Candlestick Charts

Another type of chart used in technical analysis is the candlestick chart, so called because the main component of the chart representing prices looks like a candlestick, with a thick body, called the real body, and usually a line extending above and below it, called the upper shadow and lower shadow, respectively. The top of the upper shadow represents the high price, while the bottom of the lower shadow represents the low price. Patterns are formed both by the real body and the shadows. Candlestick patterns are most useful over short periods of time, and mostly have significance at the top of an uptrend or the bottom of a downtrend, when the patterns most often signify a reversal of the trend.

While the candlestick chart shows basically the same information as the bar chart, certain patterns are more apparent in the candlestick chart. The candlestick chart emphasizes opening and closing prices. The top and bottom of the real body represents the opening and closing prices. Whether the top represents the opening or closing price depends on the color of the real body—if it is white, then the top represents the close; black, or some other dark color, indicates that the top was the opening price. The length of the real body shows the difference between the opening and closing prices. Obviously, white real bodies indicate bullishness, while black real bodies indicate bearishness, and their pattern is easily observable in a candlestick chart.

52-week candlestick chart of Google, with each candlestick depicting the open, high, low, and close of each week; below each candlestick is that week’s trading volume.

BigCharts – Interactive Chartinghttp://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=goog&time=&freq=

A doji is a candlestick with no real body, because the open price was equal to the close price. This implies that the market is in a transitional phase, that a trend is ending, or that the market is indecisive. When the opening and closing price are between the high and low price, then it is referred to as a plain doji, but if the opening and closing prices are either the high or low price, then it is given a specific interpretation.

A dragonfly doji has a long lower shadow, but no upper shadow, which means that the open and close were also the high price for the day, but also that the price was a lot lower during the day but came back up. A gravestone doji results when the open and close prices equals the low of the day, but that the price did rise significantly during the course of the day—thus, it has a long upper shadow. Both the dragonfly and gravestone doji signify that a trend is ending, whether it be up or down.

Sometimes one or both of the shadows are missing, which is a good indicator of bullish or bearish sentiment, especially if the real body is long. A shaven top results when the open or close was also the high for the day. A black shaven top indicates that the opening price was the high for the day, that the price continually dropped from there: a bearish sign. A white shaven top is bullish, since the close was also the high and that prices rose throughout the day.

A shaven bottom results when the opening or closing price is also the low. A white shaven bottom results when the opening price was the low price and it went up from there, while a black shaven top results when the close is also the low, indicating bearish sentiment.

Long shadows indicate that a lot of trading took place either far above or far below the opening and closing prices, and usually indicate that a trend may be ending.

Candlestick Patterns

As with price bars, it is the pattern that matters most in candlestick charts. Many patterns become more apparent using candlestick charting, especially reversal patterns.

Reversal Patterns

The hammer and the hanging man are characterized by a short real body and a lower shadow that is 2 to 3 times longer than the body. A candlestick of this shape that occurs at the top of an uptrend is the hanging man and one that occurs at the bottom of a downtrend is the hammer. Both signify a reversal of the preceding trend regardless of whether they are white or black.

Another reversal pattern is the harami, which means pregnant in Japanese, where a small real body follows a long real body. (Mnemonic: think of the long real body giving birth to the smaller body.)  The harami pattern is similar to the inside bar pattern, but the difference is that in the harami, only the real body is within the price of the preceding real body; the shadows can extend beyond the 1^st body. When the large and small bodies are a different color, then the pair is known as a spinning top. Generally, the harami indicates a trend reversal.

The opening and close of an engulfing candlestick is both higher and lower than the opening and the close of the day before. A black engulfing candlestick in an uptrend signifies that it is ending, while a white engulfing candlestick at the end of a downtrend signifies that the trend is reversing into an uptrend. The larger the difference between the 2 bars, the stronger the signal for a trend reversal.

A shooting star has a small real body but a long upper shadow and sits above a preceding uptrend, which is interpreted as a failure of the continuation of the uptrend, and that the trend is reversing. Similarly, the inverted hammer sits at the bottom of a downtrend, with a long upper shadow and little or no lower shadow and indicates the beginning of an uptrend.

