Japanese candlesticks are a form of plotting price movements on the chart which is far superior to the visual information conveyed by a bar chart. While bar charts concentrate on high and low prices, the candlestick also incorporates the opening and closing prices and gives a visual indication of market sentiment. The technique was originally used by the Japanese in the 18th-century in the rice futures market and this is how it gets its name. One of the most difficult aspects of forex trading to is the ability to predict continuation or reversals of price trends and candlesticks help to spot this quickly. In combination with other tools of technical or fundamental analysis, the trader is also able to determine entry and exit points.

Given below is a typical candlestick chart which you can get from your forex broker:

As you can see, the difference between the opening and closing price is shown by the thick portion or the body of the candlestick. The thin lines at the top and the bottom are called wicks or shadows and represent the high and low prices for the day. If you look carefully, the figure on the left is colored blue signifying an upward movement where did close is above the open. The figure on the right is colored red signifying a downward movement and the close is below the open. Be careful because these colors vary from site to site so get familiar with the convention used by the website from where you get your charts.

The length and breadth of the body will change from session to session depending on the price action as will the length of the shadows or the wicks. Long bodies indicate lots of buying or selling activity while short bodies show that there is little activity in the market. Continuing the above color convention, a long blue candlestick indicates lots of buyers while a long red candlestick indicates lots of sellers. It long shadow indicates a lot of activity between opening and closing whereas a short shadow shows that the activity was mostly confined to the opening and closing.

Here is a bar chart and a Japanese Candlestick Chart side by side. Notice how much easier it is to spot market trends from the candlestick chart.

Because of the usefulness in conveying market sentiment, Japanese Candlestick charts can be a great help in highlighting when the market trends are about to change. These changes may either be reversals when the market trend reverses or continuations when the market trend carries on.

Common candlestick patterns: here are some of the common Candlestick patterns and their interpretation:

-spinning tops: the candlestick with long and lower shadows and a very small body is called the spinning top. The small body indicates that there is no dominance of buyers or sellers though the long shadows indicate that both had tried to dominate the market. The appearance of a spinning top of indicates the end of a downtrend or an uptrend as the case may be. Here is an example:

-Doji lines: a Doji line has a very small body and the open equals the close. This means that buyers and sellers are equal in the market and neither is dominant. When a Doji forms, you should take special attention to the candlesticks that immediately precede. If they are bearish candlesticks, it means that buyers are running out of steam and if they are bullish candlesticks, the reverse is true. Here is an example:

Reversal patterns: for a reversal pattern to happen, a trend must have been established. A bullish reversal has to be preceded by a bearish trend and vice-versa. Here are some of the more common reversal patterns:

-Hammer and Hanging Man: as you can see yourself, these are identical formations except that one is a downtrend and the other is an uptrend.

Both have long lower shadows and virtually non-existent upper shadows. The hammer is a bullish reversal in a bearish trend and indicates that the bottom of the market will soon be achieved. The hanging man on the other hand signifies the bearish reversal in a bullish trend and indicates that the top will soon arrive.

-Inverted Hammer and Shooting Star: once again, these are identical looking candlesticks except that one body is filled and the other is not. One is used in an uptrend and the other in a down trend. Once again, the bodies are small but with a long upper shadow and a very small or non-existent lower shadow. This is what they look like:

The inverted hammer normally signals the reversal when prices have been on a downward trend and the long upper shadow suggests that sellers who wanted to sell have already sold and it is now likely that buyers will dominate the market. The shooting star, on the other hand signals a reversal when prices have been rising and suggests that sellers will dominate the market.

Continuation patterns: as opposed to reversal patterns, continuation patterns are patterns that suggest that the current trend will continue. These patterns could either be:

-bullish patterns which indicate that the market will continue to rise. The Rising Three Methods is one of these patterns and as shown below:

The chart shows trading sessions over five days. On the first day, the candle indicates the trend of hyperactivity and rising prices with small corrections on the next three days all within the range of the first candle. Then on the fifth day, the bullish activity resumes indicating a continuation in the trend of rising prices. There are plenty of other bullish continuation patterns that you should familiarize yourself with.

