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Currency traders use two basic approaches to evaluating Forex currency rates. Fundamental analysis includes looking at employment rates, monetary policy, balance of payments, and statements of central bankers or the US Federal Reserve chairman. Technical analysis of Forex currencies has to do with using market price patterns to predict the next market move. Traders use tools such as Japanese Candlesticks in order to use market history to predict coming market events. An old saying is that the past predicts the future and this is the foundation of the technical analysis of Forex currencies.
History Repeats Itself, Again and Again
Centuries ago tulip bulb traders in Holland and rice traders in Japan recognized that some price patterns always repeated themselves. They realized that if they read the first part of the pattern they could many times predict the second part. Japanese candlestick signals originated when there were Samurai in Japan and were used in rice trading. Today this tool, as well as more modern variants, is used for technical analysis of Forex currencies as well as stocks, futures, and options. In the technical analysis of Forex currencies traders look for well-defined signals. These signals are the patterns followed by the price of one currency versus another. As an example, the Doji candlestick signal is highly predictive of a market reversal. In a market that is trending up or down this signal tells the Forex trader that the market is undecided and is likely to reverse.
Technical Analysis of Forex Currencies with Candlesticks
Japanese candlesticks are white or black rectangles superimposed on a Forex price chart. The top and bottom of the rectangle are the opening and closing prices of the day. A white candle means that the market closed higher than it opened and a black candle means that the market closed lower than it opened. Lines extending above and below the candle are called shadows and indicate the complete range of trading for the day. The Doji, mentioned previously, is a very flat candle with relatively long upper and lower shadows. This signal tells us that the market traded widely during the day but settled back to near its opening price at close. When this signal occurs during a well-established up trend or down trend traders expect to see the market reverse. They believe this because historically this is what commonly happens. The Doji does not cause the change but rather it is a graphic indication of an evolving change in market sentiment. In the technical analysis of Forex currencies the past has a habit of predicting the future.