Chapter 1 : What is Support and Resistance?


Support and resistance is a valuable tool used by Forex traders that help identify possible points on Forex charts where price may change directions.

By studying these levels, Forex traders can obtain a better understanding of what is going on in the Forex market.

A picture, or in this case, a zigzag pattern, paints a thousand words so let’s take a look at what this means in practice.

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Support occurs when falling prices stop, change direction, and begin to rise. It is often viewed as a “floor” that is supporting or holding up, prices.

Support levels indicate where there will be a surplus of buyers.

Resistance  is a price level where rising prices stop, change direction, and begin to fall. It is often viewed as a “ceiling” keeping prices from rising higher.
Resistance levels indicate where there will be a surplus of sellers.

In their most basic sense, support levels denote prices that a currency will not likely fall below, while resistance levels indicate prices the currency will probably not exceed.

By analysing the support and resistance, Forex traders can more accurately predict whether a current trend will keep going or, alternatively, reverse. Armed with this information, a trader can potentially find a price point to enter a position, or close a position, and place a stop or a limit.

But at this point, we may be getting ahead of ourselves. We need to develop the foundation before we build the house, right?

First, let’s see how we can draw the support and resistance levels.


Plotting Support and Resistance Levels
It is important to remember that support and resistance levels are not always exact numbers.

They are usually a zone covering a small range of prices so levels can be breached, or pierced, without necessarily being broken. 

Throughout your journey as a Forex trader, you will often come across a support or resistance level that appears broken, but soon after you’ll find out that the market was just testing it.

If you’re using candlestick charts, these “tests” of support and resistance are generally represented by the candlestick shadows.

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Can you notice how the shadows of the candles tested the 1.4700 support level?

At those times it seemed like the market was “breaking” support.

Looking back, we can see that the market was only testing that level.

So how do we REALLY know if support and resistance were broken?
Unfortunately, there is no definite answer to that question. Some argue that a support or resistance level is broken if the market can actually close past that level. 

However, you will find that this is not always the case.

Let’s look at the same example from above and see what happened when the price actually closed past the 1.4700 support level.

In our example, the price had closed below the 1.4700 support level but it ended up rising back up above it.

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If you had believed that this was a real breakout and sold this pair, you wouldn’t have been happy.

Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken.

In fact, it is still very much intact and now even stronger.

To help you filter out these false breakouts, the trick is to think of support and resistance more of as “zones” rather than concrete numbers.

One way recommended by Forex experts that helps traders find these zones is to plot support and resistance on a line chart rather than using a candlestick chart.

The reason is that line charts only show you the closing price while candlesticks add extreme highs and lows to the picture which can be distracting.

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It’s like when someone is doing something really unreasonable, but when you ask them about it, they simply reply, “Sorry, it’s just a reflex”.




Chapter 2 : Basic Candlestick Patterns in Forex


Spinning Tops

What is a spinning top?
A spinning top is a candlestick pattern with a short real body that’s vertically centered between long upper and lower shadows. 

This candlestick pattern indicates uncertainty in the market and therefore indecision between the buyers and sellers.

Why are they called spinning tops?It’s actually quite funny. Remember these?

The Forex spinning tops are named after them simply because they share the same body structure.

What does a spinning top look like in Forex?

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The small real body (hollow or filled, green or red) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand so the result was a standoff.

  • If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.

  • If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

Now let’s see what a spinning top looks like on an actual Forex chart. 

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Marubozu
Sounds like an African clan or that we are about to teach you some Voodoo spells, but worry not.

We are always there to help you out

In Japanese, the word “marubozu ” translates to “bald head” or “shaved head” .

So what do you think it means for our candlestick?

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In Forex, Marubozu is simply a long candlestick with no upper or lower shadow (or wick) and can appear anywhere on the chart.

It basically looks like a vertical rectangle. 

In case you missed school when you were learning about vertical rectangles, here’s what they look like. 

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Marubozu comes in both a bearish (red or black) and a bullish (green or white) form and is super easy to spot due to its long body.

