There are two major methods used to analyze and forecast the behavior of the Forex market – Technical (chart) analysis and Fundamental analysis.
Forex Fundamental analysis is a type of market analysis which involves studying of the economic situation of countries to trade currencies more effectively. Most FOREX traders rely on analysis to make plan their trading strategy. The other common form of analysis is technical analysis.
Both are distinct in their own ways, but on the other hand both are considered useful forecast tools for any Forex trader. They work towards the same goal – in predicting price or movement of currency in the forex market.
In technical (chart) analysis trader studies the effect while the fundamentalist studies are about the cause of market movement. The more successful forex traders have been seen to combine both types of analysis for results that are fine tuned further.
Forex technical (chart) analysis, forecasting price movements & future market trends are based in charts study of past market action. Technical analysis is more focused on what has actually happened in the market, instead of what should ideally happen. It takes into account the price of currency and the volume of trading, and then charts are developed from such a data which is used as its primary tool. One big advantage of technical analysis is that the forex trading analysts can follow many markets and are capable of trading currency simultaneously.
Chart analysis is built on some basic and yet crucial principles. (i) Market action discounts everything! (ii) Prices move in trends, and (iii) History repeats itself.
There are five categories in Forex chart analysis theory: (i) Indicators (oscillators, e.g.: Relative Strength Index (RSI) (ii) Number theory (Fibonacci numbers, Gann numbers) (iii) Waves (Elliott wave theory) (iv) Gaps (high-low, open-closing) (v) Trends (following moving average).
For an aspiring forex trader, learning technical analysis skill is a major factor and her/his success depends on his in-depth knowledge to a great extent. One should also study about the Forex technical analysis tools while studying about Forex technical analysis
In the 1700s a Japanese man named Homma, a trader in the futures market, developed a method of technical analysis to analyze the price of rice contracts known as candlestick charting. Candlestick charts display the high, low, open, and close for a commodity each day over a specified period of time, in a format similar to a bar chart, but in a manner that maximizes the relationship between the opening and closing prices.
A narrow line shows the day’s price range. A wider body marks the area between the open and the close, referred to as real body. If the close is above the open, the body is white or green (not filled); if the close is below the open, the body is black or red (filled). Steve Nison is normally credited with popularizing candlestick charting in the west and is recognized as a leading expert on how a trader might interpret the readings.
Candlesticks provide specific visual cues that make understanding price movement easier. Trading with Japanese Candle Charts allow speculators to better comprehend market feelings. Offering a wider range of information than traditional bar charts candlesticks give emphasis to the relationship between close price and open price.
Traders who use candlesticks are likely to more quickly identify different types of price action that tend to predict reversals or continuations in trends. Furthermore, combined with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points.
Candlestick charts are much more appealing and understandable than a standard two-dimensional bar chart. There are four elements necessary to construct a candlestick chart, the OPEN, HIGH, LOW and CLOSING price for a given time period.
There are multiple forms of candlestick chart patterns:
White candlestick – signals uptrend movement
Black candlestick – signals downtrend movement
Long lower shadow – bullish signal
Long upper shadow – bearish signal
Hammer – a bullish pattern during a downtrend; Shaven head – a bullish pattern during a downtrend;
Hanging man – bearish pattern during an uptrend
Inverted hammer – signals bottom reversal, however confirmation must be obtained from next trade;
Shaven bottom – signaling bottom reversal, however confirmation must be obtained from next trade;
Shooting star – a bearish pattern during an uptrend
Spinning top white – neutral pattern, meaningful in combination with other candlestick patterns
Spinning top black – neutral pattern, meaningful in combination with other candlestick patterns
Doji – neutral pattern, meaningful in combination with other candlestick patterns
Long legged doji – signals a top reversal
Dragonfly doji – signals trend reversal
Gravestone doji – signals trend reversal
Marubozu white – dominant bullish trades, continued bullish trend
Marubozu black – dominant bearish trades, continued bearish trend
Candlestick charts are a visual aid for decision making in stock, forex, commodity, and options trading.
This is a very simplified primer on Japanese Candlesticks.
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