Introduction to Forex and Technical analysis

FOREX refers to the Foreign Exhchange Markets and the buying and selling of currencies. Everyday, an average of more that 3 trillion dolllars in transactions takes place in the FOREX market.

Each of these transactions plays a vital role in establishing a currency pairs' exchange rate. When a traveller visits a new country or when an employer pays its foreign employees, they each convert their local currency into foreign currency. Over time, these transactions cause a shift in the exchange rate.

When money flows into a currency, it strengthens, and when money flows out of a currency, it weakens. These shifts in value are what gives life to the FOREX market.

FOREX traders attempt to predict the direction of an exchange rate just like stock traders attempt to predict the direction of a company's stock price.

FOREX traders buy a currency pair when they think the exchange rate will increase and sell when they think the exchange rate will decrease. In the global market, they can do this 24 hours a day, 5 days a week.

There are 2 primary ways traders predict where the market will go:
Technical Analysis and
Fundamental Analysis

Technical Analysis is defined as the art of forecasting price movements in the future based on price actions of the past. The main tool for technical analysis is the price chart, which is a graphic representation of the price of a certain instrument such as a currency pair. There are a number of ways to display price action on a chart, each way providing its' own unique benefit.

The most popular chart types:
,Daily Line Chart - generated by connecting the days' closing prices by a line, (given time period). It is meant to offer the trader an easier way to judge the trend of a currency pair than by simply looking at a table of prices.

Bar Chart - visually depict the high, low, and closing price of each session. Traders use this information to note potential reversals on the chart which may be easier to see than on a basic line chart that only shows closing prices.

Candlestick Chart - shows more information so that one can see the open, high, low, and closing price of each session. Traders can also get a better feel for the sentiment of the market since each candle clearly shows whether it has been an up day or a down day. An up day is when the closing price is higher than the opening price and is noted by a blue candle. A down day is when the closing price is lower than the opening price and is noted by a red candle. Because candlestick charts provide the most information about price history, over the years, this chart type has become a staple tool for many traders compared to bar charts and line charts.

Candlestick charts provide visual cues that make reading price action easier, these visual cues allow speculators to better comprehend market sentiment, offering a greater depth of information than traditional bar charts where the high and low are emphasized, candlesticks give emphasis to the relationship between the open price and the close price. Traders that use candlesticks have a greater opportunity to identify different types of price action that may offer a clue about a potential reversal, one of the most difficult aspects of trading. Furthermore, combined with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points.
The body of the candle illustrates the difference between the opening and closing price, its colour, (blue for up, red for down), shows whether the session closed above the open or below the open. The wicks, (shadows) point out the extreme high and the extreme low of the currency for that session. Because the body of the candle is thicker that the wick, candlestick charts visually stress how the close price relates to the open price far more than bar charts, and it does so purposefully. Candlestick traders have a saying, "the real body is the essence of price movement", meaning the relationship of the open price versus the close price, more often than not provides the clearest picture to future price action. Bar charts allow the spikes from highs to lows to have prominence when exploring market data. These highs and lows often have no significance. The power of candles is that they visibly allow traders to screen out these extremes, focusing on what is the most relevant price data.

One of the most significant goals of technical analysis is to identify changes in direction of price action. To facilitate this, candlesticks are useful in their ability to suggest changes in the sentiment of the market. These candle formations are called "reversal patterns". there are a number of reversal patterns in western technical analysis, such as "head and shoulders" and "double tops". Those formations often don't give much insight into what the market is thinking, they simply represent common patterns in proce action that preceed a reversal. Reversal patterns often take many periods to form. Candlestick interpretations, however, concentrate much more on understanding marketplace psychology. The majority of candlestick formations form over the course of just 1 to 3 completed candles. This gives traders a more "real time" picture of current sentiment. It is important to note that with candlesticks, a reversal pattern does not necessarily suggest a complete reversal in market trend, but merely a change or pause in direction.
Whil candlestick formations have no predictive ability at all, they are quite valuable in helping the trader better time their entry and placement of their initial protective stop. Three candle formations a trader can watch for while the market moves toward a support level:
1) Morning Star - established over the course of 3 candles - 1st candle closes down, 2nd candle closes at or near the open for the day, 3rd candle moves up. The higher the 3rd candle is able to move up, the stronger the reversal.
With this pattern, watch for rallies after day 3, entry would be at the open of day 4 with a protective self stop below the low of the morning star.
2) Bullish Engulfing - obvious 2 day reversal pattern - 1st candle closes down, 2nd up
- reflects buyers overtaking selling strnegth and often preceeds a continuous rally in strength. The smaller the 1st day's candle is and the larger the 2nd day's candle is, the stronger the potential of a reversal. Small candles reflect uncertainty in the markets' trend. Entry is at the open of the next candle after the formation is completed.
3) Piercing Cloud - the market continues the down trend on the 1st day and the candle closes down, on the 2nd day, the buyers take the price up so the close is near the open of the 1st day. The formation suggests that buyers have begun to take charge of the market. Up trends are common after this formation as more buyers confidently enter the market with a clea