Welcome to my Masterclass.
In this lesson you will learn what the foreign exchange market is all about and how we are able to take advantage of the worlds biggest exchange.
The language of the market
Trading without any technical indicator, also called “naked trading”, means that we can see in real time what is going on with current price without the “mess” of indicators such as moving averages, etc. It is better known as “price action” trading, where you trade candlestick patterns or even singular candlestick shapes.
Many new traders will try find the 'holy grail' in trading, meaning they will add a multitude of indicators to their chart to be able to pinpoint the best possible entry and exit for their trades. Since all indicators are 'lagging', meaning they are comprised of past data and they are all derivatives of price action itself, they tell you what price did in the past, not what it is going to do in the future.
As new traders try out every combination of indicators they can get their hands on, and backtest their ideas thoroughly, two things happen. Firstly they get an enormous amount of screen/chart time, which in time teaches them how prices behaves and repeats itself in predictable price patterns. Secondly, they come to realize that most indicators are just echoes of the past and in the majority of the time cannot predict the future.
For this reason many experience trades don't use any or just 2-3 indicators on their charts, and have learned to read the language of the market (price action). Once you've mastered this trading language you cannot unsee it in the charts. New traders who have not masted this language are looking for 'translators' in these indicators, which of course does not work. Don't get me wrong, some of them can help make decisions, certainly in the beginning staged of your trading career. That's is why we use just a select few in our strategies as you will see.
Let's get back to candlesticks, which is the starting point to be able to read price action. What exactly are candles or candle shapes?
Candlesticks provide us with a reliable visual representation of what is going on in the market. Why is a candlestick chart better than a line chart:
A line chart only shows us the close price per period
A candlestick shows us the open, high, low and close prices per period
Here we see a visual comparison between a normal line chart and a candlestick chart.
And a Candlestick chart:
As is obvious to see, the candlestick chart seems to convey a lot more information in the same time period.
Candlesticks can be used alone, but most traders use it in combination with other technical analysis tools such as moving averages, momentum indicators, support and resistance levels, trend lines, etc.
As said earlier candlesticks consist of the open, high, low and close of a chosen time frame.
This is the anatomy of candlesticks:
Bullish candlestick: A candle closes above its opening price. It means the market went up in this time period.
Bearish candlestick: When it closes below its opening price. The market moved down in this period.
Candlesticks are often colored to give more depth to their meaning. Bullish candles are often colored with green or white bodies, and bearish candles often have red or black bodies. The timeframe of the chart determines what time period 1 candle represents. For example, on a 5 minute chart, each candle represents a 5 minute period.
A long real-body candle shape means price made a big move in a particular direction, AND stayed there. It confirms bullish/ bearish strength(momentum).
A short real-body candle on the other hand, shows us that price didn’t move a lot. It shows us that buyers and sellers are not active.
The upper wicks represent the high of the period.
The lower wicks represent the low of the period.
The wicks are sometimes also called “shadows” or “tails”. Long wicks show us that price action moved well above or below the open and close price of the period.
In the example blow, the left candle shows us that the sellers pushed the price way lower, but failed to keep it low, as buyers bought the price back up. The right candle shows us the opposite. Buying pressure pushed the price way higher, as buyers were bidding higher and higher. But buyers weren’t able to sustain this level, subsequently sellers pushed the price lower again.
These candles are often called “probes”, as these wicks often probe through support and resistance levels, and fail to break out as they again close below those levels.
In the next lesson we will show you how these candlesticks combine to form candlestick patterns, and how you can read them.