The longer the candle, the stronger the price move (whether it jumped up or down).

Let’s see what Marubozu looks like on a Forex chart. 

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Pretty easy to spot, right? 

Depending on where a marubozu is located and what colour it is, here are few guidelines:

Green or White Marubozu

  • If a Green Marubozu forms at the end of an uptrend, a continuation is likely.
  • If a Green Marubozu forms at the end of a downtrend, a reversal is likely.

Red or Black Marubozu

  • If a Red Marubozu forms at the end of a downtrend, a continuation is likely.
  • If a Red Marubozu forms at the end of an uptrend, a reversal is likely.

Doji

Doji candlesticks are unique candles that reveal indecision between buyers and sellers in the Forex market. 

In a doji pattern, the open and close prices are equal (or almost exactly equal) and their bodies appear as a very thin line.

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Even though the image above might resemble an indecisive thin candlestick, it is not what Dojis look like in Forex. Want to see what they really look like? Here you go.

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And what does it look like on a Forex chart? Just like this!

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There are four main types of doji to watch out for:

  • Long-legged doji have a lengthy wick both above and below the body
  • Gravestone doji have a high wick above the body and nothing underneath
  • Dragonfly doji have a long wick beneath the body and little to no wick above it
  • Four-price doji have no wick at all

While the traditional Doji star represents indecisiveness, the other variations can tell a different story, and therefore will impact the strategy and decisions traders make. Let’s explore each type in more detail below.

Long-Legged Doji
A long-legged doji, or a ‘rickshaw man’, is similar to a neutral doji, except for the fact that the wicks are longer on either side.

Characteristics:

  • Extended upper wick
  • Extended lower wick
  • Greater volatility

Indicates:
Indecesion

➡Chart Formation:

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➡ Chart Formation on Forex Chart

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Gravestone Doji
A gravestone doji candle is a unique formation as it only has an upper shadow. It is viewed as a bearish reversal candlestick pattern that mainly occurs at the top of uptrends. 

The open, high, and close are near the same price in the lower half of the candle.

➡Characteristics:

  • Appears at the top of an uptrend
  • Shows the rejection of higher prices
  • Bearish signal

Indicates:
Change in direction

➡Chart Formation:

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➡Chart Formation on Forex Chart:

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Dragonfly Doji
A dragonfly Doji candlestick formation is the opposite of gravestone doji as the open, high, and close are near the same price in the upper half of the candle.

It can occur in both an uptrend and a downtrend, but it is considered to be stronger when it takes place at the bottom of the downtrend.

➡Characteristics:

  • Appears at the bottom of a downtrend
  • Shows the rejection of lower prices
  • Bullish signal

Indicates:
Change in direction

➡Chart Formation:

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➡Chart Formation on Forex Chart:

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The Four Price Doji
Four price doji is a rare type of candlestick where open, high, low, and close are all the same. This candle reflects the highest extent of indecision between bulls and bears and often appears in pre-market and after-hours trading.

➡Characteristics:

  • Horizontal line
  • High, low, open and close are all at the same level
  • Unique pattern signifying indecision and low volatility

Indicates:
Ultimate Indecision

➡Chart Formation:

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➡Chart Formation on Forex Chart:

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Wrapping up

It is important to remember that you’re not looking for the perfect candle, just a candle that resembles the above patterns as closely as possible. 
And if you can’t remember all the names, don’t worry! We have prepared a little cheat pic for you. Feel free to download it below!

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Chapter 3 : Single Candlestick Patterns in Forex


Now that you’re familiar with basic candlestick patterns like spinning tops, marubozu, and dojis, let’s learn how to spot and recognise single candlestick patterns on ‘em Forex charts.

Why are they called single?
They are called single because they are composed of just one single candlestick.

And as you may have guessed, there are a few different types out there.

In fact, they come in two main types, each of which has a bullish and bearish version:

  • Hammer (bullish) and Hanging Man (bearish)
  • Inverted Hammer (bullish) and Shooting Star (bearish)

What is Hammer and Hanging Man?
Hammer and Hanging Man are single candlestick patterns commonly used by traders for the purposes of technical analysis.

