In this post we will look at the various Letters within the Forex Source code Language and what they mean when reading charts and candle sticks.
Let’s dive right in.
Letter T, t
The letter “t” in the Forex Source Code language reflects what is commonly known as a pin bar. This letter “t” alone is arguably the most important letter in the source code alphabet.
A pin bar candle is where price varies greatly but closes near or about the same location as where it opened, which will reflect a small body with a large wick. Ideally, there is a large wick on one side only.
The larger the wick, the more importance it has. If the pin bar prints as a capital letter “T” instead, it will bear an even greater importance since there no rejection, thus communicating a strong “one-sided” control of the market (price closed at high or low depending on direction).
Pin bars can be bullish or bearish depending on its shape (see below). The white pin bar is a bullish candle “t” while the black one is a bearish candle “t” (or inverted “t”). Because candles can vary greatly due to price, the next lesson will focus on the specific criteria with which pin bars must comply in order to be valid.
Letters Q, q and U, u
The next letter is commonly referred to as the inside bar candle, and in the Forex source code we use “u” to denote this candle. As in the English language, the letter “u” always follows the letter “q.” These letters are to be seen as a pair as the “u” must be fully encapsulated by the previous candle.
The “u” bars can be seen on the uptrend and downtrend as depicted in the picture above. The source code letter “u” are important clues as to what the market will communicate as it means that the market is experiencing exhaustion and will reverse or the market is consolidating its price to move higher. The way you execute these trades will be very important as we will see in Lesson III.
Letter V, v
The “v” candle bars—the bald bars—represent a unique characteristic where the close price is at or near its high price. The inverse will also be true for downward trend bars.
To signify where price closed at its high or low, use a capital “V”. If the candle has a small rejection in the direction of its trend use the lower case “v”.
These are vital as they provide us with clues since the momentum and psychology of the direction of the trend is biased to one side of the trend.
Letter W, w
In the Forex source code a “w” letter denotes an engulfing candle where this candle totally overtakes the previous candle. This is commonly known as bullish or bearish engulfing bars. Capital “W’s” should signify important obvious engulfing candles.
Letter X, x
False break letters are denoted as “x” letters as they break through a trading range and then close back into the range. Amateur traders can be easily fooled by this break as they get caught into a market trap where the Agents of the Fed reverse the trade.
If the false break candle is a pin bar then its importance increases and to signify this importance, I use a capital “X.”
Letter Y, y
This letter represents market indecision: the market is unclear of the direction it should take. The market is saying “why” as in “why should I go up or down? I won’t take a firm stance until you show me who is stronger.”
The closer together the open and the close are, the greater the significance of the market indecision. This letter is commonly referred to as a doji. If price opened and closed at the same location, this would be denoted by a capital “Y”
Letter Z, z
I guess you can figure out what these candles mean by its name. The “z’s” represent common market noise and will rarely provide you with any clues.
The market is in sleep or “dream mode” and there is nothing worth trading here. The market can go either way and thus it will not provide you with a high probability trade.
A full explanation of the significance of each source code letter will be provided in the next lesson. We will now add source code letters together to create source code words and phrases.
Market Pronunciation of Forex Letters
When you are reading the forex charts, you will most likely not be reading the same currency pair on every time-frame and therefore it is important to know how to add “source code letters” to get a better understanding of what is happening in the markets from a more macro perspective.
I like to call this the market pronunciation of Forex source code letters.
Example: To draw a candle we need to know the open, close, high, and low. When adding candles we need to get the open of the first candle, the close of the last candle, and the high and low of the candle set.
In the example below, we see two one-hour candles that, when added together, will produce a two-hour pin bar or “t”.
Even though a pin bar is a source code letter “t,” we would not directly see this pin bar unless we are watching the two-hour timeframe. The two-hour timeframe is not a typical timeframe and most likely you will not be watching it.
We now see the importance of adding letters together as it will reveal a “word” and in this case the two one-hour candles form an important word (a pin bar).
This is “reading between the lines” to really understand what the market is communicating; it is a clue as to the directional bias of the market.