-Bearish patterns which indicate that the market will continue to fall. Similar to our example above but actually indicating that reverse is the Falling Three Methods which is illustrated below:

This again is a five-day chart with lots of trading action on the first day and prices moving down. Over the next three days that is a modest recovery though prices stay in the range of the first day candlestick. On the fifth day, hectic trading activity and a downward trend in prices appears again suggesting that the trend will continue.

As we have seen earlier, one of the most commonly used technical indicators in making buy or sell decisions in forex trading is the use of moving averages. We have also seen that there was no significant difference between the use of simple moving averages and exponential moving averages. They both produce the same kind of signals and you may choose whatever suits your trading style best. There has never been any decisive evidence that simple averages are better than exponential averages or vice-versa. Remember to be consistent in the use of your technical tools.

Simple averages are an arithmetical mean of the closing prices of the days in question there is exponential averages weight the prices with the most recent being given the maximum weight. There are many sources from which you can pick up your information and the best forex broker would always provide you with the charts that you seek. Settle for what are you find the most reliable and convenient for your trading needs. Here are the steps that you should follow:

Step number one: get a feel for the long-term direction in which the market is headed. Use 200 day average for the purpose. If the market price is above the 200 day average, it is likely that the market is on an uptrend and it is an opportune moment to buy. If the market price is below the 200 day average, which is likely that the market is on a downtrend and it would be advisable to sell or go short.

Step number two: crossovers are the system most commonly employed to determine whether to buy to sell. You can use two moving averages for the purpose. For instance if you are using the four-day and the nine day averages, and the four-day average crosses the nine day average moving upwards, this is generally taken as a signal that you should buy. Similarly if the four-day average crosses the nine day average moving downwards, it is taken as a signal that you should sell. For a longer-term trend, you should use longer-term averages such as the 50 day or the 200 day average.

Step number three: some traders prefer to use three moving averages for their crossovers because they feel that this provides less volatility to the system. For instance, for your short-term trading, you may wish to use the four-day, the nine-day and the 18 day moving averages. For a buy signal to be generated, it is essential that both the shorter term averages must cross the longest average in an upward direction. In our case both the four-day and the nine day average must cross-over upwards over the 18 day average. Note however that for a sell signal to be generated, it is necessary only for one of the two shorter term averages to cross over moving downwards over the longest term average. In our case, it is sufficient if either the four-day or the nine-day average cross-over moving downwards over the 18 day average.

Using pivot points as the basis of a Forex trading strategy has been around for a very long time and is now slightly out of fashion. It still remains an effective strategy, easy to understand and to implement and the arithmetic involved is minimal. The pivot level is the level at which the market changes direction for the trading day. Using the high, low, and closing price of the previous day, some simple arithmetic can be used to calculate a number of points which can be important support and resistance levels. These taken together collectively called pivot points or pivot levels.

The actual formula is given below:

R 3 = High + 2 X (Pivot – Low)
R 2 = Pivot + (R1 – S1)
R 1 = 2 X Pivot – Low
Pivot Point = (High + Close + Low)/3
S 1 = 2 X Pivot – High
S 2 = Pivot – (R1 – S1)
S 3 = Low – 2 X (High – Pivot)

R= Resistance and S=Support

You can therefore calculate three resistance levels, three support levels and one pivot point.

The pivot points are popular with traders because they are leading indicators and can be used to predict the price action on the next day. Because so many traders use them, they tend to have a large influence on the actual trading. If the market opens above the pivot point, the inclination will be to trade long. On the other hand, if the market opens below the pivot point, the market will incline to trade short. The other two pivot points that are important are R 1 and S1 respectively. You will be looking for reversals or brakes on these points and trying to take advantage. By the time R 3 or S3 are reached, the market will either be heavily overbought or heavily oversold and these points should be used to square off positions.

Using pivot points, you might end up with a chart that looks like this:

The support levels are indicated by the blue lines and the resistance levels by the red lines. Because in the market has opened below the pivot point, the market will tend to go short. Your strategy using this chart might consist of entry at S1, exit at S 2 and a stop loss at the pivot point.

