This post of the Forex Trading Mastery blog deals with different types of individual candles. It is not important for you to know names, but it helps to be familiar with various candle`s structures to spot early shifts in forex market momentum.
First, we will look at dojis, which are candles with open and close at or very near the same price. Once a doji is closed, it communicates a balance of power between buyers and seller. Doji may be especially significant during strong trending moves, when one side usually dominates the market. The probability of a correction increases as markets move sharply in one direction. Dojis may be the first warning signs that the power between buyers and sellers is shifting.
It is important to consider individual candles in the overall market trend. We should never base trading decisions on candles alone. However, individual candles can give us early signs of slowing price momentum, and potential increase in buying and selling. Individual candles are very meaningful after multiple bars moves in one direction. For example, shooting star after a multiple bar move up suggest a potential distribution and move down is likely to follow.
The goal is to learn to read the psychology behind candles. Let`s analyze our shooting star candle after a multiple bar move higher. Below, you can see a daily chart of GBP/USD. The chart is in a strong uptrend (we will be discussing trends shortly). The trend was temporarily halted by a shooting star and a sell off followed. The shooting star occurred on January 12, 2004. On that day, the market opened at 1.8472 and during the day rallied to 1.8581 (over 100 pips move). Then sellers hit the market with force and bulls were not even able to defend their opening price. The bar was giving us an early clue about the increasing strength of sellers. If you were long, it would be a signal to reduce or liquidate (depending on your trading strategy) your long positions.
What are your top trading questions? If you could have a lunch with me, what are the top two questions you would ask about trading? Please, email me at pavel.ordos@foreksy.com. I will read all your emails and respond back.
Get a deeper understanding of the psychology behind candlesticks by studying Greg Capra`s "Mastering Candlestick Charts" DVD.
