Tradefair Weekly Update / Editor / 03 October 2008 / Leave a comment

Buzzwords of the week - Tip #12

Getting a handle on the candles

Candlestick charts originated in Japan and show price data in a special way. The price movement between the open and the close is shown as a box (called the "real body") and different colours are used for the real body depending on whether the close is higher or lower than the open. Often green is used if it's higher and red if it's lower or sometimes the colours used are blue for up and red for down.

Displaying candlestick charts in Tradefair Spreads

You can choose which type of chart to use on the Tradefair Spreads platform. Just click on Settings, then on Style, in the top right-hand corner, then choose Candle Stick.

A trick of the tail

One pattern that candlestick followers look for is the long "tail". Take for example the candle stick which formed last week on the weekly chart of the US Index the S&P 500, taken from Tradefair Spreads. Notice the real body is quite small because the open and the close were quite close in price. But look at the thin line below the real body, the tail. It is one of the very largest tails on the chart. That means, during the week, price has a enormous drop but then by the end of the week also had a rocketing recovery.
Psychologically this is important and here's why: the bears thought they were fully in control earlier in the week, but by the end of the week they had been routed. This is even more important because the initial drop took price below the lows of 2008 but by the end of the week price was back up over those lows. For the time being at least, those lows still have some power to act as a barrier preventing price closing below them.

Taking a trade based on a "tail"

Take a look at the chart: you can see that another tail formed in January 2008. If you had decided that this tail represented a significant low, and that price would not go much below it, when price once more approached the low of the tail in March, you could have entered an up bet on the index.

Bets on this index are price in pounds per 0.1. If you had been able to go long at £1 per 0.1 at 1270.0 with a stop at 1250.0, your risk would have been £200. If you had trailed your stop 20.0 below the low of the previous week you would eventually have been stopped out at 1366.0, making a profit of £966.

But please take note: it's essential with this type of trade to have good stop loss discipline, the trades don't always work. For instance, if you had tried this type of trade last week based on the July tail the trade wouldn't have worked.

Next time you log into Tradefair Spreads, set your charts as candlesticks and see if you can see any long tails - or any patterns. Try overlaying moving averages (see last week's Weekly update). We've used the S&P Rolling Daily above because it shows some nicely visible and long tails but try looking around at other charts. If conditions are right, you're just as likely to see them in other indices such as the FTSE or the DAX or even in currency pairs like the pound against the dollar.

Here's hoping you've ridden the recent waves successfully and profitably. Until next week...

Happy trading!

The Tradefair Spread Betting Team