A more advanced technique in trading with pivot points is the use the cross of two moving indicators as a confirmation of a breakout. You can use whatever indicators you are comfortable and you can also use MACD to check that it is favoring a buy. Remember however that indicators are merely confirmation of the breakout that is indicated by the chart. Here is an example:

There is actually no such thing as easy forex but pivot points are as easy and successful a strategy as you are likely to get.

In the face of intense scrutiny by investors and traders, unsure of the Greek Crises
and its possible ramifications on the rest of the European nations and the UK slowly
gaining strength in economic growth, the EUR/ GBP has continued its downtrend over
the last few weeks making lower lows as the 20 Period moving average has broken and
then held as resistance. The EUR/ GBP broke through a significant support level of
0.8424 and tested 0.8205 as support.

If 0.8424 is tested again as resistance and fails to break back above, then the
downtrend is likely to continue.

The downtrend appears to be following a Fibonacci projection movement in which the
initial price retraced to the 50% level, suggesting that price could fall further
with a likely target of 0.8158 (a key price level as well as the 138.2 Fibonacci
projection) and then ultimately to 0.7993 (also a previous key price level and the
161.8 Fibonacci projection).

If the price rises over the coming weeks then a likely target is 0.8424; which is
the previous key support level from June last year and February this year. If this
level breaks and continues up, then 0.8595 would be a secondary target to the
upside.

Created by FXKnight.com

Though we have said that technical analysis focuses on price and volume, we have said relatively little about the role of volume so far. Volume is simply the number of contracts traded over a given period of time usually one day.

The higher the volume, the more active the forex trading. Analysts look at the volume bars that are usually shown at the bottom of any chart and show the movement and trends just like prices…

Volume plays an important role in technical analysis because it can be used to confirm trends or patterns on charts. Any price movements that are accompanied by high volumes are seen to be more significant and sustainable than price movements with low volumes. So if you are examining a large price movement, you will want to cross check your conclusions with volume data. For instance, if a currency price jumps after a long steady downward trend, a large volume will indicate a probable trend reversal. If, on the other hand, the volume is modest, you may not be looking at a true reversal.

The volume should move hand in hand with the trend. In other words, rising prices should be accompanied by increasing volumes. If this is not the case, you are probably looking at a weak trend. If rising prices continue to be accompanied by low volumes, your trend is probably running out of steam. When volume differs from price, the phenomenon is known in technical analysis as divergence.

Volumes and chart patterns: technical analysts also regard volume data is critical in confirming patterns on the chart. In most chart patterns such as head and shoulders or flags, there are certain key points on the chart that need to be confirmed by volume data. Basically if the volumes do not confirm the patterns, chartists regard it as an inferior quality signal.

Volume precedes price: a fundamental belief in technical analysis is that price changes are always preceded by changes in volume. And chartists therefore study volume data closely in order to identify the reversals in trends. When volume begins to taper off when prices are rising, it is a sign that that the uptrend is faltering.

As we said earlier, seasoned analysts and forex brokers always look for confirmation of patterns from the volumes. True breakouts above support levels are almost always accompanied by higher than normal trading volume. You may ask why you should worry about volume when prices of a currency in which you are long are rising. After all, few things match the thrill of getting the price movement in the market right. However, don’t let the magic of rising prices distracting from the duties of technical analysis. If the uptrend is healthy, volumes will keep rising as prices rise because buyers will be going long in the currency. This increases the odds on the uptrend continuing,

Volumes can be erratic especially if trading on a particular day is light. The best way to keep track of the price/volume situation is to draw trend lines on both the price and the volume charts. If the trend lines move in the same direction, than you probably have a sustained healthy trend. If the trend lines diverge, say a continuing rise in prices but dropping volumes, it means that buyers are losing interest and you should be preparing to exit the position.

We have already seen that the fundamental principles of technical analysis in forex trading are:

- markets discount everything. All of the relevant information is already incorporated in the price and only knowledge of price movements is necessary to successfully predict the future trend of prices.

- prices move in patterns or trends. Prices can only move upwards, downwards or sideways and once a movement begins, it will persist and create a trend. The trend is merely a movement of the market in a particular direction. In theory the best way to identify the trend is to use a chart. The chart will consist of a series of peaks and troughs and the direction will determine whether the market is bullish or bearish.

