It happens when a cluster of candlesticks goes down and to the right. A flat trend is when the price of a currency moves sideways.
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A flat market in forex is a time frame when the strength of the bulls and the bears in the market is equal. This situation impedes the formation of a specific trend, with the result that the price has no definite trend and is moving in a certain price range. A flat market is the one where a trader can suffer the most losses. Reason being, expectations and what the market can deliver will usually not be aligned. When the market is in a tight range, big gains are doubtful. The best strategy to follow in a flat market is to sell high and buy low. There is a great variety of price action trading strategies , all of them explained and illustrated on websites of forex brokers.
One price action strategy is to identify how price bars form specific patterns on a specific type of price chart, for instance, a candlestick chart. Candlestick patterns are combinations of candlesticks on a price chart. They can include a single or several candlesticks. Three favourite candlestick patterns are: Pin bar, internal bar, and fake breakout. A pin bar is a candlestick with a small to no body and a large shadow on the one side. It indicates a strong level of resistance to a current trend and signals a possible change of trends.
Pin bars that occur at important support and resistance levels are generally very accurate signals. For example, if a pin bar is situated on a resistance level, the price will most probably decline. If the market is mostly flat, a pin bar can safely be ignored.
An internal bar , also known as an inside bar , is a large candlestick without any shadows, followed by a smaller opposite candlestick. Preferably, the first candlestick should be at least twice the size of the second one. The inside bar is a great signal to indicate the continuation of a trend, but it can also be applied as a turning point indicator.
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However, if it occurs in the middle of a trend, it is not a very reliable signal and should not be acted upon. A fake breakou t happens when a candlestick breaks the level with its shadow and closes in a different direction. It is an indication of the rejection of an important level in the market. The market will frequently appear to move in one direction and then reverse, with the result that the traders that believed in the breakout have lost.
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Forex No Deposit Bonus. Open a Bitcoin Wallet. Broker of the Month. What is price action in forex trading? Four pillars of price action There are various strategies that can be utilized by a trader in price action trading. But, before explaining some of them, let us first have a look at the four pillars of price action , being: Candlesticks Bullish Trend Bearish Trend Flat Trend Candlesticks Candlesticks are the key element of price charts.
The below image shows the structure of a candlestick. Bullish Trend A trend is a directional movement of the price of a financial instrument, like a currency. Bearish Trend A bearish trend is the opposite of a bullish trend. Flat Trend A flat trend is when the price of a currency moves sideways. Price action trading strategies There is a great variety of price action trading strategies , all of them explained and illustrated on websites of forex brokers. Candlestick patterns Candlestick patterns are combinations of candlesticks on a price chart.
A partially shaved bar has a shaved top no upper tail or a shaved bottom no lower tail. An "inside bar" is a bar which is smaller and within the high to low range of the prior bar, i. Its relative position can be at the top, the middle or the bottom of the prior bar. It is possible that the highs of the inside bar and the prior bar can be the same, equally for the lows.
If both the highs and the lows are the same, it is harder to define it as an inside bar, yet reasons exist why it might be interpreted so. An outside bar is larger than the prior bar and totally overlaps it. Its high is higher than the previous high, and its low is lower than the previous low. The same imprecision in its definition as for inside bars above is often seen in interpretations of this type of bar.
An outside bar's interpretation is based on the concept that market participants were undecided or inactive on the prior bar but subsequently during the course of the outside bar demonstrated new commitment, driving the price up or down as seen. Again the explanation may seem simple but in combination with other price action, it builds up into a story that gives experienced traders an 'edge' a better than even chance of correctly predicting market direction.
The context in which they appear is all-important in their interpretation. If the outside bar's close is close to the centre, this makes it similar to a trading range bar, because neither the bulls nor the bears despite their aggression were able to dominate. Primarily price action traders will avoid or ignore outside bars, especially in the middle of trading ranges in which position they are considered meaningless. When an outside bar appears in a retrace of a strong trend, rather than acting as a range bar, it does show strong trending tendencies.
For instance, a bear outside bar in the retrace of a bull trend is a good signal that the retrace will continue further.
