Types of Charts

Technical traders require technical charts for Stock, Commodities and Forex market analysis for trading. A technical analyst understands the movement of the market and takes trading decision by observing these charts. There are different types of technical charts. Three types of charts are mostly used in Stock, Commodities and Forex market analysis. These charts are,

Let's take a look at the three most popular types of charts:

 

1. Line chart
2. Bar chart
3. Candlestick chart

Now, we'll explain each of the charts, and let you know what you should know about each of them.

1. Line Charts

Line Chart:

Line chart appears as a line which is developed by joining the closing prices. This type of chart is particularly useful to observe and understand the trends of the market quickly. This chart is helpful for understanding the major movements only. It is not suitable to take trading decisions by this type of chart. However, this line chart can generate buy and sell signals when crossovers with moving averages occurs. Here is an example of a line chart given below.

2. Bar Charts

A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid. The vertical bar itself indicates the currency pair's trading range as a whole. The horizontal hash on the left side of the bar is the opening price, and the right-side horizontal hash is the closing price.

Here is an example of a bar chart  

Take note, throughout our lessons, you will see the word "bar" in reference to a single piece of data on a chart.
A bar is simply one segment of time, whether it is one day, one week, or one hour. When you see the word 'bar' going forward, be sure to understand what time frame it is referencing.
Bar charts are also called "OHLC" charts, because they indicate the Open, the High, the Low, and the Close for that particular currency. Here's an example of a price bar:

Open: The little horizontal line on the left is the opening priceHigh: The top of the vertical line defines the highest price of the time periodLow: The bottom of the vertical line defines the lowest price of the time periodClose: The little horizontal line on the right is the closing price

3. Candlesticks Charts

Candlestick chart show the same information as a bar chart, but in a prettier, graphic format. Candlestick bars still indicate the high-to-low range with a vertical line. However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. Traditionally, if the block in the middle is filled or colored in, then the currency closed lower than it opened. In the following example, the 'filled color' is black. For our 'filled' blocks, the top of the block is the opening price, and the bottom of the block is the closing price. If the closing price is higher than the opening price, then the block in the middle will be "white" or hollow or unfilled. 

Here at  we don't like to use the traditional black and white candlesticks. They just look so unappealing. And since we spend so much time looking at charts, we feel it's easier to look at a chart that's colored. A color television is much better than a black and white television, so why not splash some color in those candlestick charts? We simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green. If the price closed lower than it opened, the candlestick would be red. In our later lessons, you will see how using green and red candles will allow you to "see" things on the charts much faster, such as uptrend/downtrends and possible reversal points.
For now, just remember that we use red and green candlesticks instead of black and white and we will be using these colors from now on. heck out these candlesticks...! Awww yeeaaah! You know you like that!

Here is an example of a candlestick chart  

The purpose of candlestick charting is strictly to serve as a visual aid, since the exact same information appears on an OHLC bar chart. The advantages of candlestick charting are:

• Candlesticks are easy to interpret, and are a good place for beginners to start figuring out chart analysis.
• Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help in studying, it might help with trading as well!
• Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
• Candlesticks are good at identifying marketing turning points - reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later.

Now that you know why candlesticks are so cool, it's time to let you know that we will be using candlestick charts for most, if not all of chart examples on this site.

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Support and Resistance

Support and resistance is one of the most widely used concepts in trading. Strangely enough, everyone seems to have their own idea on how you should measure support and resistance.

Let's take a look at the basics first.

Look at the diagram above. As you can see, this zigzag pattern is making its way up (bull market). When the market moves up and then pulls back, the highest point reached before it pulled back is now resistance.

As the market continues up again, the lowest point reached before it started back is now support. In this way resistance and support are continually formed as the market oscillates over time. The reverse is true for the downtrend.

Like the concept of trend, support and resistance is one of the major concepts in trading. Support and resistance are psychological price levels where forces of supply and demand meet.

At support line demand starts to increase and supply starts to decrease. This is a buying pressure. Inversely at resistance line, supply starts to increase and demand starts to decrease. This situation is a selling pressure.

Support and resistance lines are horizontal straight lines. There is no exact or accurate method to draw support and resistance lines. Thus, a trader’s drawn support and resistance lines might not match with other traders completely. Thus, support and resistance lines are drawn by taking best possible high and low points, in this case some traders might consider the lowest and highest points of candlesticks where some others might consider open and close price of candlesticks in low and high points of a trend.

