What factors serve to define a profitable investment strategy? Common answers will include setting stop-loss limits, becoming familiar with a specific asset class, and knowing when to say when. However, technical analyses also play crucial roles.
The issue here is that appreciating the finer points can represent a daunting prospect; especially for those who are thinking about entering into an institutional trade. Business and retail investors will therefore have to become familiar with some fundamental tools that are used to interpret the current state of play. This article will be discussing the use of Fibonacci patterns and candlestick charts.
What are Candlestick Patterns, and What Do They Represent?
The fundamental purpose of a candlestick chart is to graphically illustrate how the price of a specific asset has moved within a certain period of time. Days, hours, or even minutes may be displayed in this manner. These charts are arguably one of the most common technical indicators that are employed by countless institutional traders. They can be used to highlight the following metrics:
- The opening price
- The closing price
- The highest price
- The lowest price
A red candlestick denotes a fall in the price of an asset, and green indicates a rise. The straightforward nature of these tools ensures that they are extremely valuable assets to novice and experienced investors alike. This brings up an important point.
What types of signals hint that a significant price rise may soon emerge? Strong bullish candlestick patterns are denoted by (at least) a series of long green candles, as these illustrate a short-term rise in value. The price itself should also open and close higher within this time frame. Such signals normally occur after a pronounced downtrend, and indicate that a reversal could be soon to follow.
The good news is that candlestick charts have been designed in such a manner as to allow for an easy analysis. Even those who are relatively new to the world of investing should therefore make it a point to become familiar with their basic mechanics.
Fibonacci Lines
Fibonacci calculations also enjoy a prominent place within the modern institutional trading ecosystem. While the underlying mechanics can be rather complicated, we will provide a basic overview for the sake of brevity here. Fibonacci analyses are based on a series of numbers; each representing the sum of the first two. Here is an example:
- 0, 1, 1, 2, 3, 5, 8, 13, 21, 34
So, why are these sums so important for traders?
One issue that readers should feel free to research in greater detail involves the concept of “Fibonacci retracements”. These can be used to clarify the high and low points associated with the price movements of a specific asset. In turn, so-called “retracement lines” are applied to clarify support (when traders tend to buy )and resistance (when it may be more logical to sell) levels. Assuming that these levels are breached, it could very well be time to enter into a position (support), or to liquidate one’s holdings (resistance).
Thankfully, traders will not need to possess a degree in advanced mathematics to interpret the signals mentioned above. The majority now employ the intuitive tools found within a Fibonacci indicator; taking the guesswork out of the equation, and providing clarity at the right times.
How Can Candlestick Charts and Fibonacci Lines be Used in Combination?
There is little doubt that candlestick charts can provide an incredible level of real-time insight when observing price movements. However, many investors choose to combine these graphical interfaces with the notion of retracement lines that was briefly described in the previous section. The goal is to obtain a more comprehensive picture of market sentiment; highlighting short-term movements such as trend reversals.
All About the Learning Curve
It is finally important to mention that this article has only scratched the surface in relation to Fibonacci patterns and candlestick charts. Even seasoned investors are always keen to improve their knowledge base, and to incorporate more strategies into their respective repertoires.
However, both of these approaches nonetheless represent the building blocks of a strong approach to trading. They can also be applied to a variety of asset classes including (but not limited to) Forex pairs, stocks, commodities, CFDs, and even cryptocurrencies. Knowledge is indeed power, so do not hesitate to learn more with the help of a qualified institutional trading platform.