Another set of patterns indicating a trend reversal are the dark cloud cover and the piercing line—neither of these indicators are as good as the preceding patterns. The dark cloud cover consists of 2 candlesticks where the 1^st has a large white body and the 2^nd has a large black body at the top of an uptrend. The black body opens above the upper shadow of the white body and closes within the range of the white body, signifying a reversal to a downtrend. Likewise, the piercing line is a large black body followed by a large white body at the bottom of a downtrend and is otherwise the opposite of the dark cloud cover, portending the reversal of the downtrend.

Three white soldiers is a pattern occurring at the bottom of a downtrend and marks the beginning of an uptrend, where each of the candlesticks has a long white real body, with each candlestick higher than the one before. The size of the bodies indicates the strength of the signal. Likewise, three black crows are 3 large black bodies at the top of an uptrend, with each candlestick lower than the preceding one and indicates the beginning of a downtrend.

Continuation Patterns

Some patterns signify the continuation of the present trend.

A rising window is a pattern consisting of at least 3 candlesticks, where there is a upward gap between the 1^st 2, and the 3^rd candlestick at least level with the 2^nd candlestick, and fails to fill the gap. A falling window has the opposite pattern.

Series of Patterns

A trend doesn’t continue forever, and it may last only minutes or hours, depending on the time frame considered. Therefore, there will be a series of patterns that change as the price moves from the support line to the resistance line. The support line is formed by prices where increased amount of buying prevents the price from falling further; a resistance line is formed by the upper price limit where increased selling prevents the price from moving higher. The support line and the resistance line form the channel. The astute trader will have to be constantly on the lookout for these changing patterns to respond quickly enough to take advantage of them.

How to Calculate Leverage, Margin, And Pip Values in Margin

written 5 April 2011 taken from http://thismatter.com/money/forex/leverage-margin-pips.htm

Although most trading platforms calculate profits and losses, used margin and useable margin, and account totals, it helps to understand how these things are calculated so that you can plan transactions and can determine what your potential profit or loss could be.

Leverage and Margin

Most forex brokers allow a very high leverage ratio, or, to put it differently, have very low margin requirements. This is why profits and losses can be so great in forex trading even though the actual prices of the currencies themselves do not change all that much—certainly not like stocks. Stocks can double or triple in price, or fall to zero; currency never does. Because currency prices do not vary substantially, much lower margin requirements is less risky than it would be for stocks.

Most brokers allow a 100:1 leverage, or 1% margin. This means that you can buy or sell $100,000 worth of currency while maintaining $1,000 in your account. Mini-accounts can have leverage ratios as high as 200.

The margin in a forex account is often referred to as a performance bond, the amount of equity needed to ensure that you can cover your losses. Thus, you do not buy currency with borrowed money, and no interest is charged on the rest of the currency’s value that is not covered by margin. So if you buy $100,000 worth of currency, you are not depositing $1,000 and borrowing $99,000 for the purchase. The $1,000 is to cover your losses. Thus, buying or selling short currency is like buying or selling short futures rather than stocks.

The margin requirement can be met not only with money, but also with profitable open positions. The equity in your account is the total amount of cash and the amount of unrealized profits in your open positions minus the losses in your open positions.

Total Equity = Cash + Open Position Profits – Open Position Losses

Your total equity determines how much margin you have left, and if you have open positions, total equity will vary continuously as market prices change. Thus, it is never wise to use 100% of your margin for trades—otherwise, you may be subject to a margin call. In most cases, however, the broker will simply close out your largest money-losing positions until the required margin has been restored.

Most brokers advertise leverage ratios, which are usually 100:1 for regular accounts and could go as high as 200:1 for some mini-accounts. Or, often, only the leverage is quoted, since the denominator of the leverage ratio is always 1. The amount of leverage that the broker allows determines the amount of margin that you must maintain. Leverage is inversely proportional to margin, which can be summarized by the following 2 formulas:

Margin = 1/Leverage

Example: A 100:1 leverage ratio yields a margin percentage of 1/100 = 0.01 = 1%. A 200:1 ratio yields 1/200 = 0.005 = 0.5%.

