The red box on the bottom left-hand side of our graph below shows the currency pair and the length for the period. Here, each candle is equivalent to 30 minutes of market activity.
Setting Up An Example This lesson is designed for a novice that has never traded using an online charting software. We will open a couple of sample trades and follow their progress over several days to see how positions change in value.
First, we are going to look at the USD/JPY pair which means we are trading the US Dollar against the Japanese Yen. Second, we will trade the EUR/USD pair which means we will be speculating on the value of the Euro against the US Dollar.
Reading Candlesticks
Candlestick Charts Each "candlestick", the individual blue and red shapes, represents price activity for a certain amount of time. The body of the candlestick bar is comprised of the difference between the open and close price. If the opening price was lower than the closing price or the given currency pair gained value, then the body of the bar is blue. To contrast, if the opening price was higher than the closing price or the given currency pair lost value, then the body of the bar is filled red. If the high and low prices for the period are located outside of the open-close range they are marked off by two lines known as the upper and lower shadows. The upper shadow protrudes from the top of the candlestick's body and marks the high price for the given time period represented by the bar. Conversely, the lower shadow protrudes from the bottom and marks the low price.
USD/JPY - October 24th, 2006 - 1:00 PM
So with all that said, we are looking at a 30 minute chart of the USD/JPY pair. The chart encompasses the price activity for about three trading sessions. Each session is more easily identified by the high-low zones, which separates the current graph into three distinct sections. A trader should do extensive analysis before placing a trade, which we will not do here. For instance one should see how the short term outlook compares to the long term outlook. We will focus on the short term right now.
We can gather from the short term information that the Dollar has been rising for the past 3 trading sessions. The last 6 candles bucked the trend as the Yen gained in strength against the Dollar. The position that a trader will open depends on what the trader speculates will happen next.
If he or she believes that the recent downward move is the beginning of a new short term downward trend, he or she would sell the pair (sell the Dollar/buy the Yen). The trader would then make money if price action continues to head downward. If the Dollar recovers and starts heading up again this trader would be wrong and lose money on his or her position. If the trader believes that the Yen's strength was an anomaly from the upward trend, they would buy the pair (buy the Dollar/sell the Yen).
Opening two Positions
For our USD/JPY example, we are going to Buy the pair, as we think that the recent Yen gains are going to be reversed, and the low point is actually a good place to buy the Dollar at a cheaper rate than at the start of the trading session.
Here is the graph once we place an open position.
USD/JPY - October 24, 2006 - 1:00 PM
In case you were wondering why the position has started at -2 pips, the spread is 3 pips for this pair, so by the time this image was captured the trade had gone in our favor by one pip. Our trade needs to reach 119.23 to be even. Right now the current price is the brown horizontal line at 119.21.
At the same time, we will open another position for the sake of comparison that bets against the Dollar. It would be too simple to take the Sell side of our USD/JPY pair, and therefore the positions would be mirror opposites of each other.
EUR/USD - October 24, 2006 - 1:00 PM
Therefore we will pick another pair, the EUR/USD, and see how the Dollar does when we buy the Euro/ sell the Dollar. Since the Dollar comes first in the USD/JPY pair and second in the EUR/USD pair, it still makes sense that we Buy both pairs, as we are buying the Dollar against the Yen in the first example, and are buying the Euro and therefore selling the Dollar in the second case.
Initial Changes, 4 Hours Later
We will now explore one of our trades, the USD/JPY, several hours after we opened it.
USD/JPY - October 24th, 2006 - 6:00 PM
Our USD/JPY position gained! Our short term prediction proved to be correct. We see the price of the Dollar bounce back after its steep fall. Our initial thoughts, that the Dollar's strength from the last couple of days will continue, plays out on the chart.
A couple of candles later... A couple of hours later, the short term uptrend seems to have stalled. There is some back and forth between the pair's bears and bulls. Our position has moved a couple of pips higher to positive 14 pips.
USD/JPY - October 24th, 2006 - 8:00 PM
Close the Position?: Since our position is positive and our initial prediction was correct this could be a good place to think about closing the position with a gain. The decision when to close a position depends on your broader strategy. That strategy depends on how conservative or aggressive your trading style is. For a short term objective (intra-day) we may have accomplished our goal ($100 gain on the trade).
During this same time our EUR/USD was falling by about the same amount, but we will show both pairs on the next page after one full day.
Lets now continue onto the next day.
The Next Day, 24 Hours Later
During the night the tide turned against the Dollar. After starting off positive, our USD/JPY position has now turned negative.
USD/JPY - October 25, 2006 - 11:30 AM
There were several stretches of time when we could have broken even on our position. The horizontal red line is the point at which we opened our position, so whenever the candles cross the red line it is a point where our position would have broken even. Even though price seems to be moving sideways, there seems to be a new downtrend forming which would be bad news for our position. We had one last chance to close the position and break even 4 candles (or 2 hours) ago.
