Price Action, Bars & Candlesticks
There are various styles of plotting prices on a chart, the most common are Price Bars, Candlesticks and Line charts but there are other useful chart styles as well, like the Heikin Ashi candlesticks, Point-and-Figure and others. At the end of this article a brief tutorial will show how these most common styles easily can be loaded in Metatrader.
Whatever the style used, prices can be plottet in different time frames i.e. 1M = 1 Minute intervals, 5M, 15M, 30M, 60M (or 1H = 1 hour) 4H , Daily, Weekly and Monthly. A day trader would use Minute based time frames, while a swing or position trader would use 4H, Daily and Weekly. Long term investors may use weekly and monthly time frames, for price information and analysis.
As illustrated below, each bar contains price information the trader can use for his analysis and trading decisions, its available in any time frame.
Open – This is the price level where the bar opened at
High – The highest price level reached in that time interval
Low – The lowest price level reached in that time interval
Close – The price level where the bar finished the time interval at
In Metatrader you’ll find these values by hovering the mouse arrow over each price bar on the chart and if you then eyeball down to the toolbar, you’ll see the Date, Time, Open, High, Low, Close and Volume information for that bar. This information is also shown in a box which pops up on the chart.
The data field on the top of the chart shows the Pair, Time Frame, Open, High, Low and the current price for only the last bar on the chart. So this will then be the Close price, when the market is closed. The current or Close price is also highlighted on the Y-axis on the right.
For each price bar you can also optionally have a Volume bar plotted below it, which would reflect the level of trading activity in that particular time interval. In Spot Forex trading this data comes as Tick Volume.
Used in combination, Price Action and Volume analysis can give valuable information about where prices are likely heading next, although the Volume part is not a crucial part of it. In this course i’ll focus on certain Price Bar and Candlestick patterns which used along with accurate Support/Resistance and special analysis & entry techniques have better odds of giving profitable trades.
Remember from the earlier Money Management article, the goal is to be consistently correct over 50% of the time on trades, which along with the minimum recommended Risk/Reward Ratio could make profitable trading over the long term possible.
As with Price Bars, the Candlestick price chart is a very popular charting method among traders. The father was the legendary japanese rice trader Munehisa Homma (1724 to 1803) who is said to have made a fortune using Candlestick chart analysis. Homma was a pioneer in seeing that market & price movement is just a reflection of mass mood.
Compared to a Price Bar, a Candlestick is more of a graphical/visual presentation of what happened in a market, currency pair, stock etc. within the time period you have set on the chart, i.e. a Daily time frame. Emotions like Fear, Greed and Optimism plays an important role in trading and Candlestick charting does a good job in visually reflecting the market mood within a specified time period.
For example, in an Up Candlestick where the Close for the day came in the upper 30% part of the daily range (closed near the High) it shows an optimistic end to the trading session and odds are good that prices will continue to rise the next trading day (at least intra-day). When the Close is higher than the Open, the Body of the Candlestick is colored i.e. white to visually reflect that it was an up day in the pair or market.
In a Down Candlestick, on the other hand, where the Close for the day came in the lower 30% part of the daily range (closed near the Low) it shows a fearful end to the trading session and odds are good that prices will continue to fall the next trading day (at least intra-day). When the Close is lower than the Open, the Body of the Candlestick is colored i.e. black or red to visually reflect that it was a down day in the pair or market.
Basically, through various types of Candlesticks, the market sends you “messages” you can take advantage of in whatever time period you’re trading, i.e. 15M, 1H, 4H, Daily etc. These are just a few examples of how we as traders can extract useful information for our trading decisions, from using Candlestick prices.
There are many Candlestick patterns that sends you different messages from the market. As traders we naturally want to go for those that could also alert us of possible market reversals. So in this course article i’ll cover what in my view is the most effective and reliable Candlestick pattern in this regard, the Hammer or often called Pin bar when standard price bars are used.
In Candlestick analysis there are many other patterns like the Doji, Hanging Man, Marubozu, Spinning Top, Engulfing patterns etc. But in my opinion, a trader only need the Hammer & Inverted Hammer (Shooting Star) to find plenty of trading opportunities. So by using this excellent Candlestick pattern along with accurate S/R (Support/Resistance) the odds of making profitable trades are improved.
Ideal Hammers would look like those two shown below. Although there are some variations to them, they could still be placed in the Hammer category.
By definition, a Bullish Reversal Hammer is formed if there is a long lower Shadow (also called wick) and the Open and the Close came within the upper 50% part of the candlestick’s range for the time interval, i.e. Daily. Although less powerful, the Close can even be lower than the Open, as long as the Close occurs within the upper 50% part of the range (the distance from the high to the low).
In trading, the important visual message this Hammer candlestick sends to you is that initially there was selling pressure as reflected by the long lower wick but then more and more buyers (Bulls) are coming to the market, pushing prices higher and finally takes control (Close near the High).
The nearer the Close is to the High of the Hammer the better, as this reflect strong buying pressure at the end of the session and with it, even higher chances of seeing a bullish market reversal the next trading day (Daily prices used in this example). But the same analysis technique can be applied to all time frames, i.e. 15M, H1 etc.
A Bearish Reversal Hammer (Inverted) is formed if there is a long upper wick and the Open and the Close came in the lower 50% part of the candlestick’s range for the time interval. The Close can even be higher than the Open, as long as the Close occurs within the lower 50% part of the range.
The information which can be extracted from this Hammer pattern is that initially there was buying pressure as reflected by the long higher wick but more and more sellers (Bears) are coming to the market and finally takes control (Close near the Low). The nearer the Close is to the low of the Hammer the better, as this reflect strong selling pressure and with it, increased odds of a bearish market reversal coming.
So these are two very important candlestick patterns a trader can take advantage of, when looking for opportunities on both the Buy (Long) and Sell (Short) side of any currency pair.
Although using Hammers isolated can improve trading, the chances of making successful trades can be improved further by looking for these patterns forming near optimal S/R levels, as the figure below shows.
To elaborate, in the Bullish Reversal Hammer example, initially selling pressure forced prices through Support on an intra basis but the fact that the Bulls were able to push prices up again and even close above this support gives a powerful signal that the currency pair or market is about to reverse up and the trader should be ready to open a Long position, in an attempt to make a profit in the direction of this expected reversal.
As for the Short trade example, the Bearish Reversal Hammer reflects that the Bulls pushed prices higher on an intra-basis but the sellers came in and took control in the end. The Inverted Hammer (Shooting Star) and it’s Close below resistance indicates lower prices ahead and the trader should consider going Short the pair.
So how can we find accurate Support/Resistance (S/R) levels?
A few Support-Resistance Articles are available on the blog.