Mahbub Forex Blog

A Brief History of Candlesticks and Candlestick Charts

What is a Candlestick?

• Candlesticks are formed using the open, high, low and close of the chart time frame we are using.

• If the close is above the open, then a hollow candlestick (usually displayed as white, green or blue) is drawn. This is referred to as a “bullish candle or bar”.

• If the close is below the open, then a filled candlestick (usually displayed as black or red) is drawn. This is referred to as a “bearish candle or bar”.

• The hollow or filled section of the candlestick is called the “real body” or body. Note: the color of the real body can vary between traders and depends on how they have the colors set / personal preference. Mine are always white for bullish and black for bearish, this is how yours need to be for purposes of our community.

• The thin lines poking above and below the body display the high/low range and are called shadows, tails or wicks…all three names apply to the same thing.

• The top of the upper shadow is the “high”.

• The bottom of the lower shadow is the “low”.

• Long candle bodies show stronger buying or selling. A longer candle body shows more intense buy or sell pressure than a shorter body.

• Short bodies imply slower or less buying or selling.

• Candlestick that are long and white show strong buying interest. The larger the white candle, the further it closed above where it opened. This shows a considerable price increase from where price opened to where it closed. Long white candles show bulls were decisively in control!

• Conversely, long black candlesticks show selling interest was strong. The further price closed below where it opened, the longer the black candlestick body. This shows that prices lost significant ground and that sellers were clearly in control.

• The upper and lower tails or shadows on candlesticks give us important information about what took place during that bar’s trading session. You may also see these referred to as “wicks” or “tails”, these terms are synonymous with “shadows”.

• Upper shadows reflect the session high. Lower shadows reflect the session low.

• Candlesticks with long shadows show us that a reversal and rejection of that price area occurred.

• Candlesticks with short shadows show us little reversal or rejection occurred.

•  A candlestick with a long upper shadow and little to now lower shadow indicates buyers or bulls lost control during the trading session and sellers pushed prices lower into the close. A long lower shadow but little to no upper shadow shows that sellers /ears lost control to buyers / bulls into the close.

• When you see a candlestick with a long shadow on one side of the bar, it’s an event to take note of. A long shadow signifies rejection of price and that a potential reversal is imminent, more on this later though.

What are Candlestick Charts?

The concept of Forex trading

• Directional Forex Trading is the art of using price movements in inter bank Foreign Exchange or capital markets to make profit. Traders may be involved in a trade for 1 second or 1 decade (10 years), depending on their trading method and trading plan.

• Our focus is the short-term view of price movement from point X to point Y. By ‘short-term’, I don’t mean ‘day-trading’ or ‘scalping’, as that is not our focus at all here. When I say “short-term view”, I mean we are holding trades anywhere from a few hours to a few days on average, possibly a week or two if we hit upon a very strong trending market.

• To profit from market movements, we must predict price direction correctly, execute a trade entry, and then manage the position between our predetermined stop loss level and desired take profit level.

• To win over the long-run, traders must develop a trading plan with a statistical edge. Price action, market trends, and support / resistance become our trading primary tools in creating this edge.

• Every trade setup carries a unique degree of risk versus reward. The cliche – “Make your winners larger than your losers” is the most obvious road to wealth. However, traders often lose focus, and they forget what each trade can realistically offer them in terms of profit. Markets do not move in straight lines, yet traders hold on to winners way too long, expecting some giant winner on every trade, but soon they see these profits evaporate faster than they came.

• You must lose your greedy attitude and set your trading guidelines! My trading setups aim to deliver approximately 2 to 4 times risk, and I am happy to take that kind of profit on any trade. This means I can win 1 in every 3 or 4 trades and still make decent profits over a sample of trades.

