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July 2019

There are dozens of bearish and bullish reversal patterns. We have elected to narrow the field by selecting a few of the most popular patterns for detailed explanations: the engulfing pattern. 

Engulfing Pattern

A reversal candlestick pattern that can be bearish or bullish, depending upon whether it appears at the ...

There are dozens of bearish and bullish reversal patterns. We have elected to narrow the field by selecting a few of the most popular patterns for detailed explanations: the engulfing pattern. 

Engulfing Pattern

A reversal candlestick pattern that can be bearish or bullish, depending upon whether it appears at the end of an uptrend (bearish engulfing pattern) or a downtrend (bullish engulfing pattern). The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body and closes in the opposite direction of the trend. This pattern is similar to the outside reversal chart pattern but does not require the entire range (high and low) to be engulfed, just the open and close.

Continue reading about engulfing patterns or start playing around in a ​risk-free demo account and notice how bullish and bearish engulfing work in real-time.

Bullish Engulfing

The bullish engulfing pattern consists of two candlesticks, the first black and the second white. The size of the black candlestick is not that important, but it should not be a Doji pattern which would be relatively easy to engulf. The second should be a long white candlestick – the bigger it is, the more bullish. The white body must totally engulf the body of the first black candlestick. Ideally, though not necessarily, the white body would engulf the shadows as well. Although shadows are permitted, they are usually small or nonexistent on both candlesticks.

After a decline, the second white candlestick begins to form when selling pressure causes the security to open below the previous close. Buyers step in after the open and push prices above the previous open for a strong finish and potential short-term reversal. Generally, the larger the white candlestick and the greater the engulfing, the more bullish the reversal. Further strength is required to provide bullish confirmation of this reversal pattern.

Bullish Confirmation

Patterns can form with one or more candlesticks; most require bullish confirmation. The actual reversal indicates that buyers overcame prior selling pressure, but it remains unclear whether new buyers will bid prices higher. Without confirmation, these patterns would be considered neutral and merely indicate a potential support level at best. Bullish confirmation means further upside follow-through and can come as a gap up, long white candlestick or high volume advance. Because candlestick patterns are short-term and usually effective for only 1 or 2 weeks, bullish confirmation should come within 1 to 3 days after the pattern.

Bearish Engulfing

The bearish engulfing pattern consists of two candlesticks: the first is white and the second black. The size of the white candlestick is relatively unimportant, but it should not be a doji, which would be relatively easy to engulf. The second should be a long black candlestick. The bigger it is, the more bearish the reversal. The black body must totally engulf the body of the first white candlestick. Ideally, the black body should engulf the shadows as well, but this is not a requirement. Shadows are permitted, but they are usually small or nonexistent on both candlesticks.

After an advance, the second black candlestick begins to form when residual buying pressure causes the security to open above the previous close. However, sellers step in after this opening gap up and begin to drive prices down. By the end of the session, selling becomes so intense that prices move below the previous open. The resulting candlestick engulfs the previous day's body and creates a potential short-term reversal. Further weakness is required for bearish confirmation of this reversal pattern.

Bearish Confirmation

Bearish reversal patterns can form with one or more candlesticks; most require bearish confirmation. The actual reversal indicates that selling pressure overwhelmed buying pressure for one or more days, but it remains unclear whether or not sustained selling or lack of buyers will continue to push prices lower. Without confirmation, many of these patterns would be considered neutral and merely indicate a potential resistance level at best. Bearish confirmation means further downside follow-through, such as a gap down, long black candlestick or high volume decline. Because candlestick patterns are short-term and usually effective for 1-2 weeks, bearish confirmation should come within 1-3 days.

Limitations of Using a Bearish Engulfing Pattern

A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend, however, they are not bullet-proof. Engulfing patterns are most useful following a clean downward price move as the pattern clearly shows the shift in momentum to the upside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.

The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the candlestick pattern. The potential reward from the trade may not justify the risk.

Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don't provide a price target. Instead, traders will need to use other methods, such as technical indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.

Final notes on Bullish and Bearish Engulfing

To be considered a bullish reversal, there should be an existing downtrend to reverse. A bullish engulfing at new highs can hardly be considered a bullish reversal pattern. Such formations would indicate continued buying pressure and could be considered a continuation pattern. 

  • A bullish engulfing pattern is a candlestick chart pattern that forms when a small black candlestick is followed the next day by a large white candlestick, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.
  • Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or more black candlesticks.
  • Investors should look not only to the two candlesticks which form the bullish engulfing pattern but also to the preceding candlesticks.

To be considered a bearish reversal, there should be an existing uptrend to reverse. It does not have to be a major uptrend, but should be up for the short term or at least over the last few days. A dark cloud cover after a sharp decline or near new lows is unlikely to be a valid bearish reversal pattern. Bearish reversal patterns within a downtrend would simply confirm existing selling pressure and could be considered continuation patterns.

  • A bearish engulfing pattern can occur anywhere, but it is more significant if it occurs after a price advance. This could be an uptrend or a pullback to the upside with a larger downtrend.
  • Ideally, both candles are of substantial size relative to the price bars around them. Two very small bars may create an engulfing pattern, but it is far less significant than if both candles are large.
  • The real body—the difference between the open and close price—of the candlesticks is what matters. The real body of the down candle must engulf the up candle.
  • The pattern has far less significance in choppy markets.

Understanding how to read an engulfing pattern is important, but if you want some help, MT5 AM Broker offers a useful Candlestick toolkit and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how bullish engulfing and bearish engulfing can make you serious money.

You can test the trade signals of this indicator by creating a Forex EA in Robo-Advisor 007 (14 Days FREE Trial).

>> Let's Get You Started

 

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Categories:  Education

There are dozens of bearish and bullish reversal patterns. We have elected to narrow the field by selecting a few of the most popular candlestick patterns for detailed explanations: the long shadow reversals.

Long Shadow Reversal Candlestick Patterns

There are two pairs of single candlestick reversal patterns made up of ...

There are dozens of bearish and bullish reversal patterns. We have elected to narrow the field by selecting a few of the most popular candlestick patterns for detailed explanations: the long shadow reversals.

Long Shadow Reversal Candlestick Patterns

There are two pairs of single candlestick reversal patterns made up of a small real body, one long shadow, and one short or non-existent shadow. Generally, the long shadow should be at least twice the length of the real body, which can be either black or white. The location of the long shadow and preceding price action determine the classification.

The first pair, Hammer and Hanging Man, consists of identical candlesticks with small bodies and long lower shadows. The second pair, Shooting Star and Inverted Hammer, also contains identical candlesticks, but with small bodies and long upper shadows. Only preceding price action and further confirmation determine the bullish or bearish nature of these candlesticks. The Hammer and Inverted Hammer form after a decline and are bullish reversal patterns, while the Shooting Star and Hanging Man form after an advance and are bearish reversal patterns.

Continue reading for more information or play around in a risk-free forex demo account and notice how reversal candlestick patterns work in real-time.

Hammer and Hanging Man

The Hammer and Hanging Man look exactly alike but have different implications based on the preceding price action. Both have small real bodies (black or white), long lower shadows and short or non-existent upper shadows. As with most single and double candlestick formations, the Hammer and Hanging Man require confirmation before action.


The Hammer is a bullish reversal pattern that forms after a decline. In addition to a potential trend reversal, hammers can mark bottoms or support levels. After a decline, hammers signal a bullish revival. The low of the long lower shadow implies that sellers drove prices lower during the session. However, the strong finish indicates that buyers regained their footing to end the session on a strong note. While this may seem like enough to act on, hammers require further bullish confirmation. The low of the hammer shows that plenty of sellers remain. Further buying pressure, and preferably on expanding volume, is needed before acting. Such confirmation could come from a gap up or long white candlestick. Hammers are similar to selling climaxes, and heavy volume can serve to reinforce the validity of the reversal.

The image below is an example of how to use in forex trading the hammer candle formation to enter a long trade, while placing a stop-loss below the hammer candle and a take profit at a high enough level to ensure a positive risk-reward ratio.

The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. The low of the long lower shadow confirms that sellers pushed prices lower during the session. Even though the bulls regained their footing and drove prices higher by the finish, the appearance of selling pressure raises the yellow flag. As with the Hammer, a Hanging Man requires bearish confirmation before action. Such confirmation can come as a gap down or long black candlestick on heavy volume.

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star look exactly alike but have different implications based on previous price action. Both candlesticks have small real bodies (black or white), long upper shadows and small or nonexistent lower shadows. These candlesticks mark potential trend reversals but require confirmation before action.


