low is a day whose low price is sharply below both the low of the following period as well as the low of the previous period. Spikes can often signal reversals of the most recent trends and they can often look similar to hammers and hanging man.
The greater the spike is - meaning the larger the difference between the high/low on the spike and the high/low on the periods before and after the spike - the greater its significance. Also, a spike high's significance also increases when the market is trending upwards, while a spike low's significance increases when the market is trending downwards.
The charts below illustrate how spike highs and lows can be identified, and what they can signal for traders who choose to incorporate them into their trading arsenal.

 Reversal Days

A reversal high day is a day in which the high price reaches a level higher than the previous high, and then reverses to close below the previous close. Like spike days, a reversal high day's mirror image is a reversal low day, in which the market sets a new low before reversing to close above the previous close. Also like spike days, the significance of reversal days increases when there is a preceding up trend (for reversal high days) or a preceding downtrend (for reversal low days).
While reversal days are widely watched and hence warrant attention from all traders, they are still prone to yielding many false trade signals. As a result, many traders who rely heavily on candlestick patterns prefer to see a reversal high day reverse to close below not just the preceding day's close, but also the preceding day's low. This signifies a strong reversal in the market, suggesting that sellers have taken control and that now may be a time to enter a short position.
The chart below illustrates how reversal day can be identified and what they can signal for traders who choose to incorporate them into their trading arsenal.

candle sticks 1 - indroduction

Candlestick I: Introduction to Candlestick and its patterns

What is a candlestick chart?
Candlestick charts shows information about the price action and the movement of the currency price over a specified period of time. It contains the market's open, closing, low and high of that specific time frame.
Below is an analysis of a candlestick chart and its components.

On a daily chart, each candle represents a 24 hours period. It contains information of the daily open and daily closing price, the highest and lowest price during that day. On an hourly chart, each candle represents an hour and so on. Since the forex market is a 24 hours market, there is no real daily open or closing price. The chart provider will decide a time, 5pm EST for instance, as the daily open and closing time. Different chart providers may have different choices for the open and closing time. Traders may find the charts from different providers are slightly different to each other.
What are candlestick patterns?
Technical analysts found that, by observing the candlesticks, there are recurring patterns on the candlestick charts. Such patterns are like recurring pictures on the candlestick charts and they tend to occur when a trend is about to end or reverse its direction. The patterns are very good visual representation of the price movements and give traders a good grasp of what is going on in the market.
Why are candlestick patterns so important?
Why are candlesticks so important? It is because they are the best gauge of what is going on in the market at the present time. If a candlestick is very short, it implies that the range for the trading day was very tight. If this candle appears after a strong up-trend, it may suggest that sellers have now begun to enter the market more aggressively, and thus the price may be on its way back down.
Eventually, candlesticks patterns can easily be used to identify potential reversals of trends in the market - especially when used in conjunction with other indicators. By observing the candlestick patterns, traders can speculate potential reversals of trends and entering the market with strong reference to the patterns.
The following are key patterns to watch out for:
Piercing Line

Bullish reversal patterns which shows sellers are losing their dominance.
Dark Cloud Cover

Bearish pattern showing slower buying momentum.
Shooting Star

Reversal patterns that occurs after gaps. Buyers make new high but are fail to sustain then.
Harami

Harami shows a trend that is losing its momentum and may reverse. Bullish or bearish depends on the existing trend.
Evening Star

Reversal pattern shows trend has changed direction after making new highs.
Morning Star

Similar to evening star, reversal pattern shows trend has changed direction after making new lows.
Hammer/Hanging Man

Good reversal pattern after a severe trend. Signifies weakening market sentiment. Pattern is considered a hammer after a down trend and a hanging man after an up trend.
Bullish Engulfing

Usually occurs after dramatic down trends. Good indication that downside momentum is lost as a large candle is completely reversed at next time frame.
Bearish Engulfing

Common pattern after strong up trends. Signifies that buyers are losing control.
Doji/ Double Doji

Pattern implies indecision in the marketplace as the price has a big range but does not going anywhere.

technical analysis 7 - price channels

 price channels
A trending market can move between parallel support and resistance levels. A price channel between two parallel lines can often be drawn in a trending market. The key to a price channel is that the lines be parallel to each other. The value of the price channel in predicting the ongoing speed of a trend depends on the lines being parallel.

