2Bull Forex Blog

Once the basics of the Forex candlestick charts have been mastered, the Forex trader will find out that there is a great deal that can be learned from a candlestick chart that has been well put together.

With the rectangle that indicates the opening and closing prices (also known as the the “candle”) and the wicks that represent the highs and lows, a trader can find out a great deal about the foreign exchange market and make wise trading decisions.

The color of the rectangle representing the candle can also provide a great deal of information.

If the currency price in question goes up, the body is white, with the opening price at the bottom and the closing price at the top. If however, the body of the candle is black, this indicates that currency price went down and the closing price is found at the bottom and the opening price at the top.

As long as the vertical axis of the candlestick chart is in proportion, a trader can tell a lot about the Forex market at a glance!

When the coloring and size of the candle and the height of the wicks are understood, a Forex trader will be better able to read the charts quite quickly.

Within the color and the length of the wick is a lot of information that is presented. With a little bit of practice, a trader will be able to tell quite a bit about the selected time frame of the Forex market with a single look at one of these highly useful charts.

When the lower wick is at least the size of the body, this signals a bullish market, where investor confidence is high. This condition is called a long lower shadow.

Conversely, a long upper shadow occurs when the upper wick is at least as long as the body of the candle, and signals a bearish market. The longer the wicks are in their respective positions, the greater the sentiment expressed.

When a hammer configuration is observed, which is a candle with only one wick, this is also significant.

With a long lower wick and a small candle, this indicates a bullish market. An inverted hammer, with no lower wick and a tall upper wick, signals a bearish market.

It is important that the trader remember to take into account the color of the body of the candle as well, for the most accurate reading.

With its Japanese roots, the Forex candlestick chart system will have several names in Japanese. For instance, Marubozu white, when there is no wick at all the body is white, indicates a dominant bullish trade, while Marubozu black indicates dominant bearish trades.

When the trader has learned to read the Forex candlestick charts accurately, he will be able to get good, comparative information in a glance. Once a little experience at reading these charts has been gained, it becomes quite easy to effectively use them in a trading plan.

If you have an interest in the foreign exchange market (more commonly known as Forex), candlestick charts are the most readable and useful graphic depiction available.

A combination of a line chart and a bar chart, a candlestick chart shows the range of price movement over a set period of time. Candlestick charts are an excellent aid when you are making decisions as you can see a lot of information about the Forex trading currency movement and with a little bit of education about what the chart represents, you will soon see why.

A rice trader by the name of Honma Munehisa was said to have developed the candlestick chart during the Tokugawa Shogunate, a period of feudal dictatorship in Japan. Honma was far ahead of his time; legend has it that he had men stationed every 6 kilometers along the road, positioned to relay the current prices of rice to his headquarters.

Honma’s charts gave him an overview of the rising and falling market prices over an extended period of time, and after they were codified, they were an invaluable tool for his operation.

These charts were used (and continue to be used today!) to predict future trends. In 1900, the American journalist and founder of the Wall Street journal, Charles Dow, discovered this technique and added it to his series of tools for understanding market behavior.

Candlestick charts are named for their distinctive shape. One entry on a candlestick chart is a black or white rectangle with a “wick” coming from each end. While this entry might seem a little hard to understand at first, it is really very simple.

A forex candlestick chart will show opening and closing prices as well as the highs and low. A single entry on a candlestick chart will show a vertical rectangle that has vertical lines protruding from the top and bottom, the “wicks” mentioned above.

Where a simple bar chart will only show you vertical lines that display the highs and lows of each time period, a forex candlestick chart will provide more information. The rectangle that is absent in the bar chart will display the range between the opening and closing prices. The top of the block is the opening price, the bottom of the block is the closing price.

There are many advantages to a candlestick chart.

A line chart, for instance, only shows the closing price over a certain period of time and a bar chart will only show you a range of the highs and lows in the price.

A candlestick chart, alternately, will show you what a bar chart does as well as give you a pictorial representation of the range between opening and closing period. With this information in hand, you can make well thought out and considered decisions.

To protect your investment on the Forex market, you need to pay attention to the trends that the candlestick charts can alert you to.

The coloring and size of the bars can also represent different things.

The size of the wicks can represent bearish or bullish trends, while the position of the rectangle on the wicks can also hint towards a bearish or bullish position during an uptrend.

Forex candlestick charts can be invaluable tools when considering the choices that are presented. By learning to read and use them, a Forex trader can gain distinct advantages in decision-making on the foreign exchange market.