Leverage = 1/Margin = 100/Margin Percentage

Example: If the margin is 0.01, then the margin percentage is 1%, and leverage = 1/0.01 = 100/1 = 100.

To calculate the amount of margin used, multiply the size of the trade by the margin percentage. Subtracting the margin used for all trades from the remaining equity in your account yields the amount of margin that you have left.

To calculate the margin for a given trade:

Margin Requirement = Current Price x Units Traded x Margin

Example—Calculating Margin Requirements for a Trade and the Remaining Account Equity

You want to buy 100,000 Euros (EUR) with a current price of 1.35 USD, and your broker requires a 1% margin.

Required Margin = 100,000 x 1.35 x 0.01 = $1,350.00 USD.

Before this purchase, you had $2,000 in your account. How many more Euros could you buy?

Remaining Equity = $2,000 – $1,350 = $650

Since your leverage is 100, you can buy an additional $65,000 ($650 x 100) worth of Euros:

65,000 / 1.35 ≈ 48,148 EUR

To verify, note that if you had used all of your margin in your initial purchase, then, since $2,000 gives you $200,000 of buying power:

Total Euros Purchased with $200,000 USD = 200,000 / 1.35 = 148,148 EUR

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Pip Values

In most cases, a pip is equal to .01% of the quote currency, thus, 10,000 pips = 1 unit of currency. In USD, 100 pips = 1 penny, and 10,000 pips = $1. A well known exception is for the Japanese yen (JPY) in which a pip is worth 1% of the yen, because the yen has little value compared to other currencies. Since there are about 120 yen to 1 USD, a pip in USD is close in value to a pip in JPY. (See Currency Quotes; Pips; Bid/Ask Quotes; Cross Currency Quotes for an introduction.)

Because the quote currency of a currency pair is the quoted price (hence, the name), the value of the pip is in the quote currency. So, for instance, for EUR/USD, the pip is equal to 0.0001 USD, but for USD/EUR, the pip is equal to 0.0001 Euro. If the conversion rate for Euros to dollars is 1.35, then a Euro pip = 0.000135 dollars.

Converting Profits and Losses in Pips to USD

To calculate your profits and losses in pips to your native currency, you must convert the pip value to your native currency. The following calculations will be shown using USD as an example.

When you close a trade, the profit or loss is initially expressed in the pip value of the quoted currency. To determine the total profit or loss, you must multiply the pip difference between the open price and closing price by the number of units of currency traded. This yields the total pip difference between the opening and closing transaction.

If the pip value is USD, then the profit or loss is expressed in USD, but if USD is the base currency, then the pip value must be converted to USD, which can be found by dividing the total pip profit or loss by the conversion rate.

Example—Converting CAD Pip Values to USD.

You buy 100,000 Canadian dollars with USD, with conversion rate USD/CAD = 1.1000. Subsequently, you sell your Canadian dollars for 1.1200, yielding a profit of 200 pips in Canadian dollars. Because USD is the base currency, you can get the value in USD by dividing the Canadian value by the exit price of 1.12.

100,000 CAD x 200 pips = 20,000,000 pips total. Since 20,000,000 pips = 2,000 Canadian dollars, your profit in USD is 2,000/1.12 = 1,785.71 USD.

For a cross currency pair not involving USD, the pip value must be converted by the rate that was applicable at the time of the closing transaction. To find that rate, you would look at the quote for the USD/pip currency pair, then multiply the pip value by this rate, or if you only have the quote for the pip currency/USD, then you divide by the rate.

Example—Calculating Profits for a Cross Currency Pair

You buy 100,000 units of EUR/JPY = 164.09 and sell when EUR/JPY = 164.10, and USD/JPY = 121.35.

Profit in JPY pips = 164.10 – 164.09 = .01 yen = 1 pip (Remember the yen exception: 1 JPY pip = .01 yen.)