Unlike trend lines, which can be drawn on any chart with two relative lows or highs, price channels should not be forced on a chart where they are not quickly apparent. Once a trend line is established, create a duplicate parallel line on the chart. Then move it up to the relative highs above or down to the relative lows below the trend line. If two or more fit with the line, there may be a valid price channel. Otherwise, the market may simply be too volatile - even in the midst of a strong trend - to plot a channel.

In the above example the (support) trend line itself is valid, but creating a parallel line on the opposite side of the prices does not add any value to the chart and is not warranted by the data. Placing a support or resistance line where it does not belong will simply provide you with false signals to buy or sell.

technical analysis 6 - trend lines and trading

Technical Analysis VI: Trend Lines

What are Trend lines?
Trend lines are lines drawn on the historical price levels that depict general direction of where the marking is heading, and provide indications of support or resistance.
Drawing trend lines is a highly subjective matter. The best test of whether a trend line is a valid one is usually whether it looks like a good line. In an up trend, a trend line should connect the relative low points on the chart. A line connecting the lows in a longer-term rally will be a support line that can provide a floor for partial retracements. The down trend line that connects the relative highs on the chart will similarly act as resistance to shorter moves back higher.

Any two relative highs or lows will be on the same line, so it is possible to draw a tentative trend line between any two points. Traders can use tentative trend lines as an indication of where support or resistance might be, but until a tentative line holds as support or resistance, it is not yet confirmed as valid.
Of course, the more times a trend line holds, the stronger it will be in the future. If a single line can connect 4 or 5 relative lows, then the chances of the next pullback bouncing off the line are high.
The best trend line?
It is an unusual situation where three points on a chart will exactly coincide with a straight line connecting them. More often, prices will be close to a line, and a best-fit line will have to suffice. This is where trend lines become more art than science. Different traders may draw different trend lines given the same chart or even connecting the same series of relative low points.
Sometimes a trend line will have to be revised as new relative highs or lows appear. Even if the trend line is a very close fit between three or more points, it is important to be flexible and redraw trend lines when necessary.

Using High/Low or Close/Open
Often the differences in drawing trend lines depend on whether the high and low prices are used or whether the closing and opening prices are used to determine the line. On a candlestick chart, the question becomes using the wicks of the candlesticks instead of the solid bodies of the candles only.

Generally closing prices are more significant points than the intra-day prices on a chart, and if a trend line can be drawn using the body rather than the wick of a candle, the body should be used. Similarly, when drawing a trend line, an intra-day spike through a line should not automatically invalidate it. If there is a candle that closed below the trend line, though, it would be a much more serious breach of the line.

Only one of two things can happen when a price approaches support or resistance: the price can break through it, or it can bounce off and reverse direction. The same is of course true for trend lines.
1. Trading on a Pullback
If a chart is trending in a clear direction, and a trend line can be drawn connecting a series of relative highs or relative lows, trading opportunities exist when the price approaches the trend line. If the price bounces off the trend line and resumes the trend in the original direction, this can be an excellent opportunity to enter the market in the direction of the dominant trend. This is often referred to as buying on a pullback in an up trend or selling into strength in a downtrend.

Buying on a bounce off such a support line can be done through a limit order just above the support.
2. Trading a Break of the Trend
The second possible trade is the break of the trend line, which can be traded just as any other broken support or resistance line. If a candle closes through a trend line to the downside, as in the example below, the proper entry point would be to sell once the price moves below the low of the breakthrough candle.