Support line is a psychological price level where price gets strength and become bullish when price comes near or at this line. Inversely, when price gets near resistance line, it gets weakness. As a result, price movements become bearish.

Support and resistance can be used in 3 ways.

1. Reversals
2. Breakouts
3. Pullbacks

Reversals:

Support should be considered as a base level of price from which price tends to bounce from this line and becomes bullish or buyer dominant (Bullish reversal). Resistance should be considered as a binder near which price gets a resistance force in its upward move and this bullishness of the price becomes weak. As a result as the price comes near resistance line it starts falling as price tends to become bearish near or at this resistance line (Bearish reversal).

Here are some examples-

 In the chart above, we can see the support and resistance line have drawn in the chart of AUD/USD currency pair. Support line is a combination of last two low points. Inversely, resistance line is a combination of two high points. First we have to draw these lines. Trading opportunities occur as the price comes near these lines.
As price gets near support line, we should look for a long position as most of the cases price tends to become bullish at or near this support line. In the chart given above, we can see that AUD/USD has got support twice (blue colored circles near support line) from this support line and started a significant upward movement.
Inversely, when price or candlestick went near or at resistance line, it has got weakness or bearishness as that resistance line worked as a binder or resistance and hence price started falling. So we should look for long position opportunity as the price is near or at support line and look for short position opportunity when price is near or at resistance line. When price moves in between support and resistance line repeatedly then it is trading zone or flat zone where there is no significant trend.
This trading zone becomes more profitable for trading by using support and resistance lines when the trading zone or range is wide or broad. Breakout possibility is high when this trading range or zone is narrow. Here is an example.
Breakouts:
It is not necessary for the price that it will always turn into bullish trend when comes near or at support line and will turn into bearish trend when price comes near or at resistance line. Sometimes price may break these support and resistance lines.
We call it breakout when price breaks out the resistance line and keep its bullish movement intact and breakdown when price breaks the support line and keep moving in its previous bearish trend. Thus, price ignores the reversals near or at support or resistance lines.
These breakouts can be traded effectively and profitably. Breakouts are the strong signal of a major trend. When price or candlestick lies between support and resistance lines, then there is no trend lies there, or it is a trading zone or ranging zone. As soon as price breaks out the resistance line, the currency pair moves into the uptrend or bullish trend and then price tends to remain in this uptrend for prolonged time.
If price breaks down the support line then currency pair has moved into a downtrend or bearish trend and then price tends to remain in downtrend for a prolonged period.
Here is an example of bullish breakout or resistance line breakout.

 In the chart given above, we can see a successful breakout in the daily chart of GBP/USD. Here, we can see the support and resistance lines and then a breakout of resistance line (blue colored circle). Remember that it is necessary for a candle or price to breakout the resistance line with a strong bullish candle, otherwise the breakout may not be successful and can be turned as fake-out (when breakout fails and come back into the trading range within a short time).
So it is mandatory for the price to or candlestick to show good strength when resistance breakout happens otherwise there is a high possibility of fake-out. We should take this resistance breakout as an entry signal for taking a long position.
Now, let’s take a look into support line breakdown. Here is an example,

In the chart given above, we can see the support and resistance line and a breakdown of the support line (blue colored circle) in the daily chart of AUD/USD. This is an example of successful breakdown as the support line has broken down with a heavy bearish candle and thus the downtrend continued vigorously.

In case of breakdown or support line breakout, there should be a strong or heavy bearish candle; otherwise there is a chance of fake-out. We should take this support line breakdown as an entry signal for taking a short position.

Pullbacks:
After a successful resistance breakout, the broken resistance line becomes support line and the price has a tendency to retrace to this new support line (broken resistance). Thus, price tends to pullback or bounce back into the bullish trend again. Inversely, when support line breaks successfully, this broken support line becomes new resistance and price intends to retrace to this new resistance and then bounce back into bearish trend.

In the chart above, we can see support and resistance lines including broken resistance/new support lines in the daily chart of USD/CAD. Every breakout has changed the previous resistance as a new support. Here, we can see 2 successive breakouts thus 2 resistances has become new support. Another important thing is; after a breakout price has retraced back near or at the new support line. Then bounced back to its previous trend as it has got support/strength from the support line. There are two pullbacks shown in this chart.

Now let’s take a look at the example of bearish pullback after a successful breakdown.