Pivot points are typically used to predict the direction that the Forex market is taking over the course of the day.

By using a simple mathematical formula to find the point where the overall trend in price changes, traders can take advantage of the movement of price, either up or down. They can use it as a gauge to determine the direction they should take whether selling a currency that is declining, or buying a currency that is on the rise.

Originally, trading pivot points was limited to floor traders. Its simplicity and straightforwardness made it an attractive tool for floor traders as it allowed them to determine the direction in which the market was heading throughout the day. The formula is simple, with no advanced mathematical skills necessary.

The most common method for calculating pivot points is a simple five point system. This system is comprised of a mathematical formula that utilizes the high, low and close of the previous day, along with two resistance levels and two support levels. The formula is relatively simple:

R2 = P + (H - L) = P + (R1 - S1)
R1 = (P x 2) - L
P = (H + L + C)/3
S1 = (P x 2) - H
S2 = P - (H - L) = P - (R1 - S1)

In this equation, let:

R = resistance levels
S = support levels
P = pivot point
H = high
L = low
C = close
O = open

It should be noted that when calculating the high, low and close, the New York closing time, which is 4 pm (EST) is generally used in Forex and other 24 hour markets.

Keep in mind the order of operations when solving these equations: solve parentheses first, exponents second, multiplication third, division fourth, addition fifth and subtraction sixth.

A variation that is quite common among Forex traders is to include an additional formula to the five point system.

P = ((Today’s O) + (H + L + C))/4

There are many websites that feature pivot point calculators. This is good news to Forex traders who are opposed to doing their own calculations. These calculators simply require some information inputted then perform all the calculations to find the pivot point.

Pivot points can actually serve two purposes. They can indicate an overall market trend. A bullish market will break the pivot point price in an upward movement. A bearish market does just the opposite.

But, they are only effective for the one day, making them short term trend indicators. For the following day they must be recalculated. Pivot points are also useful for entering and exiting the market.

Trading pivot points can be a very useful exercise for Forex traders. These few, simple calculations can be done quickly and can show levels that have a great probability for causing price movement.

However, the success of pivot points relies on the trader’s ability to use them effectively with other technical indicators such as MACD. When used in conjunction with such indicators, there is an increased probability for success.

Traders in the Forex market generally rely on two basic forms of evaluation which are used to study the markets and predict price movement: fundamental and technical analysis.

Fundamental analysis is essentially the study of a nation’s overall economy. The idea of this “Big Picture” approach is that the strength of a nations’s economy will affect the supply and demand for its currency, which will in turn affect the price of the currency.

On the other side of the “fence” is technical analysis where the currency price is assumed to reflect all news and fundamental factors, and the charts are the objects of analysis. The core belief here is that prices tend to follow patterns and by analyzing past price patterns a trader can predict the future direction of the price.

This article will present some general discussion of both areas of analysis and summarize some of the more popular indicators used to predict currency movements.

First of all, employing fundamental analysis strategies requires a basic understanding of supply
and demand, which is the most elemental force behind all financial markets. Since the value of a currency comes from the economic health of its respective country, macroeconomic changes can have a significant impact on currency rates.

Several factors can have a strong influence on rates. Some of the more significant are: politics, economic strength, speculation, economic projections, inflation rates, capital movement,interest rates, and quotas and tariffs.

Fundamental analysis itself can be broken down into two broad subcategories: capital flows and trade flows.

A country’s capital flows are the net quantity of currency being traded through various investments:
capital, equity market, fixed income market, etc.

Trade flows measure the net of imports and exports of a particular country, and the resulting effects that such flows can have on a nation’s currency.

The reason that trade plays such a strong role in determining strength of a currency is that importers
are required to sell currency used to purchase goods and services which are exported.

A Country which has a positive trade flow (more exports than imports) runs surpluses that serve to increase their currency while the opposite is true for the net importer. Fundamental analysis of this factor is one of the more important.

Traders who perform Fundamental analysis study various economic indicators to evaluate economic strength.

Some of the more significant indicators include: The Gross Domestic Product (represents the total market value of all goods and services produced), Retail Sales (measures the total receipts of all retail stores), Industrial Production (shows the change in production of factories, mines and utilities), and Consumer’s Price Index (measure of the change in prices of consumer goods).

Although there are other significant indicators that may be monitored, these are the most common and provide a basic analysis of a country’s economic strength and hence currency stability.

These reports are released on a regular basis by various government agencies and non-government organizations.

