Forex Candlesticks | Knowing them is not enough

I know, I know. Forex Candlesticks have taken on this mystique that simply by learning them, the new trader can put away his indicators for good and have an advantage over the other traders that are meandering with the more traditional forms of technical analysis. So, if you intend to learn to trade forex online, is the forex candlestick route really a viable route for the absolute beginner? It seems traders absolutely love the idea of some old man hermit on a hill who is able to predict where the forex market will move simply by looking at his platform and nothing else....

• Not worrying about dow theory (or any other trading theory for that matter)
• Not charting out the support and resistance lines
• Not learning divergence and how it works.

So, how easy is it to learn forex candlesticks and more importantly, is it really all that and more? First let's take a look at what they are and where they came from....




The history of the Forex Candlestick

First of all, the forex candlestick originated nearly 200 years ago in Japan and were used as a way to analyze the rice markets. Hence, why there is the "mystique" of candlesticks in some circles involving the forex market. Of course, over time, these candlesticks have been honed and evolved into quite a tool for traders that truly understand them. Not only that, the candlestick on platforms just look prettier than its uglier cousins, the bar and line charts. And let's face it...most beginner traders like to junk up their platforms with all sorts of colors and icons. Just kidding...

But seriously, the reason why so many traders prefer forex candlesticks over the more standard bars and lines is because they can actually visualize where the market is going (or may go). One thing to note here. If you are planning to learn candlestick methods for your trades, it is better to use a long term timeline as you will be able to identify trends in relation to the candlesticks easier. As you become more comfortable with the methods, you can graduate to the shorter timelines.

The secret is in the body of the candlestick

First of all, if you are using a platform, the typical color scheme for the bodies of your candlesticks will most likely be black and white. However, I suggest you change them to the more colorful green (for bullish markets) and red (for bearish markets). This actually works for me because I can more aptly visualize where the trades are going.

So, what does the body tell you? Basically, assuming you changed the color scheme to green and red, if the body is green, it will simply mean that the candlestick closed at a higher (bullish) position than it opened. Alternatively, if it was red, it would mean that the market closed at a lower position than it opened.

Also, the actual length of the candlestick will show you visually how much gap there was between the opening and closing price. For a beginner, this can show you very quickly how much price movement there was.

So, in short, a long stick indicates alot of price movement (either up or down). A short stick indicated a little price movement. And really, what I have noticed is that the lower the trading volume among currency pairs, the less price movement there is. The size of the candlestick implicates who is in charge, the bulls or the bears.

To really understand how this works, you have think of each "bar" or "stick" as a tug of war between the bulls and the bears. The longer the candlestick, the more in charge one is over the other (price movement). So if you have a long forex candle that is green, you can naturally assume that the bulls (at least for the moment) are in charge.

In most cases, you will also find that there are "points" attached to your candlesticks on its ends. These are called shadows and reflect the highest and lowest points that the price was traded for. While many traders may view them as important, you have to realize that the real understand of forex comes from the body.

Marubozu Candle for forex trading

Now, normally when you are doing your technical analysis, you will see a series of candles with shadows. The Marubozu candle (aka shaven candle) doesn't have a shadow but is simply one filled bar. The Marubozu is actually a good candle to use when you are trying to recognize trends and more importantly momentum. As you probably have figured out, the forex market is built on trends and momentum (the psychology of traders can push the momentum further). Why this type of candle is a better indicator than a typical candle with shadows is that it reflects an upward or downward (bullish or bearish) trend, with no pullbacks at all. This reflects a very strong momentum push

Typically (but not always), if you run into one of these candles, chances are great that the price movement will continue to rise or fall in the direction that the candlestick was showing. And obviously, the longer the candle (= price movement), the stronger the momentum. Understand that last statement...the more movement with the addition of a Marabozu can equate to a stronger push either bullish or bearish.

So, if this is the case, can't you simply initiate trades according to a Marabozu? Not exactly. If this was the case, there would be millionaires everywhere. You have to realize that the markets are driven up and down by the traders themselves. What this means is that something as simple as a forex news report can create a "false positive" in terms of movement.