- history repeats itself. Because human nature is repetitive and market psychology reacts in the same fashion to market trends, past patterns will recur in the future.

Now let us take a look at some technical indicators that have proved successful in actual trading and are recommended by many of the  best forex brokers There are a very large number of indicators to choose from and you should pick the ones that give you the maximum information for your style of trading.

Trend indicators: the trend is a term used to describe the persistent movement of prices in a particular direction over a period of time. The best way to spot trends is to create trend lines on the chart. Trend lines are drawn below the lows and above the highs and an easy way to see the direction of trends. For instance if the trend lines slope upwards, it means that both the highs and lows are getting higher and that the market is in bullish mood. The opposite would indicate a bearish market.

Support and resistance indicators: once again, trend lines are the easiest way of establishing support and resistance levels. Support and resistance levels occur when prices are testing lows or highs and then rebound. When prices look likely to break through support or resistance levels, it means that the market is ready to make a big move.

Volatility indicators: volatility simply means the tendency for prices to go up or down and the greater the frequency of change, the more volatile the markets are. Volatility is what provides opportunities for profits and losses. The most commonly used indicators are Bollinger Bands which are useful not only for spotting trends but also for timing exit and entry.

Momentum indicators: the speed at which prices move in a given timeframe is called the momentum. You can determine the strength or weakness of a trend over time by the momentum. The momentum will tend to be strongest at the beginning of a trend and weakest at the end. If extreme highs or lows occur with weak momentum, if there is a good chance that the trend is about to reverse. However, if momentum is strong but prices are flat, it is a good indication that prices are about to move. The most common momentum indicators are Stochastic, MACD and RSI.

Sentiment indicators: since market sentiment is a powerful mover of market prices, many traders will attempt to gauge whether the sentiment is bullish or bearish. These indicators are generally used only at market extremes but can be used to great profitability if markets turn.

We had earlier seen why it is necessary to analyze forex market movements and to use this information to predict future price trends.

We have also looked at the first major tool of market analysis known as fundamental analysis. Now we will consider the second major tool which is technical analysis.

Technical analysis is the process of forecasting the future trend of prices through the study of past market data principally volumes and prices. The oldest use of technical analysis is thought to be in the early 18th century by the Japanese rice trader Homma Munehisa and has today evolved into the charting technique known as candlesticks or Japanese candlesticks. Modern technical analysis is based on the Dow Theory formulated in the late 19th century by the co-founder of Dow Jones, Charles Dow.

Technical analysts concerned themselves with the use of charts and other tools to analyze the data on forex trading activity such as volumes and prices which can suggest how the market will move in the future. Unlike fundamental analysts, technicians or chartists concerned themselves exclusively with prices and volume data and make no attempt to ascertain whether an asset is over or undervalued. There are several schools of technical analysis some of which concern themselves solely with charts, others with indicators such as oscillators and still others that use a combination.

The three basic assumptions that underlie technical analysis are as follows:

#1) The market discounts everything. Some people puzzle why technical analysis ignores all the fundamental factors such as economic financial unions and focuses entirely on price. The explanation is that the price itself reflects every single important fundamental including market sentiment and by considering price they have automatically considering every single factor that moves the market. They therefore need to concentrate only on the analysis of price movements which is in effect a study of supply and demand.

#2) prices move only in patterns or trends. This means that once a trend pattern has been established, the market is more likely to move with the trend than against it. The trading strategies that many technical analysts use are based on identifying these trends and projecting the market movement accordingly.

#3) history repeats itself. Because traders in the market react in a similar fashion to market developments, their behavior can be consistently predicted and trends and patterns will repeat themselves time after time. In fact, some charts contain data that goes more than a hundred years back because they are believed to contain repetitive patterns that are still useful.

Technical analysis versus fundamental analysis: broadly speaking, fundamental analysis concerns itself with economic and financial fundamentals and attempts to establish whether the currency is overvalued or undervalued.  Believing that the situation will correct itself in due course, positions are established accordingly. This is why fundamental analysis is sometimes regarded as a value investment approach. On the other hand, technical analysis concerns itself with price movement only. To put it another way, fundamental analysis concerns itself with long-term data over the past few years while technical analysis is generally used for short-term trading and concerns itself with more short-term data.