A trader who utilizes fundamental analysis typically will have the report schedules on hand and closely monitor the reports as well as the effects they may have on currency prices. Following this for a period of time will help the trader determine better what impact on the currency prices each of the reports may provide.

Technical analysts quite often will use price charts and patterns to anticipate price changes in both direction and range.

Candlestick Charts are widely used by Forex traders.

Consisting of a rectangle that indicates the opening
and closing prices (”candle”) and the “wicks” that represent the highs and the lows, Candlestick charts allow the trader to find out a great deal about the market and to make effective decisions.

When conducting Technical analysis of the Forex Market, most traders utilize one or more technical indicators to evaluate market direction and strength.

Some of the more popular indicators are the following:

MACD (Moving Average Convergence Divergence) consists of two moving averages. When one moving average crosses over the other one, a change of trend for that currency may be expected.

Stochastics operates much the same way as the MACD. The two may be used together to confirm a trend change.

Relative Strength Indicator (RSI) provides information on whether the currency is overbought or oversold as well as whether it is likely in an uptrend or downtrend.

Bollinger Bands are somewhat unique. Consisting of three lines (the middle line is a moving average), this indicator can provide useful information on market volatility.

Fibonacci evaluation can provide a retracement projection. Unlike most other indicators, the Fibonacci analysis is a LEADING indicator yielding a determination of future market direction, not past.

Bond Spreads may also be useful as a LEADING indicator. A bond spread is typically viewed on the difference between the five year and ten year bonds of two currencies. The limitation of using Bond spreads as an indicator is it may take several months, even over a year for the anticipated currency change to actually take place.

While both Fundamental and Technical analysis of the Forex market provide very useful information, they each
have their strengths and weaknesses.

The “Big Picture” of Fundamental analysis is good at identifying general long-term trends in price movement, but it does not give enough detail to provide entry and exit points for a trader.

Technical analysis on the other hand is typically more effective in predicting short-term trends (under three months),but it can suffer by being “blind sided” by significant price swings brought about by one or more fundamental factors.

Combining both Fundamental and Technical analysis of the Forex market may give the Forex Trader the best balance in his trading plan.

By monitoring various indicators on both sides of the “fence” over time, the trader may gain a better understanding of what will work best for his particular trading plan and style.

Moving Average Convergence Divergence (MACD) is a tool for analyzing trends in the Forex market and is often used in many markets. It is considered one of the most reliable trend following momentum indicators currently available.

MACD illustrates the association between two moving averages of prices. The formula involves subtracting the 26 day EMA (exponential moving average) from the 12 day EMA. The “signal line” is plotted over the MACD. The signal line is the nine day EMA of the MACD and it functions as a trigger for buy and sell indicators.

When charting the MACD, the zero line is a base. It supports the indicator and provides an area of resistance. When there is a move above or below the zero line, it is indicative of the position of the short term average as it relates to the long term average. When the MACD rises above the zero line it suggests upward momentum.

This is because the short term average is above the long term average. When the MACD falls below the zero line, the opposite is true. When interpreting the MACD in Forex trading, there are three methods that are most common.

Crossovers

When watching the MACD, a drop below the signal line is a likely indicator to sell, meaning it is a bearish signal. On the other hand, when the MACD rises above the signal line, it is suggestive of the likely onset of upward momentum of the price of the Forex currency.

This would mean it is a bullish signal. Quite often, traders will wait before entering into a position for a confirmed cross above the signal line. Entering into a position too early can result in a false rise.

Divergence

A divergence signals the end of the current trend. It occurs when the price of the Forex currency deviates from the MACD.

Dramatic Rise

When the MACD experiences a dramatic rise, meaning that the shorter moving average is further distanced from the long term moving average, it is an indication that the Forex currency is overbought and will fall back to normal levels soon.

MACD can be found on most contemporary charting software. It is displayed as a simple chart, but only two different colored lines. One line is solid and the other is dotted, typically indicating the 12 and 26 period EMAs using the 9 period EMA as the signal line. It is one of the simplest form of trend indicators.

MACD is most beneficial because it offers characteristics of both trend and momentum in one indicator. It is most often dead on as a trend following indicator. There may be a brief lag because of the use of EMAs instead of SMAs (Simple Moving Averages).

MACD in Forex trading can be used to indicate momentum, foreshadowing moves in the underlying currency. However, while the moving averages are a benefit, they can also pose as a drawback to MACD.

This is due to the lag in the indicator. Prudent Forex traders, though, become skillful at reading the indicators, waiting out the lags and following the trends.