Foreign Exchange as a Financial Market let me show you

Currency exchange is very attractive for both the corporate and individual
traders who make money on the Forex - a special financial market assigned for
the foreign exchange. The following features make this market different in
compare to all other sectors of the world financial system:

• heightened sensibility to a large and continuously changing number of factors;
• accessibility to all traders in the major currencies;
• guaranteed quantity and liquidity of the major currencies;
• increased consideration for several currencies, round-the clock business hours which enable traders to deal after normal hours or during national holidays in their country finding markets abroad open and
• extremely high efficiency relative to other financial markets.

 

This goal of this manual is to introduce beginning traders to all the essential aspects of foreign exchange in a practical manner and to be a source of best answers on the typical questions as why are currencies being traded, who are the traders, what currencies do they trade, what makes rates move, what instruments are used for the trade, how a currency behavior can be forecasted and where the pertinent information may be obtained from. Mastering the content of
an appropriate section the user will be able to make his/her own decisions, test them, and ultimately use recommended tools and approaches for his/her own benefit.

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CONCLUSION For Candlesticks

By using real-body support and resistance levels, we can try to improve our trading and analysis on several levels. In the short term, we can derive important counteraction trading points and improved longer-term entry levels. In the longer term, we can use real-body support and resistance to get a jump on market breakouts in a trend-trading strategy.

Let me reiterate: Candlestick charting should not be used in a vacuum. That applies to the real-body support and resistance levels as well. You should, however, take the time to try out this methodology. I'm sure you'll find it worthwhile, and a beneficial addition to your technical toolbox. It just goes to show that by keeping our eyes open, we just might be able to discover new techniques.

John Forman is a currency analyst for Technical Data, a provider of real-time and day-end market commentary and trading advice over the Telerate system. He writes mostly from a technical perspective and also has experience in trading US and Canadian government cash and futures issues, equities and the energy markets.

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A REAL- life EXAMPLE for Candlesticks lol

Figure 3, which shows the sterling/Deutschemark cross-rate, contains several excellent examples. You can see how many times prices either approached or penetrated real-body support and resistance points but were unable to sustain those levels. Time after time, an attentive trader could have entered positions counter to the prevailing market action and would have done well. There are two noticeable exceptions, however.

FIGURE 3: STERLING/DEUTSCHEMARK CROSS-RATE. The sterling/Deutschemark cross-rate contains several excellent examples. You can see how many times prices either approached or penetrated real-body support and resistance points but were unable to sustain those levels. Time after time, an attentive trader could have entered positions counter to the prevailing market action and would have done well.

The first came in late December 1994, when the market finally broke down out of its range. Two things should have been noted that might have kept you out of a trade. One is the double top, or tweezers pattern in the candlestick vernacular, which took place about 10 days prior to the breakdown. That would have been your first indication that the trend was probably toward lower prices. The second indication came two days before the breakdown in the form of a shooting-star pattern, followed by a large negative real-body candlestick. This was another signal of lower prices.

The second exception was in January 1995, when the market again broke down after a consolidation. This, too, probably could have been avoided. All indications were signaling a bearish trend. That should have kept the careful trader from trading the doji day just prior to the breakdown. The doji, however, might have caused some confusion.

In addition, look at how taking those positions against the prevailing action is a great way to enter a new longer-term position. One glaring example of this took place early in January 1995, just before the second breakdown. After rallying for three days, the market approached, but never broke, real-body resistance. Prices did not stop falling until they were about 600 points lower, less than a week later.

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How to MINIMIZING THE RISKS in forex?

There is no way around the risks inherent in trading counter to the prevailing market action. All we can do is reduce the risks as much as possible by using the tools available. Happily, there are ways to do this.

First, always be aware of the longer-term picture. If the market you are planning to trade is in the middle of a strong trend, going against that action is probably one of the quickest ways to lose money. Wait until the momentum starts to ease; this will reduce your chances of getting caught on the wrong side of a breakout.

Further, this is a good time to mention a candlestick caveat: Beware of reversal patterns signaled by candlesticks in a trending market. The bond market is especially notorious for throwing out countertrend candlestick signals during major trends, and I've seen the same in other markets as well. Never look at candles in a vacuum.

So what should we look at in conjunction with candlesticks to lower our risk in the countertrend trades I am suggesting? For one, there's John Bollinger's band width indicator (BWI) as a trend indicator, which can be used by monitoring the area between the upper and lower bands. (I outlined this technique in the November 1994 STOCKS & COMMODITIES.) I like to use the BWI as an indicator of a weakening trend; I want to jump in when the slope of the BWI line starts to decrease. This is the first signal that the trend is petering out, and that at this point countertrend trades are reasonably safe.

There are, of course, other technicals that you can use. Bollinger bands themselves can be helpful, among others. Select the tool or tools that make you most comfortable.

More important than any additional indicator you could use, however, is your money management strategy. There are many ways you could trade using this methodology, and each has its own advantages and limitations. Cash or futures trading exposes you to the potential for theoretically unlimited risk, requiring tight stops and quick executions. Options could limit your risk, but probably at the cost of requiring larger moves to make them worthwhile. Of course, you may be able to tailor a combination of instruments to suit your needs.

An important factor in determining your risk exposure, and as a result how you trade, is the point at which you cut your losses. Often, there is no second support or resistance level nearby to provide a good stop-loss point, which means you'll have to use your own instinct as a guide. I find it useful to use whatever candlestick shadows there are as a rough guide to how far the market might go against me, thus letting me set reasonably good stops.

One last thing to consider: Where you're going to get out. I use a combination of techniques. Fibonacci retracement levels work fairly well, as do moving averages. I prefer to determine another support or resistance point using real bodies. Unfortunately, there are times when a significant level is not available nearby, forcing me to use other techniques.

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TRADING APPLICATIONS

One of the first uses that many technicians see for this technique is in terms of breakouts, much like in using bars. The advantage in using real-body highs and lows for support and resistance is that ranges are tighter, allowing entry into a trading position earlier than might otherwise have been the case.

Perhaps the most intriguing part of this new methodology, however, is its usefulness for day trading. Most technicians use candlesticks as a day-end indicator, but this technique gives us a greater degree of depth than is necessary for day trading. Real-body support and resistance allow us to take our analysis into the shorter time frames, which in turn allows us to get better entry points for our longer-term trades.

In my own analysis, I favor trading counter to the prevailing market action when a nearby real-body support or resistance level has been crossed intraday. This means that I recommend selling when the market has broken through very recent real-body resistance, and buying when recent real-body support has been breached. This is my strategy for trading against levels that are only a few days old, and one I recommend mostly for a very short-term position (say, day trading).

Longer-term levels require trading against the approach of a level. Often, in such cases, prices have come from a relatively long way off, and just reaching those key levels is a major achievement. Waiting for a break of support or resistance may mean missing a trade. Positions set under these circumstances can be held for longer time frames,perhaps as long as a week.

In candlestick charting, as in bar charting, the more times a level is touched, the more significant the level becomes. This is, however, a double-edged sword; if a resistance point is touched or penetrated slightly several times, it becomes more likely that a real breakout is in the offing. The wrong side of a breakout is not where we want to be. At the same time, however, the more times that a resistance point is touched, the larger the eventual decline is likely to be if the market falls instead of rallying.

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