Using Candlestick And Bar Setups To Trade Forex
- Date: 2010-08-27 - Word Count: 599
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In the article below are several trading setups using Japanese Candlesticks and price bar combinations that have been proven to work particularly well in the Forex market.
Firstly a note about - no that wasn't a typo - Candlesticks..
To the uninitiated Japanese candlesticks are a method of price presentation which was developed in the 17th century by an Osakan Rice trader and have since spread to be widely employed by both institutional as well as private investors in the east and the west.
They show the high, low, open and close of a period as comprising a 'real body' and the 'shadow'. There is not the scope in this article to give them a full explanation but there are plenty of websites out there which explain the basic patterns to you - just Google them and see..
Forex is particularly amenable to these setups mainly because of its volatility. Obviously whilst the strategies offer decent trading entry points the money management and trade management are left down to the individual trader although I have also added some trading guidelines too where appropriate.
Acute Reversals
Acute Reversals consist of 3 bars or candles in a specific sequence. The first candle, in a downtrend, would be a red candle with the trend, followed by the 2nd candle which must make a new low. It does not matter what shape the candles take but generally the better signals are generated by those which have a medium to large true range because this strategy more than any other requires volatility to work well.
After the initial setup is complete the trader must place an order at the high of the first candle and wait - if the market continues up in the 3rd candle and breaks the high of the 1st candle then it triggers the order - as shown in point 'b' in Figure 3, in the illustrations below.
Generally acute reversals offer better longer term prospects as compared to most other candlestick setups except key reversals. One possible strategy for trading them would be to place a stop at the low of the 2nd candle, take some profit at the 1:1 risk reward point and then let the trade run until an Acute Reversal occurs in the opposite direction, at which point close the complete order and open a new one in the opposite direction.
The 2-bar reversal
The 2- bar reversal occurs when a longer than average candle makes a new high or low and is followed by a candle of similar length of the opposite colour (if using Japanese candles) or going in the opposite direction if using normal bars. The setup is quite a good signal that the trend is about to change and it can sometimes mark major turning points in the market.
Traders generally place their orders at the highs or lows of the 2 setup candles and then run a trade taking half profits early and shifting the stop up relatively quickly to reduce downside risk. The illustrations below show an example of the 2 bar setup. Ideally the 2 bars should be similar in size and shape and larger than the bars around them.
Shooting Stars and Hammers
Two of the most useful patterns to the Forex trader are the hammer and it's inverse the shooting star candlestick patterns. The hammer pattern starts with a red down candle which continues an established bearish trend). This is followed by a candle which makes a new low but ends the day closing near its highs - this gives it a distinctive hammer shape, the final candle 'confirms' the hammer with a bullish surge (see diagram below).
Firstly a note about - no that wasn't a typo - Candlesticks..
To the uninitiated Japanese candlesticks are a method of price presentation which was developed in the 17th century by an Osakan Rice trader and have since spread to be widely employed by both institutional as well as private investors in the east and the west.
They show the high, low, open and close of a period as comprising a 'real body' and the 'shadow'. There is not the scope in this article to give them a full explanation but there are plenty of websites out there which explain the basic patterns to you - just Google them and see..
Forex is particularly amenable to these setups mainly because of its volatility. Obviously whilst the strategies offer decent trading entry points the money management and trade management are left down to the individual trader although I have also added some trading guidelines too where appropriate.
Acute Reversals
Acute Reversals consist of 3 bars or candles in a specific sequence. The first candle, in a downtrend, would be a red candle with the trend, followed by the 2nd candle which must make a new low. It does not matter what shape the candles take but generally the better signals are generated by those which have a medium to large true range because this strategy more than any other requires volatility to work well.
After the initial setup is complete the trader must place an order at the high of the first candle and wait - if the market continues up in the 3rd candle and breaks the high of the 1st candle then it triggers the order - as shown in point 'b' in Figure 3, in the illustrations below.
Generally acute reversals offer better longer term prospects as compared to most other candlestick setups except key reversals. One possible strategy for trading them would be to place a stop at the low of the 2nd candle, take some profit at the 1:1 risk reward point and then let the trade run until an Acute Reversal occurs in the opposite direction, at which point close the complete order and open a new one in the opposite direction.
The 2-bar reversal
The 2- bar reversal occurs when a longer than average candle makes a new high or low and is followed by a candle of similar length of the opposite colour (if using Japanese candles) or going in the opposite direction if using normal bars. The setup is quite a good signal that the trend is about to change and it can sometimes mark major turning points in the market.
Traders generally place their orders at the highs or lows of the 2 setup candles and then run a trade taking half profits early and shifting the stop up relatively quickly to reduce downside risk. The illustrations below show an example of the 2 bar setup. Ideally the 2 bars should be similar in size and shape and larger than the bars around them.
Shooting Stars and Hammers
Two of the most useful patterns to the Forex trader are the hammer and it's inverse the shooting star candlestick patterns. The hammer pattern starts with a red down candle which continues an established bearish trend). This is followed by a candle which makes a new low but ends the day closing near its highs - this gives it a distinctive hammer shape, the final candle 'confirms' the hammer with a bullish surge (see diagram below).
Related Tags: currency trading, forex trading, forex, forex broker
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