The Shooting Star is a bearish reversal pattern that forms after an advance and in the star position, hence its name. A Shooting Star can mark a potential trend reversal or resistance level. The candlestick forms when prices gap higher on the open, advance during the session, and close well off their highs. The resulting candlestick has a long upper shadow and small black or white body. After a large advance (the upper shadow), the ability of the bears to force prices down raises the yellow flag. To indicate a substantial reversal, the upper shadow should be relatively long and at least 2 times the length of the body. Bearish confirmation is required after the Shooting Star and can take the form of a gap down or long black candlestick on heavy volume.

Traders could take advantage of the shooting star candle by executing a short trade after the shooting star candle has closed. Traders could then place a stop loss above the shooting star candle and target a previous support level or a price that ensures a positive risk-reward ratio. A positive risk-reward ratio has been shown to be the key for those who learned how to trade forex successfully.

The Inverted Hammer looks exactly like a Shooting Star, but forms after a decline or downtrend. Inverted Hammers represent a potential trend reversal or support levels. After a decline, the long upper shadow indicates buying pressure during the session. However, the bulls were not able to sustain this buying pressure and prices closed well off of their highs to create the long upper shadow. Because of this failure, bullish confirmation is required before action. An Inverted Hammer followed by a gap up or long white candlestick with heavy volume could act as bullish confirmation.

Hanging Man vs Shooting Stars vs Hammers

Hanging Man, Shooting Star, Hammer, and Inverted Hammer is kind of similar candlestick patterns. This can lead to some confusion.

The hanging man appears near the top of an uptrend, and so do shooting stars. The difference is that the small real body of a hanging man is near the top of the entire candlestick, and it has a long lower shadow. A shooting star as a small real body near the bottom of the candlestick, with a long upper shadow. Basically, a shooting star is a hanging man flipped upside down. In both cases, the shadows should be at least two times the height of the real body. Both indicate a potential slide lower in price.

The hanging man and the hammer are both candlestick patterns that indicate a trend reversal. The only difference between the two is the nature of the trend in which they appear. If the pattern appears in a chart with an upward trend indicating a bearish reversal, it is called the hanging man. If it appears in a downward trend indicating a bullish reversal, it is a hammer. Apart from this key difference, the patterns and their components are identical. 

Understanding how Hanging Man, Shooting Star or Inverted Hammer candlestick patterns works is important, but if you want some help, the MT5 platform offers a useful Candlestick toolkit and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how reversal candlestick patterns can make you serious money.

You can test the trade signals of these reversal patterns by creating a Forex EA in Robo-Advisor 007 (14 Days FREE Trial).

>> Let's Get You Started

 

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Categories:  Education

Doji candle represents one of the most popular candlestick patterns, providing information both on their own and as components of a number of important patterns. In this article will breakdown the most powerfull doji candlestick pattern for forex trading.

What is Doji 

Doji form when a forex pair's open ...

Doji candle represents one of the most popular candlestick patterns, providing information both on their own and as components of a number of important patterns. In this article will breakdown the most powerfull doji candlestick pattern for forex trading.

What is Doji 

Doji form when a forex pair's open and close are virtually equal. The length of the upper and lower shadows can vary, with the resulting candlestick looking like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word “doji” refers to both the singular and plural form.

Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. Doji conveys a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session but close at or near the opening level. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing.

Different currency pairs have different criteria for determining the robustness of a doji. Determining the robustness of the doji will depend on the price, recent volatility, and previous candlesticks. Relative to previous candlesticks, the doji should have a very small body that appears as a thin line. Steven Nison notes that a doji that forms among other candlesticks with small real bodies would not be considered important. However, a doji that forms among candlesticks with long real bodies would be deemed significant.

Continue reading or play around in a risk-free forex demo account and identify Doji pattern works in real-time.

Doji and Trend

The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.

After an advance or long white candlestick, a doji signals that buying pressure may be diminishing and the uptrend could be nearing an end. Whereas a security can decline simply from a lack of buyers, continued buying pressure is required to sustain an uptrend. Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick's open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star.

After a decline or long black candlestick, a doji indicates that selling pressure may be diminishing and the downtrend could be nearing an end. Even though the bears are starting to lose control of the decline, further strength is required to confirm any reversal. Bullish confirmation could come from a gap up, long white candlestick or advance above the long black candlestick's open. After a long black candlestick and doji, traders should be on the alert for a potential morning doji star.

Long-Legged Doji

Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market. Long-legged doji indicate that prices traded well above and below the session's opening level, but closed virtually even with the open. After a whole lot of yelling and screaming, the end result showed little change from the initial open.

Dragonfly Doji

Dragonfly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a “T” due to the lack of an upper shadow. Dragonfly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

The reversal implications of a dragonfly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragonfly doji could signal a potential bullish reversal or bottom. After a long uptrend, long white candlestick or at resistance, the long lower shadow could foreshadow a potential bearish reversal or top. Bearish or bullish confirmation is required for both situations.

Gravestone Doji

Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside-down “T” due to the lack of a lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.

As with the dragonfly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, the focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, the focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.

Final notes about Doji Patterns

As was presented above, the Doji formation can be created two different ways, but the interpretation of the Doji remains the same: the Doji pattern is a sign of indecision, neither bulls nor bears can successfully take over.

There are many ways to trade the various Doji candlestick patterns. However, traders should always look for signals that complement what the Doji candlestick is suggesting in order to execute higher probability trades, that can be oscillators like Stochastic, MACD or RSI that should show a bullish divergence and oversold with Doji pattern appearing at the bottom or bearish divergence and overbought with Doji pattern appearing at the top. Additionally, it is essential to implement sound risk management when trading the Doji in order to minimize losses if the trade does not work out.

Understanding doji candlestick patterns is important, but if you want some help, MetaTrader 5 AM Broker offers a useful charting toolkit and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how candlestick patterns can make you serious money.

You can test the trade signals of doji candlestick patterns by creating a Forex EA in Robo-Advisor 007 (14 Days FREE Trial).

>> Let's Get You Started

 

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Categories:  Education

 

To understand a book, you need to be able to read the words. To understand sheet music, you need to be able to read the notes. To understand price behavior, you need to be able to read and interpret the charts. So, let’s get to one of the cornerstones ...

 

To understand a book, you need to be able to read the words. To understand sheet music, you need to be able to read the notes. To understand price behavior, you need to be able to read and interpret the charts. So, let’s get to one of the cornerstones of Technical Analysis, which is understanding candle charts and patterns. 

Candle Anatomy and Meaning 

Charts come in different styles, but we will focus on Japanese candlestick or candle charts, which have become by far the most popular because they provide the quickest visual grasp of price action and the market sentiment behind it. Much has been written about the advantages of candle charts and why they’ve become the dominant charting style since they were first introduced to the West by analyst Steve Nison in 1989, and popularized in his seminal book, Japanese Candlestick Charting Techniques, nearly a decade later. However, we’ll stick to an overview of what you need to know to make money in forex trading.

Understanding Candle Charts

First, study the parts of each candlestick, shown in Figure below.

The Figure is self-explanatory, but here are the key points to understand about candlesticks:

  • Candles usually have a body and wick (called a shadow) on both ends; however, any of these individual parts may be missing from a given candle as we’ll see below. Together, they cover the entire price range over the given period the candle represents. The body alone represents the range between the open and closing price for a given period, and the wicks, or shadows, show the upper and lower price ranges. 

  • Each candle displays all price information: the high, low, and open and closing prices for a given period, depending on the chart’s time frame. Here are two examples of candle information:
    1. Each candle on a one-minute chart covers the opening, closing, and high and low prices for one minute.
    2. Each candle on a daily chart shows this price information for an entire day. 

  • Any good trading platform should provide candlestick charts ranging from one second to one month.

  • Body-color tells us the price direction for the given period. The most common color coding is green bodies for higher closes and red for lower ones.

Relationship between Body, Wick, and Its Significance 

The length of the bodies and the wicks, in absolute terms and relative to each other, can tell us a great deal about market sentiment over the duration of a given candle. That can be significant for candles covering longer periods like an entire day, week, or month. As with any technical indicator, candles and their patterns over shorter durations are less meaningful because price movements within a given day or less often can be caused by random money flows unrelated to any real market sentiment.