This ensures that the short term force is in the direction of the break lower. The opposite would be true for a break above a resistance line.

technical analysis 5 - trending and ranging markets

Technical Analysis V: Trending and Ranging Markets

In Trending Markets
The existence of a trend in any market depends on a series of relative highs and lows. Two consecutive relative highs, each above the previous relative high, and two relative lows above the previous low would be constitute a tentative up-trend. A third relative high would confirm the trend.
The chart below illustrates a up-trend of EUR/USD:

The continuation of a trend depends on the successive rallies reaching a greater price than the previous ones. Traders can buy at relative lows and profit from the rest of the trend. Or traders can speculate the reverse of the trend and sell at relative highs. If an up-trend establishes a relative high and the subsequent rally fails to break through to a higher price, then the up-trend is in doubt. A series of decreasing relative lows would be necessary to determine that the market trend had reversed to a downtrend. More likely, the market will be range bound for a period.
In Range Bound Markets
Markets do not always move in trends. They spend a lot of time in ranges, fluctuating between established highs and lows. Often a range bound market is considered to have a sideways trend, since it is neither moving upwards to new highs or down to new lows. If the short-term trend is that of a sideways market, it is sometimes called a consolidation range. The price during a consolidation period is simply building up support for a continued move in the original direction. See the following chart:

technical analysis 4 - trend market

Technical Analysis IV: Identify the Market Trend

Three Phases of Major Trends
A trend represents a general direction of the market. Dow Theory asserts that major trends have three distinct phases: accumulation, public participation and distribution. The accumulation phase represents the first part of the trend in which those who are well-informed buy or sell. In other words, if the well-informed recognize that the recent downtrend is soon coming to an end, they would buy, and vice versa.
The public participation phase involves the masses following the major trend. This occurs as prices begin to accelerate rapidly and there is news supporting the trend.
The final distribution phase occurs as the news highly favors the current trend and speculative volume and public participation increase even further. At this point, the well-informed investors who accumulated when the market was at its peak (trough) begin to sell (buy) before other investors begin to follow suit.

A Trend Is Assumed to Be in Effect Until It Gives Definite Signals That It Has Reversed
This is a major theory that essentially mirrors the physical law stating that an object in motion tends to continue in motion until some external force causes it to change direction. Relating that principle to price trends, a strong trend will tend to continue in its current direction unless there is a price reversal indication, as per technical or even fundamental analysis. The later articles will focus on learning to spot reversals in the market and how traders can place orders to take advantage of such reversals.

technical analysis 3 -support and resistance

Technical Analysis III: Support and Resistance

What are support and resistance?
Support levels are prices where buyers have shown or are likely to show strength. Resistance levels are prices where sellers are likely to be strong.
Support
Support levels essentially give the market a 'floor', since they are areas where buyers tend to be strong. If the price falls to a strong support level, traders should expect buyers to step in and drive the price up, or at least keep it from moving any lower.
Because support levels are prices where buyers are supposed to be strong, if the price falls below a support level, this is a signal for the market. It shows that there is more selling pressure (or less buying) pressure than previously thought, and it often leads more traders to exit long positions and take short positions.

Resistance
Resistance levels perform the opposite function of support, which provide a 'ceiling' to the market. If the price rises to a strong resistance level, short sellers should be expected to enter the market and traders in long positions may cover their positions to take profits. This combination of selling pressure will often drive the price lower.
Resistance functions in the same manner as a safety net for short positions and an entry point for traders looking to buy on a breakout.

When a price breaks through a resistant level, it often triggers a large number of stop orders and makes for even greater buying power. Often the stronger the resistant level, greater the number of stops that are triggered and the larger the move above resistance.
Unfortunately, not every breakout is valid. Because they know that many traders place stops to sell just above resistant levels, some large institutional traders attempt to drive the price higher in the short term just to trigger these stops. Without any real force behind the move higher, the price can fall back to resistance. The same dangers of false breakouts apply to support levels as well.