The Hammer and the Hanging Man candlesticks look identical but give different signals and occur in different conditions.

Both appear as a candle with a small body at the top and a wick at the bottom that is two or three times longer than the body. There is no wick above the body and the colour of the body is not important.

What is important is the nature of the trend in which they appear.

The bullish Hammer appears during falling markets and the bearish Hanging Man appears during rising markets.

So how do you distinguish one another?
If this single candlestick pattern appears in a chart with an upward trend indicating a bearish reversal, it is called the hanging man.

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If it appears in a downward trend indicating a bullish reversal, it is called a hammer.  It got its name because the market is hammering out a bottom.

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Hammer

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Hanging Man

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How to spot a Hanging man or a Hammer on a chart:

  • The long shadow is about two or three times the size of the real body.
  • There is a small or no upper shadow.
  • It is likely to appear within an uptrend or downtrend.
  • It should break a recent high/low or be near to a recent high/low.

What is Inverted Hammer and Shooting Star?
Inverted Hammer and Shooting Star are single candlestick patterns commonly used by traders for the purposes of technical analysis.

Similar to the patterns mentioned above, Inverted Hammer and Shooting Star also look identical.

Both appear as a candle with a small body at the bottom and a wick at the top that is two or three times longer than the body. There is no shadow below the body and the colour of the body is not important.

The only difference between them is whether you’re in a downtrend or uptrend.

An Inverted Hammer is a bullish reversal candlestick. It appears when prices are falling and indicates that the downtrend may have reached its bottom limit and that prices may be about to reverse upwards. An Inverted Hammer signals a buying opportunity.

Let’s see what an Inverted Hammer looks like below.

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A Shooting Star is a bearish reversal candlestick. It appears when prices are rising and indicates that the uptrend may have reached its top limit and that prices may be about to reverse downwards. A Shooting Star signals a selling opportunity.

Let’s see what a Shooting Star looks like below.

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let’s see what these look like on a Forex chart.

Shooting Star

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Inverted Hammer

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And that’s it!We have now covered all single candlestick patterns!

Do you think you’ll be able to spot Hammer, Hanging Man, Inverted Hammer, and Shooting Star on Forex charts without our help? If you have 5 minutes to spare, you can practice spotting single candlestick patterns with our fun quiz here!

P.S. feel free to use this cheat pic!

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Chapter 4 : Dual Candlestick Patterns in Forex


In the previous chapter, you were made familiar with different  single candlesticks patterns that gave both continuous and reversal signals.

But what’s better than patterns with single candlestick patterns?

Patterns with TWO candlesticks!!!

But you know what that means! Double the candlestick patterns, double the trouble…

Even though memorising double candlestick patterns can be a bit more challenging, the trading results can be very rewarding. 

Dual Candlestick Patterns
Similar to the single Japanese candlestick patterns, Dual Candlestick Patterns come in a few various types and in bullish and bearish versions.

  • Engulfing Candles (Bullish Engulfing and Bearish Engulfing)
  • Tweezer Bottoms and Tops

What Are Engulfing Candles?
The engulfing pattern is a strong reversal signal that can be bullish or bearish and is composed of two candlesticks. The body of the first candlestick is immediately followed by another larger one in the opposite direction.

There are bullish and bearish engulfing patterns and they are composed of two candlesticks – one bullish and one bearish. 

Bullish Engulfing Candles

What is a Bullish Engulfing Candle?
A bullish engulfing candle is a dual candlestick pattern, which might signal an upcoming uptrend. The pattern applies after there’s been a period of consolidation or downtrend.

Characteristics of a Bullish Engulfing Candle
The two-candlestick pattern is a bearish candle followed by a larger bullish candle. The reason this is an indicator for an uptrend is that bulls are showing more strength than bears. The change in strength with the bulls shows a reversal of momentum that is likely to continue into the future.

The name of the pattern comes from the idea that the bullish candle “engulfs” the bearish candle that came before it.