 

Here’s the key to understanding the relationship between wick (or shadow) and body length and the meaning of an individual candle:

  • The longer the wicks are relative to the body, the greater the indecision and the greater the back and forth struggle between buyers and sellers, and the more likely the current trend will cease or reverse.
  • The shorter the wicks are relative to the body, the more decisive the move up or down, and the more likely that the move will continue in the same direction. 
  • A long higher close body with few or no shadows shows buyers outnumbered sellers and were in control during the entire period covered by the candle, steadily pushing price higher. The longer the candle body, the greater the buying strength. 
  • A long lower close body with few or no shadows shows that sellers outnumbered sellers and were in control during the entire period covered by the candle, steadily pushing price lower. The longer the candle body, the greater the selling strength. 
  • A small body relative to the wicks suggests the same indecisiveness to a lesser degree. If the body is red, the sellers were modestly stronger; if green, the opposite is true.

Lower Wicks

  • A relatively long lower wick suggests initial strong pessimism and selling which reversed as buying increased at the lower bargain price, and short-sellers took profits. In other words, a lower price level was tested and held firm, turning back attempts to drive the price lower.
  • A short lower shadow suggests less indecision, less testing of lower prices, and lighter selling pressure that required few buyers to reverse it. If the currency pair closes at its low for the period covered, the candle won’t have a lower wick.

Upper Wicks

  • A relatively long upper wick suggests initial optimism or buying pressure that reversed as sellers stepped in and buyers took profits. In other words, a higher price level was tested and held firm, turning back attempts to drive price higher.
  • A short upper wick shows less indecision, less testing of higher prices, less struggle between buyers and sellers. If the closing price is the high for the period covered, the candle won’t have an upper wick.

Continue reading the introduction to Japanese candlestick patterns or play around in a risk-free forex demo account and notice them in real-time.

Introduction to Japanese Candlestick Patterns

Japanese candle charts mostly indicate reversal or indecision (i.e., possible reversal), whereas Western charting patterns tend to indicate continuation (trend pausing before resuming) or reversal. Candle patterns are a vast topic. Our goal here is to introduce you to the most important among them. 

Note that the table classifies candles and patterns as bullish, bearish, or neutral. The adjective “bullish” refers to candles that show price rising or patterns that suggest the price will rise because a bull gores its adversary in an upward motion. “Bearish” is used to refer to candles that show price falling or patterns that suggest the price will drop because a bear swipes at its adversary in a downward motion.

1. Notes on Single Candle Patterns

Spinning Top

Depends on whether higher or lower close. Significance increases if occurs after an extended move in the opposite direction of the close.

In this example, the most recent candle showed a black, lower close. If these spinning tops occurred at the top of an extended uptrend, it would suggest a coming reversal. If they occurred at the bottom of a downtrend, they’d merely suggest continued downtrend, already the default assumption in an ongoing downtrend. 

Doji

Neutral: The more wick relative to the body, the more indecision because buyers and sellers are more evenly matched. The lack of a body means that the doji pattern suggest indecision and possible end or reversal of a trend. Thus they’re more meaningful when finding after a long move up or down because they suggest the move may end and perhaps reverse. 

White Marubozu – Bullish/Black Marubozu – Bearish


Conversely, the more body relative to wick, the more decisive the move and the clearer the dominance of buyers or sellers. White suggests buyers dominant, so usually suggests more upside. The black version suggests the opposite. 

Hammer – Bullish/ Hanging Man - Bearish

Hammer and Hanging Man have the same shape: Long lower wick, little or no upper wick two to three times the length of the body.

Opposite meaning depending on the following:
a. Occurs after extended move lower = Hammer, bullish, suggests market probing and hitting a bottom.
b. Occurs after extended move higher = Hanging Man, bearish, suggests market hitting a top.
In either case, higher or lower close unimportant.

Inverted Hammer - Bullish/Shooting Star - Bearish

Inverted Hammer and Shooting Star share the same shape and are the inverted forms of the Hammer and Hanging Man shown above. It has a long upper wick, little or no lower wick two to three times the length of the body. As usual, needs to occur after a move higher or lower, needs the start of reversal to confirm the pattern.

Opposite meaning depending on the following:
a. Occurs after extended move lower = Inverted Hammer, bullish, suggests markets hitting bottom, confirmed by a bounce higher
b. Occurs after extended move higher = Shooting Star, bearish, suggests markets hitting a top, confirmed by bounce lower. 

In either case, higher or lower close unimportant though if it’s in the opposite direction of the prior candles, it’s a bit more suggestive of a halt or reversal of prior candles’ trend.

2. Notes on Double Candle Patterns

Bullish Engulfing

Bullish Engulfing occurs when a bearish candle (lower close) is followed by a noticeably longer bullish candle (higher close), which “engulfs” the range of the prior bearish candle. The longer the bullish candle, the more it “engulfs” or exceeds the range of the prior bearish candle, the more bullish the pattern. Obviously, as always, context and timing matter. The pattern is more bullish if this pair appears after an extended downtrend, at strong support, or both, because these other signs confirm that the odds are higher that the downtrend is exhausted. 

Bearish Engulfing

Bearish Engulfing occurs when a bullish candle (higher close) is followed by a noticeably longer bearish candle (lower close), which “engulfs” the range of the prior bullish candle The longer the bearish candle, the more it “engulfs” or exceeds the range of the prior bullish candle, the more bearish the pattern. Obviously, as always, context and timing matter. The pattern is more bearish if this pair appears after an extended uptrend, at strong resistance, or both, because the odds are higher that the uptrend has become exhausted. 

Tweezer Tops – Bearish

Looks like a pair of tweezers at the top of an uptrend. Ideally: 

  • The first candle closes in the direction of the uptrend, the second closes down.
  • Upper wicks are longer than the bodies and should be about the same length and terminate around the same resistance (confirms resistance to further upward progress), hence the tweezers shape.

Think of these wicks as knocking against a ceiling of resistance, or the market rejecting a certain higher price as it probes for a top. 

Tweezer Bottoms – Bullish

The opposite of the above. Looks like a pair of tweezers at the bottom of a downtrend. Ideally:

  • The first candle closes in the direction of the downtrend, the second close up.
  • Lower wicks are longer than the bodies and should be about the same length and terminate around the same resistance (confirming a floor preventing further downside), hence the tweezers shape. 

Think of these wicks as knocking against a floor or support, or the market rejecting a certain lower price, as it gropes for a bottom.

3. Notes on Triple Candle Patterns

Morning Star – Bullish/ Evening Star – Bearish

Evening Star and Morning Star are the bearish and bullish variations on the same theme:

  • The first candle is in the direction of the trend, ideally with a long body that suggests a strong final push that exhausts the move.
  • The second candle is a Doji, suggesting indecision and that the first candle was the last big push for the trend.
  • The third candle is in the opposite direction of the trend and should close beyond the midpoint of the first candle, preferably with a long body showing a decisive reversal move. 

Three White Soldiers – Bullish

This pattern is comprised of three long-bodied bullish (higher close) candles after a downtrend and signals a longer-term reversal higher.
To be a valid pattern: 

  • The second candle’s body should be longer than that of the first and should close near its high with little or no upper wick.
  • The third candle’s body should be the same size or larger than that of the second and also should close at or near its high with little or no upper wick. 

Three Black Crows – Bearish

The opposite of the above Three White Soldiers. This pattern is comprised of three long-bodied bearish (lower close) candles after an uptrend and signals a longer-term reversal lower.
To be a valid pattern: 

  • The second candle’s body should be longer than that of the first, and close near its low with little or no lower wick.
  • The third candle’s body should be the same size or larger than that of the second and also should close at or near its low with little or no lower wick. 

Three Inside Up – Bullish

Found during a downtrend and signals its possible end. Characterized by:

  • The first candle closes lower and has a relatively long body in the direction of the downtrend.
  • The second candle closes higher to about the midpoint of the first candle.
  • The third candle closes above the high of the first candle. In sum, this is a very basic bullish swing pattern. The longer the second and third candle, the more convincing the reversal signal. 

Three Inside Down – Bearish

The opposite of Three Inside Up. Found during an uptrend and signals its possible end. Characterized by: 

  • The first candle closes higher and has a relatively long body in the direction of the uptrend.
  • The second candle closes lower to about the midpoint of the first candle.
  • The third candle closes below the low of the first candle.

In sum, it’s a very basic bearish swing pattern. The longer the second and third candle, the more convincing the reversal signal.

