Technical Analysis of Forex Pairs
For the trader new to currency trading there are two general means of deciding when to buy or sell one currency versus another. These are fundamental and technical analysis of Forex pairs. All trading in Forex is one currency versus another, the US dollar versus the Yen, the Euro versus the British pound and so forth. Although world events affect the value of an individual currency that value is only realized versus other currencies in Forex Trading. In fundamental and technical analysis of Forex pairs one looks at factors influencing the EUR/USD pair, for example. While the fundamentals include employment rates, monetary policy, balance of payments, and the like technical analysis of Forex pairs focuses on evolving market sentiment for cues as to where the market will go next.
The Past Predicts the Future
Going back hundreds of years to tulip bulb traders in Holland and rice traders in Japan, observant traders recognized that certain price patterns continually repeated themselves. Once this was realized it became possible to read the first part of the pattern and successfully predict the second part. Japanese candlestick signals, which evolved in a bygone era to make sense of rice markets, are in use today by stock, commodity, and Forex traders. The use of candlestick patterns in Forex trading allows many traders to see the future, so to speak, through the use of well-defined signals that can very reliably predict market trends and turnarounds. Whether one uses the very visual approach of Japanese Candlesticks or other statistically based programs for predicting Forex prices the use of technical analysis of Forex pairs uses what we already know of the markets in order to successfully anticipate what happens next.
Patience Pays Off
The point of using technical analysis of Forex pairs to profit in currency trading is that Forex trading is a business and not a game of chance. Using candlesticks as an example, a currency trader may be seeing the Euro fall in relation the greenback. He expects the Euro to hit bottom and turn around but while watching the downward direction of the Euro he is waiting for a signal at which time he will buy Euros with dollars. A common indication of a reversal of a downward market in the world of Japanese candlesticks is called the bullish engulfing signal. On what may well be the first day of an upward trend of the Euro versus the dollar, in our hypothetical example, the Euro has a down day and then the next day opens lower than the previous close. It trades widely above and below its beginning and ending values but closes the day above the previous day’s opening price. This bullish engulfing pattern is often the cue to a revival of a bull market and thus its name. This pattern is especially predictive if the last down day trades in a narrow range and the engulfing day trades in a very large range.