Valid "Forex" Candlesticks and market interpretation

[RandX]

Hello guys,

New, aspiring trader, ready to risk the shorts. Nice to be here.

I have been google'ing around quite intensely concerning this and have come to the conclusion that price action with Japanese candlesticks is the way to go (even though they've largely dumped them in Japan?)

1) I read that not all candle formations were valid in forex and the valid ones are:

Reversal Patterns:

Hammer & Hanging Man
Bullish & Bearish Engulfing
Bullish & Bearish Harami
Bullish & Bearish Harami Cross
Inverted Hammer & Shooting Star
Three White Soldiers & Three Black Crows
Advance Block
Three Inside Up and Three Inside Down
Three Stars in the South
Stick Sandwich

Continuation Patterns:

Rising Three Methods & Falling Three Methods
Bullish & Bearish Three Line Strike

Is the above list by any means complete?

2) Which realities do the following reflect:

2.1) Price falling, volume dropping and open interest dropping

2.2) Price falling, volume rising and open interest rising

2.3) Price falling, volume dropping and open interest rising

2.4) Price falling, volume rising and open interest dropping:

It would be really great if someone with enough market insight could/would elaborate on what 2.1 - 2.4 above means, as I would really like to be able to grasp volume and open interest properly before I go live. (wanna keep those shorts!)

So far, I've turned a demo account of $10.000 into $40.000 in three weeks, just using trending, known chart patterns, pivot- support- and resistance lines and a little news. (NO Fibonacci - just don't believe in it.) I think I just might be able to do this thing.

I hope you can/will help.

Cheers!

[RandX]

Ooops, the links came out all wrong. Corrected, sorry.

[RandX]

I see now the links were disabled by admins. Cool... Post corrected.

[fromJDtoFX]

no hard and fast rules here. folks talk about candles that are not valid in forex. this is just because of the fact that there are rarely gaps in forex (as it trades 6d/24hr/week). for instance, no evening star in forex because the small candle or doji cannot gap above the first long bar, as the pattern traditionally requires. most of us still think it is a valid morning star in forex, even absent a gap (see, e.g., Nisson's book on japanese candlesticks). Note that many futures trade around the clock as well (Globex on the cme, for instance). so no gaps there either (except weekends, and perhaps the short period of time globex is down before resuming trading at 6pm est.). Don't overthink this. certainly you don't have "window" patterns in forex. (the bulk of those patterns is, in fact, a gap). other than those, the other patterns are valid - to the extent that you confirm them (typically support/resistance, and perhaps an oscillator). I like to wait for confirming candles after patterns as well. (A down candle after a shooting star; a second down candle after a bearish engulfing, etc.).

not sure what you mean re the volume and open interest. open interest is an options/futures term; it has no application in the cash market (there are no "open" contracts - all spot is 2 day cash settlement. volume data is not really available in forex (other than for a specific mm or ecn - which is not even a drop in the bucket in volume compared to the interbank spot or even exchange traded futures market - meaning such data isn't really useful for trading). the price action encompassed in the candles provide clues on market psychology - some intelligence on the the battle b/w the bulls and the bears. (i.e., where are the frontlines, the beachhead; who is advancing and who is retreating; who is fresh and who is getting tired.) no information on volume.

good luck

[RandX]

Thank you for your reply. I have read that gauging price by watching the open interest development in forex futures was a good way to try to forecast/confirm price movements in spot forex. It's not about open interest in spot forex, I'm asking.

As I am not allowed to link, please google' "Forex: Gauging Forex Market Sentiment With Open Interest" and check out the suggested tactic. I like the sound of it. Your opinion? Can it somehow be brought up into view in the MT4 Window? Or perhaps be viewed real-time elsewhere on the net? I'm thinking a nice, juicy firefox tab here...

Concerning "the rules" mentioned:

Google' this: "Basics of Volume and Open Interest" by TraderX - and you'll see what I mean.