More Key Points about Japanese Candle Patterns

Though the patterns are classified as a reversal (indicate a reversal of the trend’s direction), continuation (indicate trend continuation), or indecision, depending on which is their more common role, these are generalizations. Like any technical indicator, they don’t always work and should be used in combination with others that confirm or refute them.

The evidence from Technical Analysis is useful for timing entries and exits but is rarely unequivocal. It’s up to you to weigh contradictory or inconclusive forex signals from the total of your Technical Analysis and fundamental analysis and discern where the balance of evidence points. Your interpretation of these candlestick patterns and any other indicator depends on the context in which it occurs in the forex market and stock market.

Final notes about the Candlestick Patterns

As with everything, context and timing make a difference when interpreting Japanese candle patterns: A bullish reversal pattern (like a hammer or bullish engulfing pattern) is more suggestive of a bullish reversal pattern if it comes after an extended downtrend than it is after a brief one, especially if that brief one comes within a longer-term uptrend.

That same bullish reversal pattern will have more credibility if it happens to occur at a strong support level where we’d expect a downtrend to be more likely to reverse.

If the picture isn’t clear enough, look for another opportunity. Remember, some of the best trades you’ll ever make are the ones you decide not to take. Missed opportunities only hurt your ego; bad trades hurt your capital. Remember this if you want to learn how to trade forex and make money from it.

Understanding candle charts and candlestick patterns is important, but if you want some help, MT5 AM Broker offers a useful charting toolkit and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how candlestick patterns can make you serious money.

You can test the trade signals of candlestick patterns by creating Forex EAs in Robo-Advisor 007 (14 Days FREE Trial).

>> Let's Get You Started

 

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Categories:  Education



Rather than using your own judgment, some statistical measures of price volatility are available. One of the most popular is the Average True Range (ATR) indicator, which measures the average movement for a given currency pair (or stock, commodity, etc.) for a given time period.
 

What is ATR Indicator

The ...



Rather than using your own judgment, some statistical measures of price volatility are available. One of the most popular is the Average True Range (ATR) indicator, which measures the average movement for a given currency pair (or stock, commodity, etc.) for a given time period.
 

What is ATR Indicator

The ATR indicator moves up and down as price moves in an asset become larger or smaller. The indicator is based on price moves, so the reading is a dollar amount. For example, in stock trading, an ATR reading of 0.23 means that the price moves $0.23, on average, each price bar. In the forex market, the indicator will show pips, where a reading of 0.0025 means 25 pips. 

A new ATR reading is calculated as each time period passes. On a one-minute chart, a new ATR reading is calculated each minute. On a daily chart, a new ATR is calculated each day. All these readings are plotted to form a continuous line, so traders can see how volatility has changed over time.

Because the ATR is based on how much each asset moves, the reading for one asset isn't compared to other assets in isolation. To understand the indicator better, here is how it is calculated. 

Finding the A, or the average first requires finding the True Range (TR). 

The TR is the greatest of the following:

  • Current high minus the previous close
  • Current low minus previous close
  • Current high minus current low

Whether the number is positive or negative doesn't matter. The highest absolute value is used in the calculation.

The values are recorded each day, and then an average is taken. If the ATR is averaged over 14 time periods, then the formula is as follows:

ATR = [(Prior ATR x 13) + Current TR] / 14

Continue reading about ATR or start playing around in a ​risk-free demo account and notice how ATR indicator works in real time.


ATR Settings

Typically, the default setting is 14 periods, that is, 14 days on a daily chart, 14 hours on an hourly chart, and so forth, but over time you may want to experiment with that setting. Knowing the ATR for a given period, traders can choose to place stops a given percentage of that range away from the entry point. For example, traders with great confidence in the direction of the trend who want to avoid having their stop loss hit would place their stop loss 80 to 100 percent of the ATR beyond their entry point near strong support. They’ll accept the larger loss if that stop is hit because they believe the likelihood of that happening is low. Those with less confidence and more risk aversion who want smaller losses (even if there are more of them because the stop gets hit) might place their stop closer, perhaps 50 percent or less of the ATR away from the entry point. Once you know the average volatility for a given period via the ATR, you have a better idea of how far away your fixed or trailing stop-loss order needs to be to avoid getting hit by random price movements.

Let's see an example of how to use ATR to gauge volatility and place a fixed or Trailing Stop Loss order.
 

Using ATR to Gauge Volatility 

We refer to the above example. In Figure below, we show the same EURUSD daily chart showing the daily candle for the entry date of the trade on August 11, but this time we include an ATR, which shows that over the past 14 days or daily candles, the average price range was about 210 pips. Those interested in how ATR is calculated can look it up online. 

In this example, we based our stop losses on the other factors mentioned previously. However, if we wanted to lower the chances of getting stopped out of the trade-in exchange for the risk of more loss if the trade turned against us, we could have set the stop loss at a distance 50 percent or more of the ATR, 105 pips, beneath the entry point, or some different percentage of ATR.
The point here is that there are different ways to determine how far away you set your stop loss. In this forex trading example, we used the recent lows as a guide though we could have used ATR instead. Much depends on factors like your risk appetite, market conditions, and confidence in the trade. For example, if you’ve caught a pullback to strong support in an overall strong uptrend, you might have more confidence that this uptrend will resume and allow a wider stop loss to avoid getting stopped out by random price movements. When you’re less confident, you might keep stops tighter.
 

Final words about ATR Indicator

ATR is not a directional indicator like MACD or RSI, but rather a unique volatility indicator that reflects the degree of interest or disinterest in a move. Strong moves, in either direction, are often accompanied by large ranges, or large True Ranges. This is especially true at the beginning of a move. Uninspiring moves can be accompanied by relatively narrow ranges. As such, ATR can be used to validate the enthusiasm behind a move or breakout. A bullish reversal with an increase in ATR would show strong buying pressure and reinforce the reversal. A bearish support break with an increase in ATR would show strong selling pressure and reinforce the support break.

Understanding how to read ATR indicator is important, but if you want some help, MetaTrader 5 AM Broker offers a useful Indicator toolkit and our trainers can provide you the right guidance. Play around in a demo forex and notice how ATR indicator can make you serious money.

You can test the trade signals of this indicator by creating a Forex EA in Robo-Advisor 007 (14 Days FREE Trial).

>> Let's Get You Started

 

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Categories:  Education

At some point during a trade, you’ll decide it’s time to take profits, or if the trend reversed, to cut losses when they’re small. To do that, you’ll need to use one of the exit position orders. This article will explain how to protect and maximize ...

At some point during a trade, you’ll decide it’s time to take profits, or if the trend reversed, to cut losses when they’re small. To do that, you’ll need to use one of the exit position orders. This article will explain how to protect and maximize gains using stop-loss orders. 

Exit Orders: Ways to Close a Position 

The main difference between them is whether you’re closing a losing trade to cut your losses or a winning trade to take profits.

Stop-Loss Orders - Fixed and Trailing Stops

As the name implies, stop-loss orders are pending orders that automatically close your position to stop a loss from getting any worse than your predetermined maximum amount you were willing to risk. That maximum may be determined by either:

  • Risk management considerations: broken price support of some kind (many exist as we’ll soon see) or other indications that you were wrong about the price direction.  
  • Money management considerations: you don’t want to lose more than 1 to 3 percent of your account on any given trade.

There are two basic kinds of stop-loss orders:

  1. Fixed or Simple Stop Loss: As the name implies, this order automatically executes when a fixed predetermined loss is reached or if the market gaps past it, and the loss is exceeded. Any good forex trading platform like MetaTrader 5 - MT5 will allow you to set that loss in terms of pips, cash loss, or percentage loss from your entry price. 
  2. Trailing Stop Loss: As the name suggests, this kind of stop-loss order trails or follows the price as it moves further in your favor, and it automatically closes your position after the currency pair price moves against you by a fixed number of pips, cash amount, or percentage change in price against you. Thus the trailing stop loss not only to limits losses but also locks in gains from winning trades that have started to reverse against you by more than what you believe to be normal random price movements or “market noise.”

Stop-loss orders area key part of risk management. We can enter them in advance and have our trading system automatically cut our losses. They help keep emotion out of our forex trading

For a given position size and leverage, you limit your maximum loss per trade through your stop-loss settings. The following rules on stop loss setting assume you’re entering near strong support because if you aren’t, you shouldn’t even consider entering the trade. If the trade moves against you, that nearby support is quickly breached and you have a signal to exit before a small loss becomes a large one.

Continue reading or play around in a risk-free demo forex and test the exit orders in real market conditions.

