Technical Analysis

What is the Forex technical analysis? Ref

The forex technical analysis is concerned with what has actually happened in the
forex market, rather than what should happen.

A technical analyst will study the price and volume movements and from that data
create charts (derived from the actions of the market players) to use as his primary
tool. The technical analyst is not much concerned with any of the “bigger picture”
factors affecting the market, as is the fundamental analyst, but concentrates on the
activity of that instrument’s market.

Technical analysis is based on three underlying principles:

1. Market action discounts everything

This means that the actual price is a reflection of everything that is known to the
market that could affect it, for example, supply and demand, political factors and
market sentiment. The pure technical analyst is only concerned with price movements,
not with the reasons for any changes.

2. Prices move in trends

Technical analysis is used to identify patterns of market behaviour which have long
been recognised as significant. For many given patterns there is a high probability that
they will produce the expected results. Also there are recognised patterns which repeat
themselves on a consistent basis.

3. History repeats itself

Chart patterns have been recognised and categorised for over 100 years and the
manner in which many patterns are repeated leads to the conclusion that human
psychology changes little with time.

List of categories of the technical analysis theory:

• Indicators (Oscillators, eg: Relative Strength Index RSI)

• Number theory (Fibonacci numbers, Gann numbers)

• Waves (Elliott wave theory)

• Gaps (High-Low, Open-Closing)

 • Trends (Following Moving Average)

• Chart formations (Triangles, Head & Shoulders, Channels)

Forex Charting Software

What Does Forex Charting Software Mean?

An analytical, computer-based tool used to help currency traders with forex trading
analysis by charting the price of various currency pairs along with
various indicators. Forex charting software packages are used by many traders to
determine the direction on any given currency pair.

Investopedia explains Forex Charting Software

There is a wide range of forex charting software, which varies in appearance and
functionality. However, users should look for several things in forex charting software
that will help them to get the most out of their trading, including:

• Is it free, or if there is a nominal charge? What additional features are made

available?
• What technical indicators are available?
• Is the software Windows, Macintosh (Mac), or internet (Java or HTML)
based?
• Can you trade from the charts?
• Is historical data made available through the software?
• Is the graphical user interface (GUI) pleasing to look at?
• Is the GUI conducive to monitoring a lot of information at once?

Most forex brokers allow traders to open a demo account prior to funding a full
account or mini account. This allows users to try out each broker's charting software
during a trial period.

What is a Forex technical indicator?

A Technical Indicator is a series of data points used to predict movements in
currencies. Have a look on the most popular technical indicators of the Forex and
learn how to build your own and adapted technical indicator.

Relative Strength Index (RSI)

Stochastic Oscillator
Moving Average Convergence Divergence (MACD)
 Number theory
Waves
Gaps
Trends
Chart formations

Relative Strength Index (RSI):

This index is a popular indicator of the Forex (FX) market. The RSI measures the
ratio of up-moves to down-moves and normalises the calculation so that the index is
expressed in a range of 0-100. If the RSI is 70 or greater then the instrument is seen as
overbought (a situation whereby prices have risen more than market expectations). An
RSI of 30 or less is taken as a signal that the instrument may be oversold (a situation
whereby prices have fallen more than the market expectations).

(click on graph to enlarge)

Stochastic Oscillator:

This is used to indicate overbought/oversold conditions on a scale 0-100%. The

indicator is based on the observation that in a b up trend, closing prices for periods
tend to concentrate in the higher part of the period’s range. Conversely, as prices fall
in a b down trend, closing prices tend to be near to the extreme low of the period
range.

Stochastic calculations produce two lines, %K and %D which are used to indicate
overbought/oversold areas of a chart. Divergence between the stochastic lines and the
price action of the underlying instrument gives a powerful trading signal.
Moving Average Convergence Divergence (MACD):

This indicator involves plotting two momentum lines. The MACD line is the
difference between two exponential moving averages and the signal or trigger line
which is an exponential moving average of the difference. If the MACD and trigger
lines cross, then this is taken as a signal that a change in trend is likely.

Number theory

Fibonacci numbers:
The Fibinacci number sequence (1,1,2,3,5,8,13,21,34…..) is constructed by adding
the first two numbers to arrive at the third. The ratio of any number to the next larger
number is 62%, which is a popular Fibonacci retracement number. The inverse of
62%, which is 38%, is also used as a Fibonacci retracement number. (used with the
Elliott wave theory, see hereunder)

Fibonacci Who?
We will be using Fibonacci ratios a lot in our trading so you better learn it and love it
like your mother. Fibonacci is a huge subject and there are many different studies of
Fibonacci with weird names but we’re going to stick to two: retracement and
extension.

Let me first start by introducing you to the Fib man himself…Leonard Fibonacci.

Leonard Fibonacci was a famous Italian mathematician, also called a super duper uber
geek, who had an “aha!” moment and discovered a simple series of numbers that
created ratios describing the natural proportions of things in the universe

The ratios arise from the following number series: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
144 ……
This series of numbers is derived by starting with 1 followed by 2 and then adding 1 +
2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on.