In the chart above, we can see support and resistance lines including broken support/new new resistance lines in the daily chart of USD/CHF. Every breakdown has changed the previous support line as a new resistance. Here, we can see 2 successive breakdowns thus 2 support lines have become new resistance. Another important thing is after a breakout price has retraced back near or at the new resistance line and then bounced back to its previous trend (Downtrend) as it has got resistance/binder from the resistance line. There are two pullbacks shown in this chart. Note:

Each three methods of using support and resistance line is effective and profitable. A trader should use it according to his own choice and should consider that the method he/she is using is suitable with his personality or not. For an example, you have to deal with price hike/high volatile condition and as per pullback method during breakouts. Most of the times price tends to retrace after a breakout or breakdown.

So breakout trading requires patience, and flexible stop loss/wide stop loss range otherwise it might not be profitable enough. Reversals are effective for short term trading. Breakouts and pullbacks will work well in trending condition rather than ranging condition

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Trend Lines

What is a trend

A trend is simply, the persistence of a security's price to move in a particular direction. A trend can be bullish, bearish or flat. Also, a trend is in effect till it is reversed. Markets are either bullish, bearish or flat. However markets never go up or down in a straight line. There are always corrections (in bullish markets) and pullbacks or relief rallies (in bearish markets). By identifying trends and reversals, you can enter and exit trends at the correct time and earn excellent profits with minimum risks.

Trend Lines

Trend lines are probably the most common form of technical analysis. They are probably one of the most underutilized ones as well. If drawn correctly, they can be as accurate as any other method. Unfortunately, most traders don't draw them correctly or try to make the line fit the market instead of the other way around. In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

Types of Trends

There are three types of trends:

1. Uptrend (higher lows)

1. Downtrend (lower highs)

1. Sideways trends (ranging)  

How to Draw Trend Lines on a Stock Chart ?

Drawing trend lines is an art form that can take awhile to master. That's because everyone has their own unique way of drawing them! There is no perfect way to draw them and it seems that no one can agree on the best way! 

To draw trend lines properly, all you have to do is locate two major tops or bottoms and connect them.

What's next?

Nothing....... is that it?

Yes, it's that simple.

Here are trend lines in action! Look at those waves!

Drawing trend lines
The chart below shows an example of a trend line in a downtrend and an uptrend.

number_1 Shows three swing highs on the downtrend
number_2 Shows three swing lows on the uptrend

When drawing trend lines in a downtrend, you draw them above the price.
You can practice identifying trend lines in the following exercise:

Using the wicks or bodies of the candles, which of the following trend lines is correctly drawn on this downtrend?
number_1

number_2

number_3

Solution

The solution is number_2

Drawing trend lines can be tricky and must be done correctly in order to trade with them. Remember that in a downtrend you always draw trend lines above the candles. In chart number_2 we see price testing as resistance the trend line 3 times.

When you draw trend lines in an uptrend, you draw them below the price. It is the highs on a downtrend and the lows on an uptrend that will determine a trend line.
You can practice identifying trend lines in the following exercise:
At least two swing highs or swing lows are needed to draw a trend line in either direction.
However, for a trend line to be valid, at least three highs or lows should be used. Essentially, the more times the price touches a trend line, the more valid it is, because there are more traders using them as support or resistance.
Using the wicks or bodies of the candles
To draw trend lines, some traders use the bodies of the candlesticks, while others prefer the wicks. While the majority of people will use the wicks to draw trend lines, the use of the bodies is an acceptable way to draw trend lines on a chart.
The chart below shows a trend line drawn using the wicks of the candlestick.

The next chart below shows a trend line drawn using the bodies of the candles. Either of these are acceptable.

Trend lines are subjective, so use what you feel comfortable with. However, it is important not to deviate from the method that you choose.
Using trend lines to trade
There are two predominant methods in which to trade using trend lines:

• Entering when the price finds support or resistance at the trend line

• Entering when the price breaks through the trend line

Trend line as support or resistance
If a trend line has been identified and it is holding as support or resistance, then you can use the trend line to enter into the market once the price comes back to it.

es1 Short entry after the price finds resistance at the trend line
sl2 Stop loss above the trend line
The chart above shows the trend line being used as resistance and the price using it to find an entry.
A stop loss can be put on the other side of the trend line. The size of the stop loss depends on the strategy involved.
Trend line break
The trend line break method uses the actual breakout of the line to determine an entry. When the price breaks through a trend line, it is no longer valid as support or resistance and it is likely that the price will continue to reverse direction.
There are two ways to enter using a trend line break: an aggressive entry and a conservative entry.
An aggressive entry
An aggressive way to enter using a trend line break is to enter as soon as the candle breaks through and closes on the other side of the trend line.