Where to Set the Stop Loss: Two Criteria

When setting your stop-loss order, you’re always striking a balance between two conflicting criteria:

1. The stop-loss price is close enough to your entry point so if it’s hit, the loss doesn’t exceed 1 to 3 percent of your account value, as noted previously.

2. It’s far enough away from your entry point and the likely support level so it doesn’t get hit by normal random price movements and close your position before the price has had time to move in your favor. Rather, it’s triggered only by price moves that are big enough to suggest that you were wrong and overestimated the strength of a given support zone, and now a loss is more likely than you thought. It’s time to close the position before a small affordable loss becomes a large one. There are different ways to determine the normal or average price movement to expect during a given period. Some manually determine the average or typical candle length over a given period. Some will use a certain percentage of the range as determined by the Average True Range (ATR) indicator. Price volatility varies with market conditions and time frame as must the distance from the entry point to stop loss.

Viewed from another perspective, setting stop losses means striking a balance between:

  • Less frequent but larger losses from wider (or looser) stop loss settings: The farther your stop loss from your entry point, the larger the losses on losing trades relative to your gains from winning trades. However, you have less chance of having your stop loss hit before the price starts to move in your favor (being “stopped out”). The main advantage of this approach is a higher percentage of winning trades (which you may need for encouragement), at least when you’re right about the ultimate price direction. The main disadvantage is that you risk too many large losses and lower profits compared to the following approach to setting stop losses.
  • More frequent but smaller losses from tighter (or narrower) stop loss settings: The closer your stop losses to your entry point, the smaller the losses on losing trades relative to your gains from winning trades. However, you’ll have more losses from being “stopped out” on trades that would have ultimately worked, because your stop loss will be hit more often before the price has had time to move in your favor.

Use a Trailing Stop to Protect and Maximize Gains

Though your initial plan should be to exit near likely resistance, remember that you have the option of using a trailing stop.

Instead of fixed stop losses, use trailing stop loss orders whenever possible because they give you the best of both worlds, the protection of a regular stop-loss without the limitations of a fixed exit point. Until price retraces and hits the trailing limit, you ride the move as high as it goes. Once your trailing stop is above your entry point, the only question is how much you’ll profit. As part of our drive to maintain a high risk-reward, we try to get even better than 1:3 risk-rewards when we can. Using trailing stops allows us to get those extra gains. These big winners help compensate for losing trades and for winners in which you were forced to exit with minimal gains to avoid a loss.

It isn’t always practical to use a trailing stop when you begin a trade. In these cases, you simply change the switch from a fixed to a trailing stop-loss once the trade has moved a certain number of pips in your favor, at a minimum so that your loss would be less than your initial fixed stop loss.

ATR Trailing Stop Loss

ATR is commonly used as a trailing stop loss. At the time of the trade, look at the current ATR reading. Place a stop loss at a multiple of the ATR. Two is common multiple, meaning you place a stop loss at 2 x ATR below the entry price if buying, or 2 x ATR above the entry price if shorting.

The stop loss only moves to reduce risk or lock in a profit. If long, and the price moves favorably, continue to move the stop loss to 2 x ATR below the price. The stop loss only ever moves up, not down. Once it is moved up, it stays there until it can be moved up again, or the trade is closed as a result of the price dropping to hit the trailing stop loss level. The same process works for short trades. The stop loss is only moved down.

For example, a long trade is taken at $10, and the ATR is 0.10. Place a stop loss at $9.80. The price rises to $10.20, and the ATR remains at 0.10. The stop loss is now moved up to $10, which is 2 x ATR below the current price. When the price moves up to $10.50, the stop loss moves up to $10.30, locking in at least a $0.30 profit on the trade.

More Capital Allows Wider Stop Losses

A larger account means:

  • You can afford to set stop loss settings that are wide enough to avoid getting prematurely “stopped out,” yet still only risk 1 to 3 percent of your capital, because you have more capital to risk. That means there are more trades available to take that have entry points that are both close enough to strong support and only risk 1 to 3 percent of your capital.
  • You can afford the wider stop losses needed to ride the more stable longer-term trends via longer-term positions. As noted previously, the forex market produces many stable long-term trends. However, the longer you hold a position, the larger the normal price swings and the farther the stop loss must be from your entry point. For example, a pair may have average daily price swings of 50 points, but weekly or monthly average price swings could be many times larger. A bigger account allows you to set those stop losses far enough from your entry point (near strong support, of course) to ride the wider short-term fluctuations within the more predictable long-term trends. In sum, a larger account allows you a wider choice of trades in any time frame, and also offers more chances to ride the most stable, predictable, and safer trends that are the basis of lower-risk trading.

Not surprisingly, studies suggest certain minimum account sizes increase your chances of being profitable.

Final words about Stop Loss and Trailing Stop

Because s/r levels occur over areas or zones rather than precise points, selecting entry, exit, and stop-loss points can be stressful because you’re never sure if you’re right. To lower the risk and stress level, many find it helpful to enter and exit positions in stages.

For example, if your planned position is two mini account lots, you could take profits on one lot at a more conservative price, and leave the other lot to continue with a trailing stop loss. If your trailing stop loss is set to trigger at no worse a position than your first exit point, you at least lock in a smaller profit as a worst-case scenario. This first exit should bring profits on that first lot that are at least equal to the loss risked by your trailing stop, thus allowing a 1:1 risk-reward ratio on that lot. Set your trailing stop so at worst it triggers at your initial exit and you lock in at least a modest profit and a 1:1 risk-reward ratio on the trade. If price continues to run higher, the second lot gives you added returns though not as much as if you’d let both lots run with a trailing stop once the first exit. Safety usually comes at a cost of lower returns. Taking partial profits not only eases stress levels, but it also helps build your confidence while you are learning forex trading for beginners and finding a trading method and style that works for you.

Unlike stock brokers, forex brokers’ fees are based on spreads (number of pips between the bid and ask). That means they make money on your trading volume (the amount of currency you trade) rather than your trading frequency, so you pay no extra for partial exits and entries. How often you use these will depend greatly on your confidence in a given exit or entry point. When you’re very confident about a trade, you’re more likely to keep the full position open until you hit your planned exit point.

Understanding how stop-loss and trailing-stop works is important, but if you want some help, the MetaTrader platform - Download MT5 - offers 6 types of orders and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how stop loss and trailing stop can protect and maximize gains.

You can test an automatic position closing by creating an EA Forex in Robo-Advisor 007 (14 Days FREE Trial).

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Categories:  Education

Many forex traders, particularly those who are new to the forex market, are totally unaware that there are different order types. So they simply call up their broker and tell him that they want to buy a given currency pair, gold, oil or dow jones. And the problem with that ...

Many forex traders, particularly those who are new to the forex market, are totally unaware that there are different order types. So they simply call up their broker and tell him that they want to buy a given currency pair, gold, oil or dow jones. And the problem with that?

Unless you name a specific price, you’re giving your broker permission to fill your order at any price.

The good thing is that you’re guaranteed to get filled as long as there’s trading activity – meaning buyers and sellers making a market.

It’s the price that’s the problem.

Would you go to your favorite store and tell the salesperson that you’ll take those jeans at any price or head for the gas station to fill up for whatever the pump jockey wants to charge you? No way – you don’t want to get ripped off.

But that’s exactly the risk you’re taking in the forex market if you don’t tell your broker what you’re willing to spend. For example, “I want to buy 1 Forex Lot of EurUsd but pay no more than 1.2240 USD for 1 Eur.”

Doing so takes away the advantage afforded to the much bigger traders who hold most investors at the mercy of the markets. It also removes the threat of being played by hedge funds, unscrupulous market makers, and institutional traders who would force you to buy your shares more expensively than you would otherwise.

Let us explain the types of entry orders and the differences between limit orders (buy limit, sell limit) and stop orders (buy stop, sell stop). 

Entry Orders - Opening a Position 

Unlike market orders (orders to buy or sell immediately at the current price), entry orders (or entry limit orders) are pending orders entered in advance to enter or open a new position at some future price that the trader deems more favorable than the current price. These will execute automatically and don’t require any action from the trader at that time. This ability to choose entry points in advance is very valuable for two reasons:

  • You can enter these orders at your convenience, whenever you have time. That’s important for those with limited free time to trade, yet want to enter at a certain price level or better. This is an essential feature even for full-time traders (never mind those with jobs and lives beyond trading) because they can’t be available 24 hours a day. 
  • It removes emotion from entry decisions, and that, friends, is critical. Like drinking and driving, forex trading and emotion don’t mix. When they do, you risk becoming roadkill. Few can avoid the pull of fear or greed when trading in real-time with money at stake. You want to do your analysis and objectively choose entry points isolated from the pull of fear or greed that might make one hesitate to seize an opportunity. You don’t want to jump in when it’s too late or too early.