After the first few numbers in the sequence, if you measure the ratio of any number to
that of the next higher number you get .618. For example, 34 divided by 55 equals
0.618.

If you measure the ratio between alternate numbers you get .382. For example, 34
divided by 89 = 0.382 and that’s as far as into the explanation as we’ll go.

These ratios are called the “golden mean.” Okay that’s enough mumbo jumbo. Even
I’m about to fall asleep with all these numbers. I'll just cut to the chase; these are the
ratios you have to know:

Fibonacci Retracement Levels

0.236, 0.382, 0.500, 0.618, 0.764

Fibonacci Extension Levels

0, 0.382, 0.618, 1.000, 1.382, 1.618

You won’t really need to know how to calculate all of this. Your charting software
will do all the work for you. But it’s always good to be familiar with the basic theory
behind the indicator so you’ll have knowledge to impress your date.

Traders use the Fibonacci retracement levels as support and resistance levels. Since
so many traders watch these same levels and place buy and sell orders on them to
enter trades or place stops, the support and resistance levels become a self-fulfilling
expectation.

Traders use the Fibonacci extension levels as profit taking levels. Again, since so
many traders are watching these levels and placing buy and sell orders to take profits,
this tool usually works due self-fulfilling expectations.

Gann numbers:
W.D. Gann was a stock and a commodity trader working in the 50’s who reputedly
made over $50Mio in the markets. He made his fortune using methods which he
developed for trading instruments based on relationships between price movement
and time, known as time/price equivalents. There is no easy explanation for Gann’s
methods, but in essence he used angles in charts to determine support and resistance
areas and predict the times of future trend changes. He also used lines in charts to
predict support and resistance areas.
Waves

Elliott wave theory:

The Elliott wave theory is an approach to market analysis that is based on repetitive
wave patterns and the Fibonacci number sequence. An ideal Elliott wave patterns
shows a five wave advance followed by a three wave decline.

Gaps

Gaps are spaces left on the bar chart where no trading has taken place.

• An up gap is formed when the lowest price on a trading day is higher than the
highest high of the previous day.

• A down gap is formed when the highest price of the day is lower than the
lowest price of the prior day. An up gap is usually a sign of market strength,
while a down gap is a sign of market weakness.

• A breakaway gap is a price gap that forms on the completion of an important

price pattern. It signals usually the beginning of an important price move.
 • A runaway gap is a price gap that usually occurs around the mid-point of an
important market trend. For that reason, it is also called a measuring gap.

• A exhaustion gap is a price gap that occurs at the end of an important trend
and signals that the trend is ending.

Trends

A trend refers to the direction of prices. Rising peaks and troughs constitute an
uptrend; falling peaks and troughs constitute a downtrend, that determine the
steepness of the current trend. The breaking of a trendline usually signals a trend
reversal. A trading range is characterized by horizontal peaks and troughs.

Moving averages are used to smooth price information in order to confirm trends and
support and resistance levels. They are also useful in deciding on a trading strategy
particularly in futures trading or a market with a b up or down trend.

For simple moving averages, the price is averaged over a number of days. On each
successive day, the oldest price drops out of the average and is replaced by the current
price- hence the average moves daily. Exponential and weighted moving averages use
the same technique but weight the figures-least weight to the oldest price, most to the
current.

Chart formations

Examples of chart formations: (triangle, rectangle, head and shoulders):

Technical Analysis

What Does Technical Analysis Mean?

A method of evaluating securities by analyzing statistics generated by market activity,
such as past prices and volume. Technical analysts do not attempt to measure a
security's intrinsic value, but instead use charts and other tools to identify patterns that
can suggest future activity.

Investopedia explains Technical Analysis

Technical analysts believe that the historical performance of stocks and markets are
indications of future performance.

In a shopping mall, a fundamental analyst would go to each store, study the product
that was being sold, and then decide whether to buy it or not. By contrast, a technical
analyst would sit on a bench in the mall and watch people go into the stores.
Disregarding the intrinsic value of the products in the store, his or her decision would
be based on the patterns or activity of people going into each store.

• Bollinger Bands
 • RSI -- Relative Strength Index
• Stochastic Oscillator
• MACD -- Moving Average Convergence/Divergence
• Candle Sticks

Bollinger Band
What Does Bollinger Band Mean?
A band plotted two standard deviations away from a simple moving average.

In this example of Bollinger bands, the price of the stock is banded by an upper and
lower band along with a 21-day simple moving average.

Investopedia explains Bollinger Band

Because standard deviation is a measure of volatility, Bollinger bands adjust
themselves to the market conditions. When the markets become more volatile, the
bands widen (move further away from the average), and during less volatile periods,
the bands contract (move closer to the average). The tightening of the bands is often
used by technical traders as an early indication that the volatility is about to increase
sharply.