➡Chart Formation

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➡Chart Formation on Forex Chart

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Bearish Engulfing Candles

➡What is a Bearish Engulfing Candle?
A bearish engulfing candle is a dual candlestick pattern, which might signal an upcoming downtrend. The pattern applies after there’s been a period of consolidation or an uptrend.

➡Characteristics of a Bearish Engulfing Candle
The bearish engulfing pattern is similar to the bullish engulfing patterns but signals an upcoming downtrend instead.

The difference between bearish and bullish engulfing patterns is that a larger bearish candle follows a smaller bullish candle instead. The reason for this reversal is that bears have started to out strengthen the bulls and the momentum might continue into the future. 

This pattern happens in the uptrend and indicates the seller overpowered the buyer and the prices will now turn down.

➡Chart Formation

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➡Chart Formation on Forex Chart

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What Are Tweezer Patterns?
Tweezer patterns are two candlestick reversal patterns formed by two candlesticks that have matching highs or lows.

This type of candlestick pattern is usually spotted after an extended uptrend or downtrend, indicating that a reversal will happen soon.

There are two types of Tweezer patterns: the Tweezer Bottom and the Tweezer Top.

Tweezer Bottom Candles

➡What is a Tweezer Bottom Candle?
A Tweezer Bottom candlestick pattern is a bullish reversal pattern that can be spotted at the bottom of a downtrend. It consists of two candles with very similar lows, while the second candle reflects more bullish market sentiment as the prices burst higher, in the opposite trend.

➡Characteristics of a Tweezer Bottom Candle
A tweezer bottom follows an extended downtrend and signals a reversal upwards. The first candlestick for a tweezer bottom has a bearish candle with a moderate-length shadow below. The second candlestick is a bullish candlestick with an equal length body and shadow sharing the same low as the first candle.

It indicates that there is strong support and the price is likely to head higher.

➡Chart Formation

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Notice how the candlestick formation looks just like a pair of tweezers!

Amazing!

➡Chart Formation on Forex Chart

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Tweezer Top Candles

➡What is a Tweezer Top Candle?

A Tweezer Bottom candlestick pattern is a bearish reversal pattern that can be spotted at the top of an uptrend. The first candle is bullish but shows rejection of higher prices, and the second candle attempts to surge higher but fails. It signals that the resistance strong and the market will decline and consolidate.

➡Characteristics of a Tweezer Top Candle

A tweezer top is the opposite of a tweezer bottom as it follows an extended uptrend and signals a reversal downwards. The tweezer top pattern has a bullish candle with a shadow on top, and a bearish candle with a shadow on top following it. Similar to the tweezer bottom, the bodies and shadows must share the same high, low, open and close.

It indicates that there is strong resistance and the price is likely to go lower.

➡Chart Formation

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➡Chart Formation on Forex Chart

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As always, feel free to download the cheat pic below to help you along the way!

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Chapter 5 : Triple Candlestick Patterns in Forex


Triple Candlestick patterns means triple the effort, but triple the rewards too. 
To identify triple Japanese candlestick patterns, you need to look for specific formations that consist of three candlesticks in total.

They are often used to predict the next behaviour of currency prices, whether it is continuation or reversal patterns. But we’re getting ahead of ourselves.

Let’s take a look at the popular triple Japanese candlestick patterns.

Evening and Morning StarsThe Morning Star and the Evening Star are triple candlestick patterns that usually occur when a particular trend is ending. 

They are both reversal patterns because they show the end of one trend and the start of another.

Let’s explore each one in more detail below.

Evening Star Candlestick Pattern

➡ What is an Evening Star Candlestick Pattern?

The Evening Star pattern is a three-candle, bearish reversal candlestick pattern that appears at the top of an uptrend. It signals the slowing down of upward momentum before a bearish move lays the foundation for a new downtrend.

➡Characteristics of an Evening Star Candlestick Pattern.