Quite simply, as forex brokers will tell you, there is no such thing as a right or a wrong technique. Canny traders will use whatever information is to their advantage and not worry about being either fundamental or technical purists. For instance, many fundamental traders will use technical analysis to determine the timing of their entry into and exit from the forex market. Equally, many technicians will use fundamental factors to evaluate the accuracy of the predictions from the charts and indicators. What you should bear in mind is that there is no need to be dogmatic and you can mix and match the data to suit your personal investment style.

Hank Pruden, who formulated the theory of behavioral finance, says “For the better part of 30 years, the discipline of finance has been under the thrall of the random walk\cum efficient market hypothesis.

Yet enough anomalies piled up in recent years to crack the dominance of the random walk.” and goes on to add “Behavioral finance is the use of psychology, sociology and other behavioral theories to explain and predict financial markets. Behavioral finance describes the behavior of investors and money managers and their interaction in companies and securities markets.”

In other words, human weakness is consistent and predictable and that knowledge can help the forex trader to make money in forex trading. As we all know, the financial markets are dominated by a herd instinct where the dominant emotions are fear and greed. Investors stampede into markets out of greed and stampede out of them out of fear. So when we look at the four key indicators of volume, price, sentiment and time, we must necessarily look at the effect of human behavior.

Let us take a concrete example. When money first pours into the forex market on a buying surge, these are generally shrewd inve

storswho have read the signs and acted upon them. Later as volumes and prices build, the bandwagon starts to roll and the herd piles into the market. As the market starts to top, it is the herd that is doing the buying while the canny investor, having spotted the top, is actually doing the selling. Later, when the market corrects, as sooner or later it must, the smart investor has pocketed his profits and left losses to the herd.

Behavioral finance has its roots in Adam Smith (“The Theory of Moral Sentiments,”) and the two most important observations are:

-people often behave in an irrational fashion when making decisions and

-the way a decision is put to a person can influence that decision.

Markets can therefore be inefficient because the way people think and make decisions cannot be accurately expressed in mathematical terms. A lot of economic theory such as the efficient market hypothesis assumes that people act rationally and only after taking all the information into account. Actual evidence suggests,and forex brokers confirm, that contrary to this belief, a lot of decision-making in the financial markets would be considered arbitrary and irrational by classical economists.

The pioneers of behavioral finance found that contrary to utility theory, investors react to gains and losses differently. They fear losses far more than they like gains and will therefore take higher risks to avoid loss than they would to realize gains. The behavior known as “fear of regret” says that people tend to feel bad after they have been exposed in an error of judgment and often postpone selling investments that will result in a loss to avoid this regret. It is sometimes theorized that investors indulge in the herd mentality to avoid feeling regret if their judgment is wrong.

There is little doubt that behavioral finance brings an important extra human dimension to the analysis of forex markets. There is still some way to go in creating usable techniques for profiting from markets but a shrewd investor will certainly take human behavior into account while buying or selling. As William Gross said “Markets invariably move to undervalued and overvalued extremes because human nature falls victim to greed and/or fear.”

An ETF is a unique investment that combines features of stocks and index funds. Like stocks, they can be traded any time during the trading day on a stock exchange. Like index funds, they represent an investment in a pool of financial assets or securities that mimic the performance of a specific index. Here are some compelling reasons why you should be trading ETF’s:

[We highly recommend ETF Trend Trading if you want to be taught 1-1 on how to make money from ETF Trading...]

#1) ETFs are safer than single stocks or commodities or currencies. Because they represent a basket of underlying assets, you are automatically diversified for risk and not dependent on the fortunes of a single financial asset.

#2) You can trade an ETF just like an equity on the stock market. You can therefore trade long or short, trade on margin with leverage and use limit orders and other risk management techniques.

#3) ETFs rapidly growing in popularity and you could choose from a wide range of ever-growing investment vehicles to suit your particular investment objectives.