KEY TAKEAWAYS

  • A limit order is visible to the market and instructs your broker to fill your buy or sell order at a specific price or better.
  • A stop order isn't visible to the market and will activate a limit order once a stop price has been met.
  • A stop order avoids the risks of no fills or partial fills, but because it is a market order, you may have your order filled at a price much worse than what you were expecting.

Continue reading or play around in a risk-free forex demo account and test orders like sell limit, buy limit, sell stop and buy stop in real-time.

Order Types for Buying or Going Long a Currency Pair 

Buy Limit

Buy Limit Definition – Buy Limit is an entry order to buy a currency pair at a future price below the current price, typically used by bargain hunters seeking to buy on a pullback from the current price at what they believe is at or near a level that has served as a floor or support in their chosen time frame, be it an hour, day, week, month, year, or longer. They are seeking to buy low and sell high. They’re comparable to value buyers in the stock market.

Buy Stop

Buy Stop Definition – Buy Stop is an entry order to buy at a future price above the current price, typically used by traders who believe that once price breaks above a certain price level that has served as a ceiling or resistance level in the past, the price should continue a sustained move higher. Their goal is to buy as the price begins to make a sustained move higher. They’re comparable to momentum buyers.

Order Types for Selling or Going Short a Currency Pair 

Because currencies trade in pairs, you’re always long one currency and short another. When you sell or go short a currency pair, you’re buying the counter currency (the one on the right) and paying for it by selling the base currency. No restrictions exist against shorting a pair because selling and buying a currency pair is essentially the same type of transaction. Forex trading involves buying one half of the pair and selling the other to pay for it, regardless of the currency in which your account is denominated. 

Sell Limit

Sell Limit Definition – Sell Limit is an entry order to sell the pair short at a future price above the current price, typically used by bargain hunters seeking to go short a currency pair at what they believe is at or near a price level that has served as a ceiling or resistance in their chosen time frame. They believe that around this price level the currency pair will start to drop. They are hoping to sell high and buy low. As we learned earlier, really what they’re doing is trying to buy the counter currency at a lower price relative to the base currency, and then sell it for a profit at a higher price relative to the base currency.

Sell Stop

Sell Stop Definition – Sell Stop is an entry order to sell at a price below the current price, typically used by momentum-type short sellers, those who believe that once the pair breaks below a price that has served as a floor or support in the past, the pair will make a sustained move lower.

Combined Stop and Limit Orders 

Buy Stop Limit

Buy Stop Limit Definition– this type combines the two first types being a stop order for placing Buy Limit. As soon as the future Ask price reaches the stop-level indicated in the order (the Price field), a Buy Limit order will be placed at the level, specified in Stop Limit price field. A stop level is set above the current Ask price, while Stop Limit price is set below the stop level.

Sell Stop Limit

Sell Stop Limit Definition – this type is a stop order for placing Sell Limit. As soon as the future Bid price reaches the stop-level indicated in the order (the Price field), a Sell Limit order will be placed at the level, specified in Stop Limit price field. A stop level is set below the current Bid price, while Stop Limit price is set above the stop level.

KEY TAKEAWAYS

  • For symbols with Exchange Stocks, Exchange Futures and Futures Forts calculation modes, all the types of pending orders (buy limit, sell limit, buy stop, sell stop) trigger according to the Last price (the price of a last executed deal). In other words, an order triggers when the Last price touches the price specified in the order. But note that buying or selling as a result of triggering of an order is always performed by the Bid and Ask prices.
  • In the Exchange execution mode, the price specified when placing limit orders is not verified. It can be specified above the current Ask price (for the Buy Limit orders) and below the current Bid price (for the Sell Limit orders). When placing an order with such a price, it triggers almost immediately and turns into a market one. However, unlike market orders where a trader agrees to perform a deal by a non-specified current market price, a pending order will be executed at a price no worse than the one specified
  • If an appropriate market operation cannot be executed when a pending order triggers (e.g. there is not enough margin), the pending order is canceled and moved to history with the Rejected status.

Final words about Entry Orders

Limit orders (buy limit, sell limit) are almost always the better way to go, and not the stop orders (buy stop, sell stop). 

By simply adding price to the order, a few things happen:

  • The order is routed to the limit order book, so it’s known and everybody sees it.
  • The order is guaranteed to fill at a given price that’s defined in advance so you’ll know exactly what price you’ll get.

The risk is that your order may not be hit in fast-moving markets because the limit no longer applies. 

So here are the Key Takeaways:

  • Orders are like tools: you want the right one for the job.
  • Market orders leave you at the mercy of the markets and larger traders because you have no control over the price you’ll get.
  • The simple, easy-to-use way around this is to use a “sell limit” “buy limit” or order that specifies how much or how little you want to pay to the penny… ahead of time. Either you get that price, or the trade doesn’t happen.

Obviously, we’ve just scratched the surface here – there are as many order types as there are ways to serve coffee at Starbucks.

We’ll cover those in due course, along with all sorts of variations including everything from the big three – market, limit, and stops – right up to those that may as well be an alien language – FOKs (fill or kill), IOCs (immediate or cancel), and GTCs (good till cancelled).

In the meantime, we want you to get in the habit of specifying price every time you place an order.

That way you’ll trade on your terms and, in doing so, dramatically increase your profit potential. 

Exit Orders (stop loss and trailing stop or take profit) are detailed in our next article about fixed and trailing stop orders

Understanding how entry orders (buy limit, sell limit, buy stop, sell stop) works is important, but if you want some help, MetaTrader 5 - MT5 download - offers 6 types of pending orders and our trainers can provide you the right guidance. Play around in a ​demo forex and notice how limit orders can make you serious money.

You can test automated strategies using different types of orders by creating an Expert Advisor in Robo-Advisor 007 (14 Days FREE Trial).

>> Let's Get You Started

 

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Categories:  Education

What are the main features of, and differences between, MT4 and MT5? Which of these two trading platforms will best fit your trading style?

Some would say the simplicity of MT4 is its biggest selling point. It has been called the industry standard, as most forex brokers use the MT4 ...

What are the main features of, and differences between, MT4 and MT5? Which of these two trading platforms will best fit your trading style?

Some would say the simplicity of MT4 is its biggest selling point. It has been called the industry standard, as most forex brokers use the MT4 terminal as their primary trading interface.

Other would say the MT5 platform, released in 2010, features some significant changes from its predecessor. It is aimed at a different market user and therefore can be understood as a definitively different platform rather than a different version of MT4.

Let’s take a look at a comparison between MT5 and MT4. We've compared the common features and explained the updates of the latest version from MetaQuotes.  

Continue reading or download MT5 and notice the major upgrades compared to MetaTrader 4.

MetaTrader 5 vs MetaTrader 4

1. Partial Order Filling Policies: availability of the partial order filling option, in which a trade with a maximum volume that is now available in the market is executed, not exceeding the volume requested in the order, while unfilled volume is canceled. 

MetaTrader 5: YES
MetaTrader 4: NO

2. Depth of Market: the depth of market option, which features bids and offers for a financial security ar different prices depending on the volume.  

MetaTrader 5: YES
MetaTrader 4: NO

3. Time&Sales (Exchange data): ability to receive Time and Sales from the Exchange.

MetaTrader 5: YES
MetaTrader 4: NO

4. Economic Calendar: availability of the economic calendar - the fundamental analysis tool featuring publications on various countries' macroeconomic indicators, which can affect the prices of the financial instruments.

MetaTrader 5: YES
MetaTrader 4: NO

5. Transfer funds between accounts: a possibility to transfer funds between accounts on the same server.

MetaTrader 5: YES
MetaTrader 4: NO

6. Embedded MQL5.community chat: possibility to chat with other traders directly in the MetaTrader platform.

MetaTrader 5: YES
MetaTrader 4: NO

7. Netting: support for the netting accounting system, which only allows having one open position of a financial instrument

MetaTrader 5: YES
MetaTrader 4: NO

8. Exchange Trading: trading on an exchange, that offers stocks, futures, bonds, options.

MetaTrader 5: YES
MetaTrader 4: NO

9. Multilingual Unicode: support for the Unicode character encoding standard that ensures the correct display of characters and symbols in any language. 