• When trading Forex (or any market), we are effectively running a company. Trading Losses are the cost of business, wins are our revenue, and our profit is the difference between our winners and losers, as well as any fees such as spreads and commissions. Worst case scenario, on a $10,000 size account, we have to run this company at 500% per annul just to make a living! Difficult you ask? YES!
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• Becoming a great trader is like playing a difficult sport, such examples would be tennis, soccer or basketball. Learning the rules is easy, but as we all know, playing the game to win is difficult and requires training and experience to develop skills and intuition over time. The common element in most successful athletes, is that they start out very early in life, and the blue print for success slowly plants itself in he/she’s brain over time.

• I am one of the lucky ones, I started early on at 15 years of age, and whilst I don’t make millions of dollars per year (yet), I do make a very good living. I make money because I can read price action and read the charts correctly, and I am very patient and disciplined. I truly believe this is a measure of experience and intuition. I was taught the basic strategies, but the way I can filter trades and understand what’s happening in front of me is something I learned from the ‘school of hard knocks’, and this is something that comes only through experience and screen time.

• There are obviously some very basic strategies to help play this game we call trading. Some will play it socially, some will move on to an advanced level, some will perfect the art and turn into professional traders.

• Remember, a solid trading judgment is the sum of years of screen time and trading experiences. Most of our subconscious learning is taught to us by trading live price action, listening to trading mentors, or reading about various trading concepts like the ones you are about to learn in this course.

• Traders should use entry methods which have a robust edge, even if the winning edge is small, we favor using an entry mechanism that has a tendency to repeat itself, as opposed to entering randomly.

• A robust edge is a proven market event, it’s a repetitive price event in the market which acts as a “signal” for the trader to pay closer attention and create an order in the market.

• Depending on our risk / reward ratio, the ‘edge’ could be as low as winning just 25% percent of all trades. The higher the risk / reward ratio, the lower the required win rate. The lower the risk / reward ratio, the higher the required win rate.

• A robust edge is not the only ingredient in a trading plan, there are naturally many other key factors which go hand-in-hand when each trade is placed, i.e. position size.

• All traders who fail in the forex market are no better than a gambler at a casino. These ever persistent ‘punters’ trade with real money, they ride the emotions, the highs and lows, similar to that of a black jack player. They lack knowledge and certainly have no trading method or edge that they’ve mastered. There is no plan, and no money management or staking model, and these “thrill seekers” certainly all lack the correct mindset to become successful. You MUST do the opposite of this large crowd of losers if you want to win.

• Those traders who truly believe trading is a mechanical process are fooling themselves. You must now ground yourself in reality. You bought this course to learn “how it really is”.

• You must learn to read charts, study price action, and above all, you must learn to act on price action signals without emotion.
  

• If you’re lucky enough to find some kind of mechanical forex systems that work for several months, most of the time, these models end up falling apart in the future for enough time to wipe novice traders out. This is why mechanical retail forex systems have no place in real world trading. They are useless at best.

• Trading logic remains the same, but people and markets are constantly changing. Be prepared to continue to learn each day, as well as adapt your approach to suit market conditions.

• If you’re truly still searching for some magical, concrete, systematic way to trade, you’re still in first gear. I need to get you to second gear, to move past being greedy and lazy-minded, and learn some real trading concepts that will help you profit in the market, long-term, not just for a day or a month.

• There is no short-cut to learning and mastering an effective trading strategy, there’s no ‘Holy Grail system’, and there is nothing completely automated which retail traders will ever be able to put to use for an affordable price. The large players will always hold the advantage, and our only chance is to learn how to ride the price movement these large players create.

• For lack of a better phrase, we must learn to ‘piggy back’ the big players, which we can do by reading the market’s price action.

• Aligning market momentum and price action is a definable edge for professional traders.

• There is an old saying that professional traders miss half the great moves in the market, and I whole heatedly agree. You will not get on board every major move, just be happy to get on board a few a month or even every other month.

• I have come to the conclusion after 15 years in the market that although there are price action signals and trends occurring all the time, which often run opposite to one another, I can’t define my market edge by simply trading one entry condition or trigger. What I found is that ideally, I want to combine 2 parameters, often 3 or more, purely and simply because by using “confluence of signals” I can easily define an edge.