Total Profit in JPY pips = 1 x 100,000 = 100,000 pips.
Total Profit in Yen = 100,000 pips/100 = 1,000 Yen

Because you only have the quote for USD/JPY = 121.35, to get profit in USD, you divide by the quote currency’s conversion rate:

Total Profit in USD = 1,000/121.35 = 8.24 USD.

If you only have this quote, JPY/USD = 0.00824, which is equivalent to the above value, you use the following formula to convert pips in yen to domestic currency:

Total Profit in USD = 1,000 x 0.00824 = 8.24 USD.

Mini Forex and Trading Platforms

By : Ryan Lee Daniels
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Before we can even talk about Mini Forex Trading Platforms, we first have to understand what a mini forex contract is.

So what exactly is a mini forex contract?

A Mini Forex Contract

To understand what a Mini Forex contract is, let’s take a look at what a standard contract in the forex market is. Once you understand what a standard forex trading contract is, you’ll have a clearer grasp of what a mini forex contract is.

The Forex markets are traded using contracts or lots, where one contract is also understood to be one lot. You can buy or sell contracts, depending on whether you expect the currency pair to move up or down. Of course, if you expect the pair to move up, you’d BUY the contract. And if you expect the pair to move down, you’d SELL the contract.

How is ONE Standard Contract/Lot Valued?

One STANDARD contract in the forex market is valued at USD$100,000. When you buy or sell 1 contract, you are in effect buying or selling USD$100,000.

With the leverage available at most brokers, you don’t actually require USD$100,000 to buy or sell ONE contract. With a leverage of 100:1, you can buy or sell ONE Standard Contract worth USD$100,000 with only $1,000 in your account.

However this is highly inadvisable because if you only have USD$1,000 in your account, you should not be trading ONE Standard contract as that could potentially wipe out your account in one single bad trade.

So if ONE Standard Lot is worth USD$100,000, how much is ONE Mini Forex contract worth?

How ONE mini forex contract relates to ONE standard contract

A mini forex contract is 1/10th the value of a standard contract. So since a standard contract is worth USD$100,000, a mini forex contract is worth USD$10,000.

In other words:

One Standard Contract: USD$100,000 One Mini Contract: USD$10,000

When you trade ONE Mini Forex Lot, you are controlling USD$10,000.

Now, some forex brokerages have broken the value of the Standard Lot even further into Micro-Mini Forex contracts, where one Micro-Mini is 1/10th of a Mini Forex Lot.

Summary of Contract Sizes

In summary, there are 3 different contract values:

One Standard Contract: USD$100,000

One Mini Contract: USD$10,000

One Micro-Mini Contract: USD$1,000

So when you trade, you can always use the appropriate contract size for your account equity. To choose the appropriate contract size, it helps when you know the value of 1 pip of each contract size.

The value of 1 pip per:

Standard Contract (1.00 lots): $10

Mini Contract (0.10 lots): $1

Micro-Mini Contract (0.01 lots): $0.10

Even with a small trading account, you can still trade 1 micro-mini contract (0.01 lots), where 1 pip is worth $0.10. From there, you can slowly scale up your trading size from 0.01 lots to 0.02 lots or more, depending on the equity level at that time.

And depending on the trading platform and the broker that you are using, you may or may not have access to one micro-mini forex lot, so you have to check out which brokers offer contract sizes all the way down to micro-minis.

Selecting A Trading Platform or Broker

While there are several trading platforms or brokers, you are advised to do some background checks on them, not only in terms of their trading platform capabilities, but also in the financial solvency of the brokerage itself.

A very useful place online to find out the financial solvency of the broker you are researching is using the US Commodity Futures and Trading Commission website.

Be A Smarter Trader

About the author:
Ryan Lee Daniels runs a website dedicated to Forex Trading Education.

Global Forex News

Forex (Foreign Exchange)

1. Fundamental Analysis

Economy Indicators

Fundamental analysis involve a lot of analysis on the macroeconomic situation.