MetaTrader 5: YES
MetaTrader 4: NO

MetaTrader 5 vs MetaTrader 4 - Common Features

1. Order Fill Policy: you can set additional order execution conditions

MetaTrader 5: Fill or Kill, Immediate or Cancel, Return
MetaTrader 4: Fill or Kill

2. Pending Order Types: types of pending orders requesting a broker to buy or sell a financial security under pre-defined conditions in the future.

MetaTrader 5: 6
MetaTrader 4: 4

3. Technical Indicators: the number of technical indicators, which can automatically detect patterns in the financial instruments price dynamics and help users to make trade decisions.

MetaTrader 5: 38
MetaTrader 4: 30

4. Graphical Objects: the number of graphical objects that help to identify instrument price trends, to detect support/resistance levels, time cycles, channels and more.

MetaTrader 5: 44
MetaTrader 4: 31

5. Timeframes: the number of timeframes - time intervals in which quoted financial instruments are grouped.

MetaTrader 5: 21
MetaTrader 4: 9 

6. Email System: the features of the built-in email service, which enables users to receive important information from the broker directly into MetaTrader. 

MetaTrader 5: With attachment 
MetaTrader 4: No attachment

7. Strategy Tester: trading robots testing and optimization mode supported by the built-in Strategy Tester

MetaTrader 5: Multi-threaded + Multi-currency + Real ticks
MetaTrader 4: Single thread

8. Hedging: support for the hedging accounting system, which allows having more open positions, both in the same direction and opposite direction.

MetaTrader 5: YES
MetaTrader 4: YES

9. Symbols: the number of financial instruments that can be traded in MetaTrader.

MetaTrader 5: Unlimited
MetaTrader 4: 1024

10. Supported Markets: financial markets, on which the user can trade into MetaTrader.

MetaTrader 5: Forex/Futures/Options/Stocks/Bonds
MetaTrader 4: Forex

Which platform is better?

This all depends on your personal trading style and preferences. But if you believe in technology and have a focus on all type of trading, then the MT5 platform may be for you.

EAs can be applied to both platforms, but keep in mind that MT5 was created to improve the automated traded.

Additional, there is a compatible Expert Advisor Generator integrated with MetaTrader 5 that can help traders generate Forex EAs with a couple of clicks, without writing codes. 

You can try our risk-free MT5 demo account to see if it’s the right platform for you before you start any real trading.

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Typically, you would look for clues between the indicator and price action in order to make a decision. One of the most powerful trading signals that combine price action analysis with the use of indicators is the Divergence signal, and that’s what we intend to discuss in this article ...

Typically, you would look for clues between the indicator and price action in order to make a decision. One of the most powerful trading signals that combine price action analysis with the use of indicators is the Divergence signal, and that’s what we intend to discuss in this article.

Bullish Divergence vs Bearish Divergence

Bullish divergences are, in essence, the opposite of bearish signals. Despite their ease of use and general informational power, trading oscillators tend to be somewhat misunderstood in the forex trading industry, even considering their close relationship with momentum. At its most fundamental level, momentum is actually a means of assessing the relative levels of greed or fear in the market at a given point in time.


Oscillators are most useful and issue their most valid trading signals when their readings diverge from prices. A bullish divergence occurs when prices fall to a new low while an oscillator fails to reach a new low. This situation demonstrates that bears are losing power, and that bulls are ready to control the market again—often a bullish divergence marks the end of a downtrend.


Bearish divergences signify potential downtrends when prices rally to a new high while the oscillator refuses to reach a new peak. In this situation, bulls are losing their grip on the forex market, prices are rising only as a result of inertia, and the bears are ready to take control again.

You can test the trade signals of bullish and bearish divergence by creating an Expert Advisor in Robo-Advisor 007 (14 Days FREE Trial).

Classes of Divergences

Divergences, whether bullish or bearish in nature, have been classified according to their levels of strength. The strongest divergences are Class A divergences; exhibiting less strength are Class B divergences; and the weakest divergences are Class C. The best trading opportunities are indicated by Class A divergences, while Class B and C divergences represent choppy price action and should generally be ignored.


Class A bearish divergences occur when prices rise to a new high but the oscillator can only muster a high that is lower than exhibited on a previous rally. Class A bearish divergences often signal a sharp and significant reversal toward a downtrend. Class A bullish divergences occur when prices reach a new low but an oscillator reaches a higher bottom than it reached during its previous decline. Class A bullish divergences are often the best signals of an impending sharp rally.


Class B bearish divergences are illustrated by prices making a double top, with an oscillator tracing a lower second top. Class B bullish divergences occur when prices trace a double bottom, with an oscillator tracing a higher second bottom.


Class C bearish divergences occur when prices rise to a new high but an indicator stops at the very same level it reached during the previous rally. Class C bullish divergences occur when prices fall to a new low while the indicator traces a double bottom. Class C divergences are most indicative of market stagnation—bulls and bears are becoming neither stronger nor weaker.

Examples of Bullish and Bearish Divergences

With divergences, traders identify a rather precise point at which the market's momentum is expected to change direction. But aside from that precise moment, you must also ascertain the speed at which you are approaching a potential shift in momentum. Market trends can speed up, slow down or maintain a steady rate of progress. The leading indicators that you can use to ascertain this speed are:

Stochastic Divergence 

Momentum oscillators generally move in the same direction as price. However, because the momentum oscillators are measuring not just the direction of price change but also the rate of change in price, their direction will diverge from the direction of the price of the asset when the rate of change slows. In other words, when the price is moving higher or lower, so should the oscillator. However, when the speed of that trend slows, the direction of the momentum oscillators will start to diverge from that of price. Those divergences can be valuable leading indicators of a possible trend reversal. For example, slowing momentum, as reflected by these divergences, suggests a trend reversal may be coming. 

Here’s some explanation of bullish divergence:

  • Lines A and A1: These are examples of how an oscillator typically moves in the same direction as price, in this case reflecting the same downward momentum.
  • Lines A and A2: Even though the USDCAD is moving lower, A2 shows how the stochastic oscillator is suggesting a reversal is coming, as it reflects increasing bullish momentum (or fading bearish momentum). In other words, recent prices have been higher over the period it measures, hence the uptrend in the stochastic that foretells the coming uptrend.
  • Lines B and B2: Again, while the USDCAD itself is moving higher, the momentum of the move is weakening over the dates covered; hence, while the pair itself keeps moving higher, the stochastic starts trending lower, forecasting the coming reversal.

     

Divergence RSI

Divergences signal a potential reversal point because directional momentum does not confirm the price. A bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum. The chart below shows a bearish divergence in August-October. The stock moved to new highs in September-October, but RSI formed lower highs for the bearish divergence. The subsequent breakdown in mid-October confirmed weakening momentum.

A bullish divergence formed in January-March. The bullish divergence formed with eBay moving to new lows in March and RSI holding above its prior low. RSI reflected less downside momentum during the February-March decline. The mid-March breakout confirmed improving momentum. Divergences tend to be more robust when they form after an overbought or oversold reading.

Before getting too excited about divergences as great trading signals, it must be noted that divergences are misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences can appear in a strong downtrend - and yet the downtrend continues. Chart below shows the S&P 500 stock index with three bearish divergences and a continuing uptrend. These bearish divergences may have warned of a short-term pullback, but there was clearly no major trend reversal.



MACD Divergence

Divergences form when the MACD diverges from the price action of the underlying security. A bullish divergence forms when a security records a lower low and the MACD forms a higher low. The lower low in the security affirms the current downtrend, but the higher low in the MACD shows less downside momentum. Despite decreasing, downside momentum is still outpacing upside momentum as long as the MACD remains in negative territory. Slowing downside momentum can sometimes foreshadow a trend reversal or a sizable rally.

A bearish divergence forms when a security records a higher high and the MACD line forms a lower high. The higher high in the security is normal for an uptrend, but the lower high in the MACD shows less upside momentum. Even though upside momentum may be less, upside momentum is still outpacing downside momentum as long as the MACD is positive. Waning upward momentum can sometimes foreshadow a trend reversal or sizable decline.

A bearish divergence forms when a security records a higher high and the MACD line forms a lower high. The higher high in the security is normal for an uptrend, but the lower high in the MACD shows less upside momentum. Even though upside momentum may be less, upside momentum is still outpacing downside momentum as long as the MACD is positive. Waning upward momentum can sometimes foreshadow a trend reversal or sizable decline.