• Over time, I have noted that an equal amount of price action signals will occur in random chart areas as well as in alignment with trends or horizontal levels.

• In summary, I define my edge in the market only after I see more than 1 of my factors of confluence align, enabling me to increase the odds of success. Furthermore, by doing this, I tend to find the market makes larger moves, because often, I am trading from major turning points, or within natural mid-term trends.

• If good trading judgment is the key to success, but good trading judgment only comes after years of market experience, how can an aspiring trader like you hope to achieve success? I get this question often, and it’s a fair question…

• One short-cut is naturally to find a mentor such as myself, as well as to continue to research price action trading strategies, and experience market behavior first-hand.

• Shorter time frames are the most volatile and unpredictable, thus , paper trading (demo trading) a 5 minute chart can be a quick learning tool, even if that means you’re learning “what not to do”, experience is experience, good or bad…(I don’t teach or trade short-term frames like the 5 minute chart, the point is that they can be quick learning tools of what not to do)

• In a nutshell, the journey to trading success is inescapably one of screen time and acquired market knowledge. The aim of this course is to guide you, to help you in your interpretation of the data in front of you. You must master the art of reading charts and price action.

• Whilst I can’t promise you success in trading, I sincerely believe that if you master the information in this course and continue your study and application of strategies pertaining to price action and trading from value in trends, your chances of making it to professional status will be increased 100 fold.

The Concept of Trading

• Professional Forex Trading is the art of using short term price movements in interbank Foreign exchange to make profit.

• Using Price Charts, our focus is to trade with an “EDGE” to successfully trade price movement from point x to point y.

• We must predict price direction correctly, execute a trade entry, and then manage the position between our predetermined stop loss level and desired take profit level.

• Our winning edge is found using Technical Analysis, specifically, price action analysis.

• I.E. Finding Price action signals, Working with short term market trends and identifying key support / resistance. These tools are combined to create our winning edge.

• Traders should use entry methods which have a robust edge, even if the winning edge is small, we favor entering a trade using a repeatable and tested method as opposed to randomly chasing prices.

• A robust edge is a proven market event, it is a repetitive price event in the market which acts as a “signal” create an order in the market.

• Risk Reward is Crucial

• Traders often fail in the forex market when they trade with emotion, riding the highs and lows, similar to that of a black jack player in a casino.

• They can’t follow rules, set goals and certainly have no consistent trading method. We must do the opposite to the masses of traders in order to win.

• Risk reward is the most important aspect of trading. It is the mathematical equation which tells us how much we stand to risk and how much we stand to lose on any single trade.

• If I was to risk 50 cents to make $2, my risk vs. reward would be 4! Also written as 1:4

• As traders, we can control our risk reward on every trade. A high reward for our risk is an obvious goal of every trader.

• Every trade setup carries a unique degree of risk versus reward. The cliché – “make your winners larger than your losses” is the most obvious road to wealth in trading

• Often, traders lose focus, and they forget what each trade can realistically offer them in terms of profit. Markets do not move in straight lines, yet traders hold on to winners way too long expecting some giant winner, and soon… They see these profits evaporate.

• You must lose all greedy emotions and stick to your rules! Most basic trading setups aim to deliver approx. 2 to 3 or 4 times what you risk, and we should be happy to take that kind of profit. This equation means we can win 1 in every 2, 3 or even 4 trades and still make decent profits over a large sample of trades.

• When Forex trading, we are effectively running a company. Trading Losses are the cost of business, wins are our revenue.

• The number one winning attribute of all traders is patience.

• Wait for your desired trading setup, don’t ever enter just to be in a trade. Great traders often speak of being “neutral” or not in a position, as the most profitable trade setup there is.

• Once a perfect setup is identified, a winning trader will act on it with discipline.

• Trade the setup you see, believe what the market is telling you.

• Never panic or become anxious in the face of missed trading opportunities. Remember the market will be open again tomorrow, and never fall into the trap of getting on every single move.