The Evening Star occurs when the Japanese candlestick pattern is reversing from an uptrend to a downtrend as shown in the example below. The following occurs in this pattern:

  • The first candlestick is bullish, indicating part of a recent trend.
  • The body of the second candlestick is very small, showing indecision of investors in the market.
  • The third candlestick confirms a reversal of the previous trend as it closes way below the first candlestick.

➡Chart Formation

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➡Chart Formation on Forex Chart

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Morning Star Candlestick Pattern

➡ What is a Morning Star Candlestick?

The Morning Star candlestick is a three-candle, bullish pattern that signals a reversal in the market. The morning star can be found at the end of a downtrend, signifying a potential turning point in a rising market. 

➡ Characteristics of a Morning Star Candlestick?

The morning star occurs when the downward trend is reversed to an upward trend.  The following occurs in this pattern:

  • The first Japanese candlestick is red and bearish, which is part of the recent downward trend.
  • The second candlestick is small, showing push and pull between buyers and sellers.
  • The third candlestick confirms that the buyers have won the tuck of war, and so the market is reversing to an upward trend.

➡Chart Formation

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➡Chart Formation on Forex Chart

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Three White Soldiers and Black Crows
The three white soldiers and black crows are other types of three-candlestick patterns.

But rather than signaling a reversal, compared to many other patterns we’ve looked at, the white soldiers and black crows are used to confirm a trend.

Let’s explore each of them below. 

Three White Soldiers Candlestick Pattern

➡ What is a Three White Soldiers pattern?

Three white soldiers is a bullish candlestick pattern that is used to predict the reversal of the current downtrend in a pricing chart. The pattern consists of three consecutive long-bodied candlesticks that open within the previous candle’s real body and a close that exceeds the previous candle’s high.

➡ Characteristics of a Morning Star Candlestick?

The morning star occurs when the downward trend is reversed to an upward trend.  The following occurs in this pattern:

Three White Soldiers pattern is found at the end of a downtrend and indicates a shift in the balance from the sellers to the buyers. The following occurs in this pattern:

The bodies of the second and the third candlesticks should be of approximately the same size – if the third candlestick is visibly smaller than the preceding two candles, this means that the buyers are not completely in control and may indicate weakness among the buyers.

The candles have small or no upper wicks.

➡Chart Formation

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➡Chart Formation on Forex Chart

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Black Crows Candlestick Pattern

➡ What is a Black Crows pattern?

The Three Black Crows pattern is a bearish reversal pattern used to predict the reversal of the current uptrend in a pricing chart. It usually indicates weakness in an established uptrend and signifies the potential emergence of a downtrend.

➡Characteristics of a Black Crows pattern

The three crows pattern also referred to as the “three black crows”, is a reversal pattern found at the end of an uptrend.  The following occurs in this pattern:

It consists of three consecutive bearish candlesticks.

The bodies of the second and the third candlestick should be approximately the same size – if the third candlestick is visibly smaller than the preceding two candles, this means that the sellers are not completely in control and may indicate weakness among the sellers.

They have small or no lower wicks.

➡Chart Formation

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➡Chart Formation on Forex Chart

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Three Inside Up and Down

The three inside up and down candlestick patterns are the last type of triple candlestick patterns. Both, Three Inside Up and Down, signal the reversal of a trend. 

The three outside up and three outside down patterns are characterised by one candlestick immediately followed by two candlesticks of opposite shading.

Three Inside Up Candlestick Pattern

What is a Three Inside Up pattern?

The three inside up is a bullish reversal pattern that occurs at the end of a bearish trend, signaling the beginning of a potential reversal.

It consists of three candles, with the first two candles forming an inside bar that’s followed by a bullish breakout.

➡Characteristics of a Three Inside Up pattern

The following occurs in this pattern:

  • The first candlestick is long and bearish, indicating that the market is still in a downtrend.
  • The second candlestick is bullish and should ideally close at the halfway mark of the first candlestick.
  • The third candlestick is also bullish and closes beyond the open of the first candlestick, ideally above the high of the second candle.

➡Chart Formation

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➡Chart Formation on Forex Chart

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Three Inside Down Candlestick Pattern

➡What is a Three Inside Down pattern?