For instance, you may see a bullish marabozu and initiate the trade only to find that the trade goes south almost immediately. What is happening is that traders are reacting to the news and then selling off their stock to pull in immediate profits. In other words, you need to understand how the market is reacting on the whole...not simply from one stick.

Now obviously, there are a ton of different candlesticks and "clusters" that you can use in determing trends but I won't go into them as there are entire websites devoted to this. This is just meant as an overview of forex candlesticks.

And that brings me to the point of this post in the first place. Everyone is looking for an "easy way" out in regards to trading forex online. However, learning how to trade forex online is a growing process in which you need to learn the fundamentals first and then apply what you have learned to other, more advanced trading strategies. For instance, a forex candlestick (or a bar or line) will do you absolutely no good if you have no idea where the market is going in relation to all the other things...you know, like the support and resistance lines and the overall trend of the market.

Automated Forex Trading Systems | Do They Actually Work?

I have been around the block in regards to forex products and forex systems and as many of you are probably aware, I am no fan of Automated Forex Trading Systems, although some do work. Now before you get your panties in a bunch and ask the question "if they work, why don't I like them?", hear me out. Every Automated Forex Trading System that I have messed around with has made me money and lost me money as well. And for you newbies out there who are looking for a slam dunk in terms of making consistent profits, if you live by automated software, you will, in fact die by automated software. And worse still, you will have no idea why your automated trading system didn't work.

Here are the reasons why I don't think that Beginners of forex online trading should use an automated system:

• One of the supposed benefits to automated software for the forex market is that you don't have to know how to trade. The jargon in the sales letter used to promote these systems pander to the beginner. "You can set it and forget it and watch as the profits roll in daily". Well, anyone that has been in the forex market for even a few months can attest to the fact that given the volatility of the market itself, different situations make for different strategies.
• Because of the fact that you can "set it and forget it", many beginners to forex trading take way too many risks- A couple years ago, the japanese market dropped its interest rates causing the USD to drop rapidly. One of the "automated forex systems" that was working had many of its members suffer margin calls. Bear in mind that these people were probably not aware that with great risk comes great reward. And since up to that point, many were making a killing using this automated trade software, they started thinking that if they ramped up the leverage, they could make even more. One small move can change everything folks...everything. And when the news came out, there were many margin calls from people who had no idea what they were doing. Another one bites the dust!
• Automated Forex Trading Systems are geared for people who don't know a thing about Forex Trading- I have a serious beef with this. If you don't know how to ride a motorcycle, it probably isn't a good idea for your first drive to be on the autobahn. Same thing applies to trading. If you have never traded online, then it is probably good to acclimate yourself to trading first before you start to work on someone else's revolutionary system. Then again...it is your money...I guess if you don't mind not understanding how things work then you won't mind not knowing why a system failed you, right?
• If you use an Automated Forex Trading System and don't understand how the system works (what numbers are getting plugged in to establish entry and exit points, for example), then you will likely never know how to augment your system. If you are a beginner, then this should apply to you doubly.

I don't want anyone to think that I am poo-poohing automated systems for forex. On the contrary, I do occasionally use other people's systems from time to time. I am actually testing Forex Killer right now for some shorter term trades (I do mainly long term trades). Automated systems actually have a place for those who want to do trades without having the headache of sitting computer side all day long. And if you are a day trader or forex scalper, then a system may be what you are looking for.

Just be aware that an automated forex trading system is likely not going to make you fabolously rich. Just like anything else, it is a tool. And if you are going to use the tool, you should go underneath the hood of the system to see what indicators are being used in order to understand the methodology of why the system is trading the way it is trading. Anything less and you are simply cheating yourself of a potential wealth of knowledge behind the system.

Plus, if you understand how a particular system works, you can always augment it to suit your own personal trading personality...and that my friends, is money in the bank. An automated forex trading system can work for you if you know what you are doing in the first place.