Thus, economy indicators of the country such as GDP growth rates, unemployment rates, retail sales, and interest rate are used heavily in when valuating a country’s currency. Some of the frequent used economy indicators in Forex trading are as below (Click in each for detail explanations):

• The Gross Domestic Product (GDP)
• Retail Sales
• Interest Rates
• Unemployment Rate

Besides those listed above, other fundamental factors used to analysis the currency strength include Industrial Production Reports, Consumer Price Index (CPI), Manufacturing PMI-ISM, and Manufacturing Production. We will cover each of these indicators from time to time.

How are indicators used in Forex fundamentals trading?

A country’s economic situation refelects directly onto the currecny trading world. Hence, it is important for a Forex traders to keep an close eye on the financial clalender release by it country itself or private sectors. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency’s price. There are third-party reports, technical factors, and many other things that also can drastically affect a currency’s valuation.

Also, it is recommended to study the fundamental aspects of several country whenever trading in the forex market. For those countries that have strong political/economical connection, currencies value flux hand-in-hand. Thus researching a few countru in a trade is necessary.

Some useful tips when implementing fundamentals analysis in Forex trading are:*

• Economic calendar: When and where. Currency values response sharply to certain release of economy indicators. Keep an close eyes on the currency price trend whenver there is a release on related economy indicators.
• Be informed about the economic indicators that are capturing most of the market’s attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most watched indicators.
• Know the market expectations for the data, and then pay attention to whether or not the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results and, if there is, be aware of the possible justifications for this difference.

*References from http://www.investopedia.com/articles/trading/04/031704.asp

2. From Fundamentals to Technicals in FX Market

Pure fundamental trading is very problematics. Without a doubt the analysis is very effective in predicting the overall economic condition and the market behavior.

It gives clear picture on general economy health of certain entity (a country in case of Forex) and shows how economy situation become what it is now as well as predicting the overall economic growth trend in the future.

However, information obtained thru fundamental studies often fails to signify short term fluctuation in Forex market. Thus, it is wise to apply precise techniques to convert fundamental study’s results into accurate entry/exit price indicators.

This will then bring us to the topic of Technical Analysis in Forex trading.

This Economic Calendar is developed and provided by FxFisherman.com, a huge forex community.

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Foreign exchange

WHAT IS FOREX

The simple sense of Forex (Forex currency exchange, Foreign Exchange) is simultaneous purchase and sale of the currency or the exchange of one country’s currency for the one of another countr. Forex is an interbank market that was created in 1971 when international trade transitioned from fixed to floating exchange rates. Since then the rates of currencies relative to each other are determined by the most obvious means which is the exchange at a mutually agreed rate. The Forex market is a non-stop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders’ investments increase or decrease in value based upon currency movements. Foreign exchange market conditions can change at any time in response to real-time events.

WHAT IS FOREX

The simple sense of Forex (Forex currency exchange, Foreign Exchange) is simultaneous purchase and sale of the currency or the exchange of one country’s currency for the one of another countr. Forex is an interbank market that was created in 1971 when international trade transitioned from fixed to floating exchange rates. Since then the rates of currencies relative to each other are determined by the most obvious means which is the exchange at a mutually agreed rate. The Forex market is a non-stop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders’ investments increase or decrease in value based upon currency movements. Foreign exchange market conditions can change at any time in response to real-time events.

The forex market exists wherever one currency is traded for another. It is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is almost US$ 4 trillion.

The main enticements of currency dealing to private investors and attractions for short-term Forex trading are:

1. 24-hour trading, 5 days a week with non-stop access to global Forex dealers.

2. An enormous liquid market making it easy to trade most currencies.

3. Volatile markets offering profit opportunities.

4. Standard instruments for controlling risk exposure.

5. The ability to profit in rising or falling markets.

6. Leveraged trading with low margin requirements.
7. Many options for zero commission trading.

The investor’s goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is always done in currency pairs. The world currencies do not have a fixed exchange rate and are always fluctuating being traded in the currency pairs Investments usually deal with 4 major pairs: Euro against US dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar against Swiss franc or EUR/USD, USD/JPY, GBP/USD, and USD/CHF used to sign these pairs accordingly. These major pairs are considered as Forex market’s “blue chips”. You will not receive any dividends on the currencies. Well known “buy low – sell high” gives the profit for currency trades.