[phil838]

Originally Posted by fromJDtoFX

not sure what you mean re the volume and open interest. open interest is an options/futures term; it has no application in the cash market (there are no "open" contracts - all spot is 2 day cash settlement. volume data is not really available in forex (other than for a specific mm or ecn - which is not even a drop in the bucket in volume compared to the interbank spot or even exchange traded futures market - meaning such data isn't really useful for trading). the price action encompassed in the candles provide clues on market psychology - some intelligence on the the battle b/w the bulls and the bears. (i.e., where are the frontlines, the beachhead; who is advancing and who is retreating; who is fresh and who is getting tired.) no information on volume.

good luck

Yeah, I agree.

I read that article on volume and open interest before the moderators removed it. Even though the author claims to be a forex trader he has no clue what he's talking about.

Volume in the forex world refers to the number of ticks in a given period, not the dollar amount traded. And there is no such thing as open interest in spot forex.

[RandX]

Phil838:

Read the article on investopedia and you'll see it's not about open interest in spot forex at all, but about using the movements in forex futures as an indicator.

Sounds perfectly valid to me.

FromJDtoFX:

"which is not even a drop in the bucket in volume compared to the interbank spot or even exchange traded futures market - meaning such data isn't really useful for trading)."

Then whats the point of Volume Spread Analysis?

[fromJDtoFX]

yes I have seen that article.

my quote from below is taken out of context. what i was referring to was the volume data that some market makers or ecns provide. such data reflects the volume done by that individual mm or ecn, and not the entire spot fx market. because it is decentralized, there is no such data. and any individual ecn or mm, which are retail for the most part, are tiny compared to the market as a whole (like less than 1/10 of 1%). using that data for trading is like taking volume data from a small, unknown equity ecn or ats that caters to retail traders (i.e. not a major one like BATS) and trying to make a judgment about nyse volume. or determining the number of fish in the ocean based on the number of fish in an enclosed sound almost completely cut off from the ocean.

a related issue is the "level ii" data that mm/ecns provide. an imbalance at that ecn doesen't really tell you anything about the actual spot interbank market. just the limited liquidity on that platform. unlike traders in the futures pits, this data will not be of any use to you (except perhaps to explain why spreads are so wide (narrow).

compare all that to exchange traded futures (or equities or anything else with central data/central ctpy/exch traded).

now, with respect to using futures data to make judgemets about spot fx - i suppose you could extrapolate such data to a certain degree (folks do look at COT reports every friday). though again, these are in fact different markets. for instance, what is globex data from the asian or european session really going to tell you about spot? there is almost never much volume on globex overnight. otoh, volume during the pit sessions (U.S. session) can provide information regarding the conviction of a move, etc. whereas spot is very active at most hours, futures are not.

i wouldn't waste too many brain cells thinking about this. concentrate on candlestick patterns, other patterns, price action generally; learn to use and understand some basic indicators as an adjunct (rsi, stoch, macd; pivots). figure out how to determine s/r; trend, etc. And at first, only trade with the longer term trend. (scalp fading tredns for small retracements is not for beginners). trade what is happening, not what you think should happen. and be flexible. systematic in what you are doing, but flexible. b/c market conditions change and what worked all summer during the low vol range trading may not work when the markets begin to trend again (in other words, shorting at the top and going long at the bottom - risky in a trending market...on uptreds in long term charts, buy on retracements to support. vice versa on a long term downtrend. when consolidating, play breakouts (up or down - usually these things continue the prior trend; regardless, trade what is happening, not what should happen). if you get a triangle consolidation in an uptrend, and it breaks up, good - trade it once it breaks. if it breaks down, you might want to sit it out (as you would be trading against the trend). ototh, maybe the trend is a weak/neutral one. and trading the downside break against the trend with a tight stop could be ok...or maybe you sit oiut the breakdown, and if a true trend reversal has not set in, you trade long once the uptrend resumes at a level of prior support...use your good judgement...

once you have figured all that out, then maybe you can start thinking about what vol and open interest in the futures market might be telling you something about the direction of the spot market.

good luck!