• Try to be a short-term trend follower as often as possible, don’t be the hero who picks every top and bottom. Of course, there will be exceptions, but when starting, try to be a trend follower.

• If you miss a setup, don’t chase prices, most of the time there will be a second opportunity to re-enter.

• A good trader will only take trades that meet strict criteria in his or her trading plan.

• Technical analysis or “T.A.” is the study of historical price action represented on a chart. It is the examination of past price movements to anticipate future price movements.

• This method of market analysis is used to study short term and long term price graphs. We can apply technical analysis to all financial markets.

• As Forex traders, we are 95% focused on technical analysis to generate trading signals.

• Let’s use the price of fuel as an example. We want to graph the price of petrol price over a 3 week period.

• Time is plotted on the bottom price axis and the day to day price is plotted on the right hand side axis.

• We can see clearly that the chart shows Wednesday is the cheapest day to buy fuel.

• We might assume, Wednesday is therefore the best time to buy, or Wednesday is ‘support’…

• Price action is the single most important thing traders need concern themselves with on a day to day basis. It is the all-encompassing key to all aspects of profitable trading.

• Price action takes into account every aspect of what is happening in the market and around the world at any precise moment.

• Price action will define where the key market levels are, and will provide price patterns and signals to trade from.

• A naked, raw candlestick chart like the one shown below, should be the most used tool in every trader’s toolbox…

• A support level is the level of price which buyers are expected to enter the market in sufficient numbers to take control from the sellers.

• A Resistance level is the level of price which sellers are expected to enter the market in sufficient numbers to take control from the buyers

• These horizontal levels are important because they provide clues to where the market MAY react in the future.

• Price can either break through or hold a horizontal chart level.

• I rarely use support and resistance to enter a trade unless I have price action confirmation at or near the level. If there is a strong trend and I am selling a retracement, I may use support and resistance for a low risk entry.

• Once broken, swing points act as containment (support or resistance) in the direction of the trend. That means basically that where there was old supply, there will be new demand, and where there was old demand, there will be new supply. This is an ever-changing trait of markets, and basically drives all trends.

• Static support and resistance on longer term price horizon is more relevant to trade from. So when doing study, look at time frames above 240 minute chart for intraday traders, with daily and weekly being ideal for end of day traders.

• Support and Resistance rotate over and over, meaning, old support becomes new resistance, and old resistance becomes new support. The smaller the time frame the less accurate and more often it changes.

• We don’t always trade from support and resistance, we may use the level to place a stop loss. E.g., if we enter a trend trade to the long side (bought) at a moving average, we might place our stop under support. (The opposite is also true, a short trade might mean we place our stop loss above resistance).

• Support and resistance work best in trending markets and can be seen working on both short and long term time horizon…

• There are often ‘false breaks’ of support and resistance, which we can use to trade. (more on this later)

• Price action usually gets us into most trades, so don’t be too concerned about becoming an expert at identifying swing points and support and resistance. You just need to be aware of the levels and patterns that form near them. Learn to plot them on the chart, always.

• It is not hard to realize by simply glancing at a chart, that horizontal levels in the market guide everything.

• The Bulls team are attacking up the chart, while the bears are defending and push them back down the chart. The area where bears are defending are “resistance levels” (try line)

• When the Bulls cross the “resistance line” (score a try), they then pull back and try to score again.

• The Bears team are attacking down the chart, while the bulls are trying to defend and push them back up the chart. The area where the bears step in to defend are “support levels” (try line).

• When the bears cross the “support line” (score a try), they then pull back and try to score again.

• The ‘Pointy bits’ after each wave in the market are knows as swing points.

• When a market makes higher lows and higher highs it is up trending, and when it makes lower highs and lower lows it is down trending.

• Old support becomes new resistance, old resistance becomes new support.

• Draw horizontal lines through relevant levels.

• To enter trades with High probability.

• To place protective stop loss

• To place limit order to take profit (target areas)

• To expect a change in market conditions or trend.