es1 Short entry after the price broke through the trend line to the downside
sl2 Stop loss is placed above the trend line
The chart above demonstrates that once the candle closes on the other side of the trend line, then you can enter immediately. A stop loss can be placed on the other side of the trend line.
A conservative entry
A more conservative way of trading the trend line break is to wait until the price has broken through the trend line and then tested from the other side as either support or resistance.

number_1 Price breaks through the trend line to the downside
number_2 Wait for the price to come back to the trend line and find resistance
es3 Once determined that the breakout is true, enter into a short entry
sl4 Stop loss is placed above the trend line
The chart above shows a trend line that has been broken after acting as support. The price then tested it from the other side as resistance, further confirming that the breakout is likely to continue. After the trend line has been tested as resistance, you can enter a short position and place a stop loss on the other side of the trend line.
Caution using trend line breaks
In order to trade a breakout of a trend line, it is a good idea to wait until a candlestick actually closes on the other side, or tests the other side of the trend line as either support or resistance. Without a close on the other side of the trend line, it is generally not considered an actual break.

number_1 False breakout
In the above chart, the price moved below the trend line. However, it retraced and the candlestick closed above the trend line. If a trader entered as soon as the price broke through, it would have been a losing trade.
Summary
So far, you have learned that ...

• ... trend lines are drawn at an angle and are used to determine a trend and help make trading decisions.

• ...in an uptrend, trend lines are drawn below the price and in a downtrend, trend lines are drawn above the price.

• ... to draw a trend line in an uptrend, two lows must be connected by a straight line.

• ... to draw a trend line in a downtrend line, two highs must be connected by a straight line.

• ... a trend line should be connected by at least three highs or lows to make it valid.

• ... the more times the price touches the trend line, the more valid it is.

• ... trend lines can be used as support or resistance, in which case you can enter trades when the price touches the trend lines.

• ... another way to trade using trend lines is a trend line break, where the price breaks through the trend line.

1. Here are some important things to remember about trend lines:

1. It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.

1. The STEEPER the trend line you draw, the less reliable it is going to be and the more likely it will break.

1. Like horizontal support and resistance levels, trend lines become stronger the more times they are tested.

1. And most importantly, DO NOT EVER draw trend lines by forcing them to fit the market. If they do not fit right, then that trend line isn't a valid one!

In conclusion...
I have a confession. I don't draw trend lines very often! After you have looked at thousands of charts, you can see them without having to actually draw them in. And I certainly would never buy a stock just because it is hitting a trend line.
They are just a piece of the puzzle.

3 Tips For Trendline Trading

Trendlines are a staple for technical traders that can be used on any currency pair and on any time frame. Follow these 3 easy steps to drawing trend lines which is a powerful tool to time entries and exits of a trade. A trendline is probably the most basic tool in the technical trader’s toolbox. They are easy to understand and can be used in combination with any other tools you might already be using. By definition, a trendline is a line connecting two or more lows or two or more highs, with the lines projected out into the future.Ideally, traders look at these extended lines and trade on prices reacting around them, either trading a bounce of the trendline. So, what can we do to make sure the trendlines that we've drawn are sound?

Tip #1 – Connect Swing Lows to Swing Lows (or Swing Highs to Swing Highs) We want to draw a line connecting either two (or more) swing lows or two (or more) swing highs. For those unfamiliar with the term swing highs/lows, we simply mean the peaks and valleys created with zig zagging prices. Once we connect peaks with other peaks or valleys with other valleys, we want to see the line not being broken by any candle between those two points. Take the examples below.  

Learn : Draw Unbroken Trendlines

In the first image, you will find that we successfully drew a line connecting two swing lows. But, between those two points, the price broke through the line that we drew. This invalidates the trendline.

What we want is what we see in the second image, two swing lows connected together by a line unbroken by price. This is a valid trendline that is ready to be projected out into the future.

Next time price gets near this trendline, we will want to look for a bounce. A convenient way of trading this type of setup is using Entry orders. Entry orders can be set to get you into a trade at a specific price.

I like to set my Entry orders several pips above a support trendline or several pips below a resistance trendline. That way if the price reacts before getting to the trendline, I still have a chance at getting into a trade. You have to remember that if there are many traders looking at the same price to act as support/resistance, there is a chance that orders will be stacked around these levels. If there are enough orders keeping the price from getting to the trendline, the price might not get to you order if it’s placed directly on it.