Now the pair shows a (-21) pip loss on our position. If your analysis seems to have faltered, it is time to re-evaluate a trade. Don't get fixated on a given position as you want to cut your losing trades and ride your winning trades. The mentality that "price will come back to the level at which I opened the position" is dangerous.
On the other hand our EUR/USD position is gaining traction. We should see what our goals were before opening this position and re-evaluate if this is a good place to close the position.
EUR/USD - October 25, 2006 - 12:00 PM
As mentioned before one should let their winning positions keep gaining. However as a short term goal, if +20 pips is what you were looking for then it may be time to close the position. If we are favoring the Euro in the near term future, we would keep holding the position.
We will hold both positions to show what happens next.
Candles Can Paint a Story of Wild Activity, 26 Hours Later
USD/JPY - October 25th, 2006 - 3:00 PM
In the next several hours, the Dollar recovers. Another opportunity to break even or even close the position with a gain presents itself. However, price action becomes quite volatile as can be seen from the large candlesticks and shadows. This point is the last time we will have a chance to break even for a long time, even though we can't know this at the present moment.
The current candle, along with the previous one, tells a story of how the market behaved during that time. At first the pair was heading upwards, moving past 119.25. At that point the pair's bears sold and brought the pair down below 118.95. At this low point the pair's bulls bring the pair back up ending the candle at 119.10. The final half hour follows a similar pattern. The back and forth action here means that a trader will have to be skilled in order to exit correctly.
EUR/USD - October 25, 2006 - 3:00 PM
Let's see the position that was speculating on Dollar weakness and Euro strength.
The last two candles are similar to our USD/JPY position in that both have volatile price action. The second to last candle shows a similar story as explained before. Bulls push up the price, but then bears bring it back down. The pair's bulls are not beaten and in the next candle they bring the price back up to 1.2610. At this moment our position has gained +40 pips.
Retraction from a Big Move - 30 Hours Later
USD/JPY - October 25th, 2006 - 6:00 PM
In the following snapshots we have finished October 25th's trading session. Since the Forex market is open 24 hours a day, the agreed upon time when one trading session ends and another begins is 5:00 PM EST. We can see this graphically on the VT Trader software because the daily high/low zone has begun anew. Our positions have been open for more than 24 hours at this point.
After the volatile candles we saw in the previous page around 3 PM, the markets calm down and there is a measured move in the Dollar's favor lasting 5 candles. By the time the new short trend ends, our USD/JPY position is back to being down around -14 pips.
EUR/USD - October 25th, 2006 - 7:00 PM
In our EUR/USD position we have a similar retraction after a sharp climb. This image is captured an hour later than the USD/JPY pair, and it can be seen that the (relatively) long term trend has resumed as the pair continues heading up (favoring the Euro). What likely happened here was that investors and traders than wanted to buy the Euro took advantage of a dip in the price to buy more long EUR/USD positions.
Had we closed this position earlier, after achieving some short term profit targets, we would be missing these gains. Of course, its easy to say what one should have done after seeing what has already happened. How and when a trader decides to close his or her positions depends on their strategy and what plan or outlook the trader had in mind when placing the trade.
Let's take one last look at our positions, after one more trading session has completed.
Two Days Later - 48 Hours Later
USD/JPY - October 26th, 2006 - 1:30 PM EST
When we come back to our positions after another trading session, we start to see trends forming. In the USD/JPY example, there is a downward channel being established.
The first lesson that can be learned from following this position is what happens when one holds onto a losing position. If at first the position did poorly and did not meet the expectations set up in a trader's plan, it would have been prudent to re-evaluate that trade and close the position. This could have minimized the losses. Instead the position is now down 90 pips. There is an automatic method a trader can use to close a position that is moving against him or her, or in their favor. One can place a stop or limit orders that close positions when they reach a certain price. Stops and Limits are discussed in Lesson Risk Management. Stops and limits may help take away the emotional factors of fear and greed when deciding to close a position.
A second lesson to be learned from the above image is that it can be risky to leave a position open without monitoring it. A 1 Lot position that has lost 90 pips can translate into a $900 loss and a trader that left his or her position open without proper risk management could easily suffer big losses.
Of course, this works in the other direction as we will see below. Our winning position keeps improving as the Dollar is doing poorly. We are also able to see the earlier candles and moves that we had studied in the previous pages of this lesson.
EUR/USD - October 26th, 2006 - 1:30 PM EST
We finish this EUR/USD example with the position up 125 pips, which equals $1,250 for our 1 Lot trade after about two full days of market activity. We saw the position move back and forth, and on the last trading session a short term uptrend formed that clearly benefited the Euro.
Conclusion:
As we can see from these two examples, the Forex market has periods when it is quiet and calm, and periods of high activity. We saw the Dollar strengthen then weaken against two different currencies concurrently. We have also shown how closing a position depends on the situation, the trader, and his or her plan beforehand. What would you do next if you had these positions open? Would you close them right away, or would you wait to see if the trends will continue?
Well, you can see if you would have been correct by registering for a practice account or Live account.
We hope these examples provide you with some clarity on how positions move up and down, and how money can be made or lost trading Forex.