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This is explained by the way the outside bar forms, since it begins building in real time as a potential bull bar that is extending above the previous bar, which would encourage many traders to enter a bullish trade to profit from a continuation of the old bull trend. When the market reverses and the potential for a bull bar disappears, it leaves the bullish traders trapped in a bad trade.
If the price action traders have other reasons to be bearish in addition to this action, they will be waiting for this situation and will take the opportunity to make money going short where the trapped bulls have their protective stops positioned.
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If the reversal in the outside bar was quick, then many bearish traders will be as surprised as the bulls and the result will provide extra impetus to the market as they all seek to sell after the outside bar has closed. The same sort of situation also holds true in reverse for retracements of bear trends. As with all price action formations, small bars must be viewed in context. A quiet trading period, e. In general, small bars are a display of the lack of enthusiasm from either side of the market. A small bar can also just represent a pause in buying or selling activity as either side waits to see if the opposing market forces come back into play.
Alternatively small bars may represent a lack of conviction on the part of those driving the market in one direction, therefore signalling a reversal. As such, small bars can be interpreted to mean opposite things to opposing traders, but small bars are taken less as signals on their own, rather as a part of a larger setup involving any number of other price action observations.
For instance in some situations a small bar can be interpreted as a pause, an opportunity to enter with the market direction, and in other situations a pause can be seen as a sign of weakness and so a clue that a reversal is likely. One instance where small bars are taken as signals is in a trend where they appear in a pull-back. They signal the end of the pull-back and hence an opportunity to enter a trade with the trend.
An 'ii' is an inside pattern - 2 consecutive inside bars. An 'iii' is 3 in a row.
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Most often these are small bars. Price action traders who are unsure of market direction but sure of further movement - an opinion gleaned from other price action - would place an entry to buy above an ii or an iii and simultaneously an entry to sell below it, and would look for the market to break out of the price range of the pattern. Whichever order is executed, the other order then becomes the protective stop order that would get the trader out of the trade with a small loss if the market doesn't act as predicted.
A typical setup using the ii pattern is outlined by Brooks. The small inside bars are attributed to the buying and the selling pressure equalling out. The entry stop order would be placed one tick on the countertrend side of the first bar of the ii and the protective stop would be placed one tick beyond the first bar on the opposite side. Classically a trend is defined visually by plotting a trend line on the opposite side of the market from the trend's direction, or by a pair of trend channel lines - a trend line plus a parallel return line on the other side - on the chart.
In its idealised form, a trend will consist of trending higher highs or lower lows and in a rally, the higher highs alternate with higher lows as the market moves up, and in a sell-off the sequence of lower highs forming the trendline alternating with lower lows forms as the market falls. A swing in a rally is a period of gain ending at a higher high aka swing high , followed by a pull-back ending at a higher low higher than the start of the swing.
The opposite applies in sell-offs, each swing having a swing low at the lowest point.
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When the market breaks the trend line, the trend from the end of the last swing until the break is known as an 'intermediate trend line' [16] or a 'leg'. Frequently price action traders will look for two or three swings in a standard trend. With-trend legs contain 'pushes', a large with-trend bar or series of large with-trend bars. A trend need not have any pushes but it is usual. A trend is established once the market has formed three or four consecutive legs, e. The higher highs, higher lows, lower highs and lower lows can only be identified after the next bar has closed. A more risk-seeking trader would view the trend as established even after only one swing high or swing low.
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At the start of what a trader is hoping is a bull trend, after the first higher low, a trend line can be drawn from the low at the start of the trend to the higher low and then extended. When the market moves across this trend line, it has generated a trend line break for the trader, who is given several considerations from this point on. If the market moved with a particular rhythm to-and-fro from the trend line with regularity, the trader will give the trend line added weight. Any significant trend line that sees a significant trend line break represents a shift in the balance of the market and is interpreted as the first sign that the countertrend traders are able to assert some control.
The alternative scenario on resumption of the trend is that it picks up strength and requires a new trend line, in this instance with a steeper gradient, which is worth mentioning for sake of completeness and to note that it is not a situation that presents new opportunities, just higher rewards on existing ones for the with-trend trader.