 

Tip #2 – The More Connecting Points, the Better

 

You've probably noticed that I have referenced two or more highs/lows make up a trendline. The reason I mention "or more" is because trendlines can continue to be relevant far out into the future and can be bounced off of several times. As a general rule of thumb, the more times a trendline has been hit and respected with a bounce, the more important the market believes that it is. Like anything, however, trendlines cannot last forever. So after a multitude of bounces, one has to expect a break to eventually occur.

The first reason this is true is that you can draw a line connecting any two points on a chart. Just because there were two distinct highs in the last 50 bars and you drew a line between them doesn't actually mean the line is a valid trendline. What you would have is a potential trendline.

To truly validate a trendline, you need to see the price actually react from a line projected from a trendline drawn based off of two prior points. Essentially, a third high/low is needed to truly solidify a trendline. Once you have this, you can then feel better about looking for opportunities to exploit the market when price reaches the trendline again. While having a third high/low is recommended before looking for a trade, it is not required. Aiming for an entry on point #3 below could work out just fine.

Learn: Validate Trendlines

 

Each time you see the price bounce off the same line, the more likely it is that others are watching it too and are playing the same game you are. This could help you get several good entries in a row, but remember trendlines won't last forever. So you want to make sure you set proper stop losses to get you out quickly if the support/resistance trendline eventually fails.

Tip #3 – Buy Bullish Trendlines, Sell Bearish Trendlines

 

The trend is your friend! This steadfast rule also applies to trading trendlines. For experienced traders, this basically means we should only look to buy at bullish support lines and sell at bearish resistance lines. For traders not into trading jargon, let the following images below explain this to you.

 

Learn : Buying Bullish Support Trendlines

 

An upward slanting (bullish) trendline means the price has been trending up, so we want to look for buying opportunities. Buying opportunities occur when the price drops down and comes close to the trendline that has caused upward bounces before.

 

Learn : Selling Bearish Resistance Trendlines

 

A downward slanting (bearish) trendline means the price has been trending down, so we want to look for selling opportunities. Selling opportunities occur when the price moves up and comes close to the trendline that has caused downward bounces before.

Trading only in the direction of the trend well let us exploit potential trendline bounces as efficiently as possible. And while they won't always give us winning trades, the trades that are winners should give us more pips than had we been attempting to place trades against the trend.

(Note: There is also the potential to trade a break of a trendline rather than a bounce, but that is a more advanced technique. This is something to be covered in a future article.)

Connecting the Dots

Coming full circle, trendlines are a very simple tool to use. You are connecting dots on a chart. But hopefully the 3 tips above will help you take drawing trendlines to the next level. Make sure that the lines you draw are connecting two or more highs or two or more lows, but have not been broken by the price between those points. Remember to look for at a 3rd bounce to validate a trendline. Also, make sure you are taking advantage of trading with the trend by looking for buys in bullish markets and sells in bearish markets.

Overall, I hope this makes you more confident in drawing trendlines. Good trading!

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Channels

If we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel. No, we're not talking about ESPN, ABC, or Cartoon Network. Still, this doesn't mean that you should walk away like it's a commercial break- channels can be just as exciting to watch as America's Next Top Model or Entourage!

Channels are just another tool in technical analysis which can be used to determine good places to buy or sell. Both the tops and bottoms of channels represent potential areas of support or resistance.

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line. To create a down (descending) channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line. When prices hit the bottom trend line, this may be used as a buying area. When prices hit the upper trend line, this may be used as a selling area.

Types of channels

There are three types of channels:

1. Ascending channel (higher highs and higher lows)
2. Descending channel (lower highers and lower lows)
3. Horizontal channel (ranging)

Important things to remember about trend lines:

• When constructing a channel, both trend lines must be parallel to each other.
• Generally, the bottom of channel is considered a buy zone while the top of channel is considered a sell zone.
• Like in drawing trend lines, DO NOT EVER force the price to the channels that you draw! A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at another is not correct and could lead to bad trades.

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Trading the Lines

Now that you know the basics, it's time to apply these basic but extremely useful technical tools in your trading. Because here  we want to make things easy to understand, we have divided trading support and resistance levels into two simple ideas: the Bounce and the Break.