Below we will have candlestick addition or market “pronunciation” examples to form an equivalent source code word.
Example: this example may provide an important clue as to what the market is communicating. Fill in the rest of the candle stick addition examples below (answer key at the end of this lesson.)
As we have seen in the previous section the source code letter “w” represents a pin bar when the candles are added together. Adding candlesticks together will help you to get a better understanding of the language of the markets as a whole.
Adding source code letters broadens your view of the market. Although most traders will not trade based on what they see on a two-hour timeframe, this will nevertheless provide you with a clearer understanding of the language of the market and you will be able to make better-informed and wiser trades.
Putting candlestick addition aside, if we simply put the source code letter together we can create words as such below. Some letters (if the right shape and in the right location) can have a powerful meaning in the markets. These meanings will be discussed in the next lesson on how to execute high probability trades.
Forex Source Code letters and words are then used to create phrases. Phrases could be the general trend of the price action movement created by the Agents of the Fed, as they are the ones primarily responsible for moving the market
Forex Source Code Phrases
The general idea of source code phrases is what the market is communicating from a macro perspective, thus the underlying longer-term trend.
The first step into analyzing a trend is to determine the impulsive and corrective trends. This is a crucial concept to learn as these will communicate who is in control of the markets (buyers or sellers).
Impulsive moves are mainly created by the Agents of the Fed (banks and institutions), and they are something to which you must pay close attention when entering a trade.
Particular types of trends in the market will have unique characteristics. Note the following:
There are two types of trends: Impulsive (strong force) or corrective (weak force).
- Characteristics of an impulsive trend:
- 1. Largest candles in the set;
- 2. The majority of candles are in one direction (i.e. same colour);
- 3. The closes of the candles are mostly at the lows in a downward market and near the highs in an upward market;
- 4. Could see letter “v’s”.
- Characteristics of a corrective trend:
- 1. Smallest candles in the set;
- 2. Candles are an even mix in colour;
- 3. The closes of the candles are mostly in the middle, not able to maintain price direction, and suffer from price rejections (larger wicks on the tops and the bottoms, a characteristic which confirms to us that there is a lack of commitment at either side of the market);
- 4. Could see letter “y’s”.
- The benefits of identifying impulsive and corrective trends:
- 1. Spotting the major trends and trading with them;
- 2. Entering a trade on corrective trends;
- 3. Observation of who is control of the market; etc.
Trend analysis and the proper identification of impulsive and corrective moves will enhance the probability of a successful trade when entering in the direction of the major trend vis-a-vis a price action setups.
What can we say about the trend in the gold chart above? The general trend is downward. Within this trend, however, we see the following: Line A represents an impulsive move; Line B, corrective; Line C, impulsive; and Line D, corrective.
Movements in price action tend to move in patterns, similar to that of a wave.
Impulsive moves are generally in one direction which can represent the tides; corrective moves can be either horizontal or slight pullbacks against the impulsuive moves which represent the trough of the waves. Once an implusive wave makes a new high in price, it is likely that this high will be retested due to the nature of who is in control of the markets.
Picture yourself vigorously whirling water in a bucket in a clockwise direction; within a few moments, the water assumes a momentum of its own. Imagine, now, that you abruptly change the direction of the water’s course, moving the bucket in a counter-clockwise motion.
At first there is resistance to this new change in direction, but if this resistance breaks, the tides will reverse course and the markets will go in the opposite direction.
In trading terms, this means that the bulls could be exiting the market and becoming bears. This is why “V” top and bottoms are a rare occurence in the markets. Double and triple bottoms/tops lend themselves to the probability that the trend might be reversing.
Using price action signals at these levels could further validate this reversal.
The study of waves is actually the study of physics, and appropriately, Newton’s laws of motion could also be applied to trading.
From Newton’s first law: “an object either is at rest or moves at a constant velocity, unless acted upon by an external force”. An impulsive move in the opposite direction along with a price action setup could confirm that the trend is over, basically meaning that the tides have reversed course.