The main concept within the foreign exchange market remains the pressure on the US dollar.  There are several forces at work and seem to reflect both short covering and new long position.    The net speculative position in CME futures remains short euros and sterling.  The euro’s net short position has been cut dramatically from a record 114k contracts in mid-May to 21.3k as off early last week.  Sterling shorts have been reduced from 76.7k in early May to 18k early last week.  The net speculative sterling position has not been long since Aug 2008.   The dollar’s slide has been of sufficient duration and magnitude to encourage momentum traders and model-driven funds to get short.   Fundamentally, there are a number of reasons for the position adjustment.

First, and probably most importantly, the European experiment of monetary union without political union is not collapsing as many had thought a couple of months ago.  There are a number of analyst and traders that are still expecting such an outcome, but they have greatly diminished as European officials innovated and created greater institutional capacity.  Second, the US economic recovery appears to have slackened.  Yesterday’s manufacturing and construction number might show a different picture as August unfolds, but the recent economic data, for May and June have been relatively disappointing.    However, given the structural headwinds and the recent experience, many fear the worst.  Third, European economic data has surprised to the upside and this stands in stark contrast with the US data stream.  Most European data has been better than expected, and a continuation, will lead to a strong interest rate differential, and better money flow into Europe.

The Euro and the pound have pushed through the 100-day moving average resistance area, and the 20-day moving average is now crossing the 100-day moving average, showing that short-term momentum continues to move toward the Euro.  The trade is to stay long the Euro until resistance near 1.3700.

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.

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.

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

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.