 

The Bounce

As the name suggests, one method of trading support and resistance levels is right after the bounce.

Many retail traders make the error of setting their orders directly on support and resistance levels and then just waiting to for their trade to materialize. Sure, this may work at times but this kind of trading method assumes that a support or resistance level will hold without price actually getting there yet.

You might be thinking, "Why don't I just set an entry order right on the line? That way, I am assured the best possible price."

When playing the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. Instead of simply buying or selling right off the bat, wait for it to bounce first before entering. By doing this, you avoid those moments where price moves fast and break through support and resistance levels. From experience, catching a falling knife can get really bloody...

 

The Break

In a perfect world, support and resistance levels would hold forever, Nifty would be healthy, and we'd all have Sensex. In a perfect trading world, we could just jump in and out whenever price hits those major support and resistance levels and earn loads of money. The fact of the matter is that these levels break... often.

So, it's not enough to just play bounces. You should also know what to do whenever support and resistance levels give way! There are two ways to play breaks: the aggressive way or the conservative way. 

The Aggressive Way

The simplest way to play breakouts is to buy or sell whenever price passes convincingly through a support or resistance zone. The key word here is convincingly because we only want to enter when price passes through a significant support or resistance level with ease. We want the support or resistance area to act as if it just received a Chuck Norris karate chop: We want it to wilt over in pain as price breaks right through it.

The Conservative Way

Imagine this hypothetical situation: you decided to go long INR hoping it would rise after bouncing from a support level. Soon after, support breaks and you are now holding on to a losing position, with your account balance slowly falling.

Do you... 

1. Accept defeat, get the heck out, and liquidate your position?
OR
2. Hold on to your trade and hope price rises up again?

If your choice is the second one, then you will easily understand this type of trading method. Remember, whenever you close out a position, you take the opposite side of the trade. Closing your INR long trade at or near breakeven means you will have to short the INR by the same amount. Now, if enough selling and liquidation of losing positions happen at the broken support level, price will reverse and start falling again. This phenomenon is the main reason why broken support levels become resistance whenever they break. As you would've guessed, taking advantage of this phenomenon is all about being patient. Instead of entering right on the break, you wait for price to make a "pullback" to the broken support or resistance level and enter after the price bounces. 

 

A few words of caution... THIS DOES NOT HAPPEN ALL THE TIME. "RETESTS" OF BROKEN SUPPORT AND RESISTANCE LEVELS DO NOT HAPPEN ALL THE TIME. THERE WILL BE TIMES THAT PRICE WILL JUST MOVE IN ONE DIRECTION AND LEAVE YOU BEHIND. BECAUSE OF THIS, ALWAYS USE STOP LOSS ORDERS AND NEVER EVER HOLD ON TO A TRADE JUST BECAUSE OF HOPE.

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Summary: Support and Resistance, Trend Lines, Channels

Summary: Support and Resistance

 When the market moves up and then pulls back, the highest point reached before it pulls back is now resistance. As the market continues up again, the lowest point reached before it climbs back is now support. One thing to remember is that horizontal support and resistance levels are not exact numbers. To help you filter out these false breakouts, you should think of support and resistance more of as "zones" rather than concrete numbers. One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart. Another thing to remember is that when price passes through a resistance level, that resistance could potentially become support. The same could also happen with a support level. If a support level is broken, it could potentially become a resistance level 

Trend Lines

In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

There are three types of trends: 

1. Uptrend (higher lows)
2. Downtrend (lower highs)
3. Sideways trends (ranging)  

Channels

 

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak.

To create a down (descending) channel, simple draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley.

1. Ascending channel (higher highs and higher lows)
2. Descending channel (lower highers and lower lows)
3. Horizontal channel (ranging)

Trading support and resistance levels can be divided into two methods: the bounce and the break.

When trading the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. Instead of simply buying or selling right off the bat, wait for it to bounce first before entering. By doing this, you avoid those moments where price moves so fast that it slices through support and resistance levels like a knife slicing through warm butter.

As for trading the break, there is the aggressive way and there is the conservative way. In the aggressive way, you simply buy or sell whenever the price passes through a support or resistance zone with ease. In the conservative way, you wait for price to make a "pullback" to the broken support or resistance level and enter after price bounces.

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Candlestick Basic, Patterns

Understanding candlestick charts

Candlestick charts are probably the most commonly used charts by Stock, Commodities and forex traders. This is the preferred method of displaying price action because these charts provide a quick and easy way to size up the market. When looking at candlestick charts there are 3 elements that you should pay attention to.

