From our previous blog posts, you should not be able to approach the Forex Market using fundamental analysis. However, that is not enough. In fact, many traders consider fundamental analysis to be a little bit dreary. So, they do not use it. Instead, they adhere strictly to Technical Analysis in approaching the market and making decisions about it. However, we believe that both can be used together.
So, here, we will be talking about Technical Forex Analysis, too. Since it has become so widely used, it is a tool that is worthy of incorporating into your trading arsenal. Hence, you should really take your time to study this.
Technical Forex Analysis
Technical Forex Analysis is the other most widely adopted method of approaching the Forex Market. While Fundamental Forex Analysis is based on economic indicators, Technical Forex Analysis, on the other hand doesn’t deal with those factors at all. Instead, it is founded on the assumptions:
– The price is all there is. All economic indicators — and more — are already factored in the price.
– Price moves in trends.
– History tends to repeat itself.
Consequently, it seeks to analyse the market using tools other than the fundamental economic parameters. Technical Analysts always say, “Since fundamentals are already factored in the price, what is the point of analyzing them?” Hence, they focus on tools such as:
So, how do they use those tools to approach the Forex Market and make informed decisions about it? Read on!
Charts are an invaluable tool in Technical Forex Analysis because they help to present graphic representations of price movements. They enable Forex traders to analyse, in real-time, happenings in the market in such a way that they can easily make decisions about them. Three types are used:
– Japanese Candlestick Chart
– Bar Chart
– Line Chart
The Japanese Candlestick Chart, however, is the most widely used, so we will be focusing our discussion on it. It is so graphic that it presents important market information such as the open, high, low, and close price (OHLC) during a given time frame in the clearest way.
There are two types of Japanese Candlesticks: bullish and bearish. And at this juncture, it is important you note that bullish Japanese candlesticks are conventionally represented by either white or green while bearish ones, on the other hand, are represented by either black or red.
Bullish and Bearish Candlesticks
When the market closes above the open, a bullish candlestick is formed and is denoted as either white or green. When the close price is below the open, the candlestick is said to be bearish and is represented as black or red.
Based on the size of the body, a bullish or bearish candlestick can either be long or short. A long bullish candlestick indicates strong buying. It signals that buyers are far stronger than sellers and are dictating the direction of the market. A short bullish candlestick, on the other hand, suggests that there is little buying activity in the market.
Conversely, the formation of a long bearish candlestick is suggestive of strong selling pressure. It indicates that sellers are stronger than buyers and are dictating the direction of the market. A short bearish candlestick, on the other hand, indicates that the selling activity in the market is minimal.
Tip: The longer the candlestick, the stronger the trend and the more likely the market will continue in that direction.
Candlestick patterns are moves graphically shown on the charts used by traders to predict changes in price. Over 40 such patterns have been recognised, but we will be limiting ourselves to the commonly encountered ones, from basic to triple. Those common ones will serve you well enough in this early stage of your Forex trading career.
Basic Candlestick Patterns
The basic candlestick patterns are Spinning Tops, Marubozu, and Doji. These patterns indicate different situations in the market and you can use them to predict its next moves.
When a candlestick has long upper and lower shadows, it is called a spinning top. Because a spinning top always indicates indecision by market participants, the colour of its body does not matter. Instead, what you should watch is whenever a spinning top is formed.
For example, if you find a spinning top in the middle of an uptrend, it suggests that buyers are already exhausting their steam and sellers are beginning to equally weigh in. As a result, a potential trend reversal could be in sight. Similarly, if it is during a downtrend, you should watch out for a possible reversal in direction, too.
Summary: A spinning top has long upper and lower shadows. When you come across it in a trend, up or down, the trend could be about to reverse.
A Marubozu is a candlestick without shadows. That is, such a candlestick has only a body without any shadows projecting from it. Apart from this fundamental structural difference, a Marubozu also differs from a spinning top in that the colour of its body matters. Hence, based on this, there are two types of it.
Bullish Marubozu and Bearish Marubozu.
The bullish Marubozu, which is conventionally represented either as white or green, is formed when the market has the same open as the low and the same close as the high. The bearish Marubozu is either black or red and is formed when, instead, the price opens at the high and closes at the low.
Summary: A Marubozu is used to indicate either a buy or sell signal. Bullish and bearish Marubozus signify buyer and seller pressure respectively. Hence, with a bullish Marubozu, you can go long at the next day’s open and with a bearish Marubozu, you can go short at the low price of the day.
There you have them, spinning tops and Marubozu. Our next post will continue with Dojis and we will then move on to Single Candlestick Patterns. But before we get there, who says you cannot start with Forex right away? Sign up for our membership plan here and start receiving our reliable signals!