Divergences should be taken with caution. Bearish divergences are commonplace in a strong uptrend, while bullish divergences occur often in a strong downtrend. Yes, you read that right. Uptrends often start with a strong advance that produces a surge in upside momentum (MACD). Even though the uptrend continues, it continues at a slower pace that causes the MACD to decline from its highs. Upside momentum may not be as strong, but it will continue to outpace downside momentum as long as the MACD line is above zero. The opposite occurs at the beginning of a strong downtrend.

Understanding divergence in trading is important, but if you want some help, the MetaTrader 5 platform offers a useful Oscillators toolkit and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how Stochastic, RSI and MACD divergence patterns can make you serious money.

You can test the trade signals of bearish and bullish divergence by creating a Forex EA with our Expert Advisor Generator (14 Days FREE Trial).

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June 2019

Harmonic price patterns take geometric price patterns to the next level by using Fibonacci retracement to define precise turning points. Unlike other common trading methods, Harmonic trading attempts to predict future movements. Let's look at some examples of how harmonic price patterns, including Gartley, Butterfly, Bat, Crab, and Shark ...

Harmonic price patterns take geometric price patterns to the next level by using Fibonacci retracement to define precise turning points. Unlike other common trading methods, Harmonic trading attempts to predict future movements. Let's look at some examples of how harmonic price patterns, including Gartley, Butterfly, Bat, Crab, and Shark are used in trading.

The Geometry of Harmonic Patterns

Harmonic patterns construct geometric pattern structures (retracement and projection swings/legs) using Fibonacci sequences. These harmonic structures identified as specified (harmonic) patterns provide unique opportunities for traders, such as potential price movements and key turning or trend reversal points. This factor adds an edge for traders as harmonic patterns attempt to provide highly trustworthy information on price entries, stops and targets information. This may be a key differentiation with other indicators/oscillators and how they work.

There are plenty of articles about Fibonacci and the theory of how these numbers exist in nature and in the financial world. For more details read our articles "What is Fibonacci" and "Trading with Fibonacci Retracements"

The graphic below illustrates how Fibonacci ratios are used to apply retracement, extension, projection, and expansion swings.

Types of Harmonic Patterns

There is quite an assortment of harmonic patterns, although there are four that seem most popular. These are: 

  • Gartley pattern 
  • Butterfly pattern 
  • Bat pattern 
  • Crab pattern
  • Shark pattern.

You can test the trade signals of Harmonic Patterns by creating a Forex EA with the Expert Advisor Generator (14 Days FREE Trial).

The Gartley Pattern

The bullish pattern is often seen early in a trend, and it is a sign the corrective waves are ending and an upward move will ensue following point D.

This is how to read the Gartley pattern chart. We will use the bullish example. The price moves up to A, it then corrects and B is a 0.618 retracement of wave A. The price moves up via BC, and is a 0.382 to 0.886 retracement of AB. The next move is down via CD, and it is an extension of 1.13 to 1.618 of AB. Point D is a 0.786 retracement of XA. Many traders look for CD to extend 1.27 to 1.618 of AB.

The area at D is known as the potential reversal zone. This is where long positions could be entered, although waiting for some confirmation of the price starting to rise is encouraged. A stop-loss is placed not far below entry, although addition stop loss tactics are discussed in a later section.

For the bearish pattern, look to short trade near D, with a stop loss not far above.

The Butterfly Pattern

The Butterfly pattern is different than the Gartley in that the butterfly has point D extending beyond point X.

Here we will look at the bearish example to break down the numbers. The price is dropping to A. The up wave of AB is a 0.786 retracement of XA. BC is a 0.382 to 0.886 retracement of AB. CD is a 1.618 to 2.24 extension of AB. D is at a 1.27 extension of the XA wave. D is an area to consider a short trade, although waiting for some confirmation of the price starting to move lower is encouraged. Place a stop loss not far above.

With all these patterns, some traders look for any ratio between the numbers mentioned, while others look for one or the other. For example, above it was mentioned that CD is a 1.618 to 2.24 extension of AB. Some traders will only look for 1.618 or 2.24, and disregard numbers in between unless they are very close to these specific numbers.

The Bat

The Bat pattern is similar to Gartley in appearance, but not in measurement.

 

Let's look at the bullish example. There is a rise via XA. B retraces 0.382 to 0.5 of XA. BC retraces 0.382 to 0.886 of AB. CD is a 1.618 to 2.618 extension of AB. D is at a 0.886 retracement of XA. D is the area to look for a long, although wait for the price to start rising before doing so. A stop-loss can be placed not far below. 

For the bearish pattern, look to short near D, with a stop loss not far above.

The Crab Pattern

The Crab pattern is considered one of the most precise of the patterns, providing reversals in extremely close proximity to what the Fibonacci numbers indicate.



This pattern is similar to the butterfly, yet different in measurement.

In a bullish pattern, point B will pullback 0.382 to 0.618 of XA. BC will retrace 0.382 to 0.886 of AB. CD extends 2.618 to 3.618 of AB. Point D is a 1.618 extension of XA. Take longs near D, with a stop loss not far below.

For the bearish Crab pattern, enter a short near D, with a stop loss not far above.

The Shark Pattern

The Shark Pattern is a new harmonic pattern. It possesses a unique formation called an Extreme Harmonic Impulse Wave that retests defined support/resistance while converging in the area of the 0.886 retracement – 1.13 extension.

In all cases, the completion point must include the powerful 88.6% support/retracement as a minimum requirement. In addition, the unique extreme Harmonic Impulse Wave employs a minimum 1.618 extension. This combination with the 88.6% retracement defines a unique structure that possesses two profound harmonic measures to define the minimum level. In many cases, the price action will retest the initial starting point of the pattern and define excellent opportunities to take advantage of a forex market that has moved to far too fast within a limited period of time. 

Examples of Harmonic Patterns

The Gartley pattern shown below is a 5-point bullish pattern. These patterns resemble “M” or “W” patterns and are defined by 5 key pivot points. Gartley patterns are built by 2 retracement legs and 2 impulse swing legs, forming a 5-point pattern. All of these swings are interrelated and associated with Fibonacci ratios. The center (eye) of the pattern is “B,” which defines the pattern, while “D” is the action or trigger point where trades are taken. The pattern shows trade entry, stop and target levels from the “D” level.



The following chart shows another 5-point harmonic pattern (Butterfly Bearish). This pattern is similar to the above 5-point Gartley pattern, but in reverse. Here the pattern is “W”-shaped with “B” being the center (eye) of the pattern. The pattern shows trade entry, stop and target levels from “D” levels using the “XA” leg.

Harmonic Pattern Identification

Harmonic patterns can be a bit hard to spot with the naked eye in forex trading and stock trading, but, once a trader understands the pattern structure, they can be relatively easily spotted by Fibonacci tools. The primary harmonic patterns are 5-point (Gartley, Butterfly, Crab, Bat, Shark) patterns. These patterns have embedded 3-point (ABC) or 4-point (ABCD) patterns. All the price swings between these points are interrelated and have harmonic ratios based on Fibonacci. Patterns are either forming or have completed “M”- or “W”-shaped structures or combinations of “M” and “W,” in the case of 3-drives. Harmonic patterns (5-point) have a critical origin (X) followed by an impulse wave (XA) followed by a corrective wave to form the “EYE” at (B) completing AB leg. Then followed by a trend wave (BC) and finally completed by a corrective leg (CD). The critical harmonic ratios between these legs determine whether a pattern is a retracement-based or extension-based pattern, as well as its name (Gartley, Butterfly, Crab, Bat, Shark). One of the significant points to remember is that all 5-point and 4-point harmonic patterns have embedded ABC (3-Point) patterns.

All 5-point harmonic patterns (Gartley, Butterfly, Crab, Bat, Shark) have similar principles and structures. Though they differ in terms of their leg-length ratios and locations of key nodes (X, A, B, C, D), once you understand one pattern, it will be relatively easy to understand the others. It may help for traders to use an automated pattern recognition software to identify these patterns, rather than using the naked eye to find or force the patterns.

Understanding how to identify a Harmonic Pattern is important, but if you want some help, the MT5 platform offers a useful Fibonacci toolkit and our trainers can provide you the right guidance. Open a ​forex account and notice how Gartley, Butterfly or Crab pattern can make you serious money.

You can test the trade signals of Harmonic Patterns by creating a Forex EA with the Expert Advisor Generator (14 Days FREE Trial).

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