Color of the candles

Just simply watching what color is prevalent at the moment you can get an instant feedback on who is in control of the market. More green then red candles indicate that we’re in a bullish move or uptrend. Reversely more red on your charts indicates that we’re most likely in a downward trend. A mix of green and red with no dominating color shows us that none of the players in the market is in control and we’re trading in a range.

Size of the candles

The size of the candles indicates the momentum of the price. Big candles indicate increasing momentum in price while small candles indicate indecision. See the chart below of some recent price action in the Euro.

Notice the big candles on the chart above and how whenever they start to pop up price “makes a run for it”. Momentum increases and trends starts to develop.
Shape of the candles
The 3rd element of the candles that you should pay attention to is the shape. The chart below marks shows a type of candle that is called a doji. A doji is a small candle with an opening and closing price that are almost equal. It indicates indecision in the market and a possible reversal.

The other candle shape type that you should look out for is is what is commonly called a Pin Bar. A pin bar is a price action reversal pattern. The chart above shows example of three of these Pin Bars on the Euro. Notice the long wicks at the bottom of the candles. The wicks indicate that sellers were quickly pushed back by the buyers as prices change direction. The longer the wicks are the more the odds increase that we might see a reversal in price.

Introduction

In the 1700s, a legendary Japanese rice trader named Homma used trading techniques that eventually evolved into the candlestick techniques that technical analysts on the Japanese stock market used in the 1870s. Steve Nison introduced these techniques to the Western world in his first book, Japanese Candlestick Charting Techniques.

The advantage of using candles on charts is that single or multiple candle patterns give earlier and more reliable reversal signals. Every candle shows the activity for the referenced period in hourly, daily, or weekly charts, for example.

 Figure 6.1: Horizontal reference points of the candlestick. 

In figure 6.1, the horizontal reference points of the candle represent the opening price, the highest price, the lowest price, and the closing price of the considered period. The rectangular portion of the candle, or the body, represents the range between the opening and the closing prices. If the closing price is higher than the opening price, the body is white (not filled). If the closing price is lower than the opening price, the body is black (filled).

Figure 6.2: Candlestick naming.

A candle consists of either just a body or a body with an upper and/or a lower shadow. A candle with an opening and closing price at almost the same price level is called a doji (figure 6.2). The candlewicks are called shadows, and they extend up to the highest price and down to the lowest price of the related period. Candlestick charts can be used in any time frame, including minutes, hours, days, weeks, or months.

Candlestick chart patterns are formed by one or more candles; they indicate a short-term trend reversal or a trend continuation. You must always take into account the previous trend when interpreting candlestick patterns. Candlestick patterns do NOT give price targets!

Format, Naming, and Meaning Candlesticks Format Overview

Format description:

Sr.	Name	Interpretation
1	Big white body (White Marubozu)	Very positive
2	Big black body (Black Marubozu)	Very negative
3	White opening Marubozu	Quite positive
4	White closing Marubozu	Positive
5	Black closing Marubozu	Negative
6	Black opening Marubozu	Quite negative
7	White candle	No direction
8	Black candle	No direction
9	Dragonfly doji	Reversal?
10	Doji star	Reversal?
11	Gravestone doji	Stable/Reversal
12	Long-legged doji	Reversal?
13	Four price doji	Reversal?
14	Hammer (white) Hanging man	Bottom reversal Top reversal
15	Hammer (black) Hanging man	Bottom reversal Top reversal

Psychological Background 

Candlesticks psychological background 1.

 







The candlesticks demonstrate the psychological trading that takes place during the period represented by a single candle.

Candlesticks psychological background 2.

 Rising power candles ------------------

Some candles with falling power ---------------

Candles with reversal power -------------------

 Important  Main  Factor 

• A big white body means buyers are in power, and the trend is up.
• A big black body means sellers are in power, and the trend is down.
• A small body means that buyers and sellers are trying to take power.
• A big shadow below is a positive sign and indicates strength.
• A big shadow above is a negative sign and indicates weakness.
• A doji is a candle with opening and closing prices that are close together.
• A doji means that price acceleration is slowing down and that bulls and bears are in balance.
• A doji at a top or bottom often is the first signal of a price reversal.

Candlestick Patterns

The power of Candlestick Charts is with multiple candlesticks forming reversal and continuation patterns. These candlestick patterns given below:

 

  

 

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