A three inside down is a bearish candlestick reversal pattern that forms at the end of an uptrend, signaling a shift in the direction of the trend.

The pattern consists of a positive candle that’s followed by an inside bar, after which the price breaks down below the open of the first candle. 

➡Characteristics of a Three Inside Down pattern

The following occurs in this pattern:

  • The first candlestick is long and bullish, indicating that the market is still in an uptrend.
  • The second candlestick is bearish and should ideally close at the halfway mark of the first candlestick.
  • The third candlestick is also bearish and closes beyond the open of the first candlestick, ideally below the low of the second candle.

➡Chart Formation

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➡Chart Formation on Forex Chart

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Chapter 6 : What are Trend Lines in Forex?


The Trendline is among the most important tools used by technical analysts.

Rather than looking at the past business performance or other fundamentals, technical analysts look for trends in price action. And what better tool to look for trends than a trend line, right?

Why is it important to identify the trend? 

Well, technical analysts believe that identifying the trend is the first step in the process of making a good trade.

What is a Trend Line?
A trend line is a straight line that connects two or more price points and extends into the future to act as a line of support or resistance.

Trend lines connect significant lows in an uptrend and they connect significant highs in a downtrend, creating dynamic resistance.

Dynamic resistance means that as time changes, so do the price of the support or resistance. 

For example, in an uptrend, the level of support goes up as time progresses. In a downtrend, the level of resistance goes down as time progresses.

What is Uptrend and Downtrend?

An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope.

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A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. 

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Let’s see what Uptrend and Downtrend look like on an actual Forex chart.

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Drawing three touch trend lines
To draw Forex trend lines properly, all you have to do is locate two major tops or bottoms and connect them.
What’s next?Nothing.Really, it’s that simple. 

Want to see another example of what downtrend and uptrend look like on a Forex chart?
There you go!

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Notice that when drawing trend lines in a downtrend, you draw them above the price. When you draw trend lines in an uptrend, you draw them below the price. 

Sideways trend
Yup, that’s right. There is a third type of trend on top of Downtrend and uptrend. 

What is sideways trend?
A sideways trend is the horizontal price movement that occurs when the forces of supply and demand are nearly equal.

In a sideways trend, the price moves in a narrow band, neither going upward nor downward.

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Since there is no clear directional trend, sideways trends can be very frustrating for short-term traders and trend traders.

Let’s recap!

There are three types of trends:

  • Uptrend (higher lows)
  • Downtrend (lower highs)
  • Sideways trend (ranging)


In case you ever get confused, we have prepared a little cheat pic for you. 

Feel free to download it by clicking below.

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Chapter 7 : What are Trend Channels in Forex?


Okay, so now that you know all there is to know about trend lines, what if I told you that you can take it one step further?

If you draw a parallel line at the same angle of the uptrend or downtrend, you will have created a channel.

Let’s explore.

What is a Trend Channel?
A trend channel, also sometimes called a price channel, is a set of parallel trend lines defined by the highs and lows of an asset’s price action.

These lines typically run pretty close to a parallel of each other. They are super helpful to Forex traders because they help them see uptrends and downtrends. 

Let’s take a look at what a Trend Channel looks like in practice. 

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Types of Trend Channels
Similarly to trend lines, there are 3 types of trend channels. 

  • Ascending channel (higher highs and higher lows)
  • Descending channel (lower highs and lower lows)
  • Sideways or horizontal channel (ranging)

Drawing trend channels 101
With the trend line in place. Creating the channel is easy. All there is left to do is to copy the trend line and drag this new line into position. This new line is known as the “Channel line”.

In a bullish trend, the trend line is plotted below the price action, while the trend channel line is positioned above the highs of the price movement.

In a bearish trend, the trend line is plotted above, while the trend channel line is below the price action.

One thing that is important to understand that trend channels don’t have to be absolutely parallel and it’s even possible that one side of the trend channel is horizontal support or resistance – in such a case, we typically speak of triangles or wedges but more on that in later chapters. 

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