#4) You have access via ETFs to a wide range of markets such as commodities. You could for instance trade oil or gold in a most convenient fashion. You could also trade country ETFs for geographical diversification (the hottest investment destinations in the next 40 to 50 years are reckoned to be Brazil, Russia, India and China and you could take advantage). If you have an interest in forex trading, you can trade currencies via ETFs.

#5) ETFs represent an excellent long-term investment vehicle for long-term investments such as 401 (k) plans. After all the objective of any long-term investment is a risk diversification with the prospect of growth. An ETF allows you to do so in a simple and straightforward fashion without the need for complicated strategies while allowing you to control risk.

#6) ETFs present an excellent way to hedge your investments. The ideal hedge security is normally a security that is highly liquid with high trading volumes so that you can buy or sell any kind of market conditions. You could for instance hedge an existing portfolio of equities by going long or short on the appropriate ETF. This works both for short-term and long-term hedging.

To buy and sell ETFs, you need to open an account with a broker. If you have an existing broker who is reliable, find out if you can trade through him. Set up a sensible investment plan in consultation with your broker and use all the risk management techniques you need. Remember, that like stocks, you will have to pay a commission to your broker each time you perform a transaction.

Finally, here are some trading tips from leading experts:

-your maximum investment in any single ETF should not exceed 10 percent of your total portfolio

-track the performance of your ETF’s. You can do this by tracking the performance of the appropriate index fund.

-some traders recommend that you set up order with your broker to automatically sell any ETF that loses five percent to 10 percent of its value in a single trading day.

As interest in ETF’s has skyrocketed, issuers have hurried to expand the scope of products to every conceivable asset in the investment universe.

Many investors have gone past the stage of regarding ETF’s as a supplement to equities and bonds and have now adopted all ETF portfolios and techniques such as ETF Trend Trading. With asset class diversification coming from the appropriate ETF (equities, bonds, currencies, commodities and so on) rather than investing in each of the underlying assets, portfolios are becoming far easier to manage especially for the average investor.

Money market ETF’s now offer investors an opportunity to put their short-term cash to work. These funds invest in a variety of low risk and short-term investments such as certificates of deposit, commercial paper and Treasury bills. The advantages of money market ETF’s are:

-their yields are higher than certificates of deposit

-their costs are lower than money market mutual funds

-they make monthly interest payments

-they offer a degree of diversification which would be well beyond the reach of an average investor

-they offer the tradability and liquidity of equities

The best way to understand how a money market ETF operates is to look at a couple of the more popular ones:

WisdomTree U.S. Short-Term Government Income Fund: this fund, which is actively managed, invests in short-term government securities such as Treasuries and bonds issued by federally sponsored agencies and repo agreements backed by government securities.

Claymore U.S. Capital Markets Micro-Term Fixed Income ETF: this actively managed fund the tracks an index made up of securities with a maturity of less than 12 months such as fixed income securities and Treasuries.

Because ETF’s are such a flexible investment vehicle, you can also invest in ETF’s that are not technically money market ETF’s but provide good short-term and low risk investment opportunities. Two such ETF’s are briefly described below:

PIMCO Enhanced Short Maturity Strategy Fund: this fund is not technically a money market ETF because it invests primarily in investment quality short-term debt securities. The objectives of the actively managed fund is to provide better returns and higher income on the than money market funds.

PowerShares VRDO Tax-Free Weekly Portfolio: variable rate demand obligations (VRDO) are actually long-term floating-rate interest bonds wereon which interest is typically reset every month. Liquidity comes from the fact that the bonds can be sold at any time to an investment dealer.

In addition to the US markets, there are now ETF’s that offer exposure to the money markets of various different countries such as Japan, China, India and Brazil. Developing country money market ETF’s tend to offer higher returns which it is possible to enhance if you handle the currency risk judiciously. You must remember that these are generally denominated in the home country currency and it is also possible to lose money on adverse currency movements.

If you are choosing to invest in a money market ETF, the two things you should study carefully the details of the holdings that make up the investment basket and the costs. You should also remember that some money market ETF’s could be less liquid than others and you may have a problem in trading them actively.