This is one of the most popular technical analysis techniques. The closer the prices
move to the upper band, the more overbought the market, and the closer the prices
move to the lower band, the more oversold the market. s

==========================================

Bollinger Bands can help to define if ongoing data field values are behaving
normally or breaking out in a new direction. For instance, when the closing price of a
Forex market moves over its upper Bollinger Band, it usually increases in that
direction. Bollinger Bands also helps to find out when trend reversals may happen. A
reversal is usually characterized by new peaks or falls outside of the bands followed
by another peak or fall inside the bands.
Bollinger Bands are a pair of values put as an "envelope" around a data field. To
measure the values you should take the changing average of the data for a definite
period and subtract or add the definite number of standard deflections for the same
period from the moving average.

RSI
In June 1978 Welles Wilder's article introduced the Relative Strength Index (RSI),
which is a widespread oscillator. Mr. Wilder's book, "New Concepts in Technical
Trading Systems", also provided step-by-step instructions on counting and explaining
the RSI. The name "Relative Strength Index" is slightly deceptive, because there is no
comparison of the relative strength of two securities in the RSI, but rather the single
security's domestic strength. "Internal Strength Index" might be a more suitable name.
Two market indices, which are often known as Comparative Relative Strength, are
compared by Relative strength scales.
When the RSI was introduced, Wilder advised to use a 14-day RSI, but the 9-day and
25-day RSIs were also popular. Moreover it is a chance to find the period that would
be more suitable for you during the experiments with changing the number of time
periods in the RSI calculation. (The unsteadiness of the indicator depends on the
number of days was used to calculate the RSI - the indicator will be more inconstant,
if it was used the fewer days.)

The RSI arranges between 0 and 100 and it is also named as a price-following
oscillator. The best analysis of the RSI was found out: it is better to find a divergence
in which a new high is being made by the security, but the RSI is going down to
surpass its previous peak. This divergence means that soon the reversal will come. A
"failure swing" completed, when the RSI turns down and decrease below its most
recent low.

The fact that the failure swing happened proves the coming reversal. Mr. Wilder's
described in his book five uses of the RSI in analyzing commodity charts. You could
also use this method as the other security types.

Tops and Bottoms; Before the underlying price chart, the RSI surmounts above 70
and falls below 30 as usual. Chart Formations; chart patterns, such as head and
shoulders (page 215) or triangles (page 216) that could or could not be evident on the
price chart, are often formed by the RSI. Failure Swings (which is sometimes called
support or resistance penetrations or breakouts); the RSI exceeds a previous peak
(high) at this moment or falls below a recent trough (low).

Support and Resistance; sometimes more clearly than price themselves, levels of
support and resistance are demonstrated by the RSI. Divergences; As it was described
earlier, divergences happen when the price goes lower (or higher) and it isn't affirmed
by a new high (or low) in the RSI. Prices usually reform and follow the RSI. It would
be good to read the Mr. Wilder's book, where you could find additional information.

Calculation

The RSI Indicator is a indicator of speed of changing of price. It is calculated in the

following way:

RSI = 100 / (1 + D(P,n)/U(P,n)),

where U(P,n) - is a moving average of growing of the P price within n periods,

D(P,n) - is a moving average of falling of the P price within n periods.

There are all possible merits of the indicators situated in an area from 0 to 100. The
two control levels (the higher bottom control level is above 70, the lower bottom
control level is below 30) are put on the chart with the help of horizontal markers.

While the RSI increases and overcomes the top control level (above 70), the indicator
displays the oversaturation of the market with buy trades, and then begins the zone of
sales. Conversely, when the RSI crosses the low bottom control level (below 30), the
indicator displays the oversaturation of the market with sell trades, and then starts the
buying area.

Stochastic Oscillator

The Stochastic Oscillator is an indicator of speed of changing or the Impulse of

Price.

%E = 100 * (N - LLV(n)) / (HHV(n) - LLV(n)),

%D = MA(%K, s),

where N - is the price of closing of the current period,

LLV(n) - the lowest price within the last n periods,

HHV(n) - the highest price within the last n periods,

n - amount of periods (usually from 5 to 21),

s - amount of periods of calculation of the moving average.

It demonstrates the moments, when the price reaches the border of its trade diapason
within predefined time period. It comprises 2 curve lines - the slow (%D) and the fast
(%K).The Stochastic Oscillator also comprises 4 variables.

They are the following:

1) The number of time periods used in the stochastic calculation are called %K
Periods.

2) The number of time periods used when calculating the moving average of %K are
called %D Periods.

3) The interior smoothing of %K is being controlled by the value. A value of 3 is

considered a slow stochastic. And a value of 1 is considered a fast stochastic.

4) %D Method helps to measure %D. It can be of different kinds - Simple,

Exponential, Time Series, Weighted or Variable Triangular.

One method when trading using the Stochastic Oscillator is to sell when the either line
rises above 80 and then falls back below. Vice versa, purchase when either %K or %D
decreases below 20 and then again reaches that level. Another way of action is to
watch timing trades and to sell when the %K line shifts below the %D line and
purchase when the %K line shifts over the %D line.

Besides you should always follow the discrepancies. For instance, if prices start
reaching new peaks and the Stochastic Oscillator fails to surpass its previous peaks,
the indicator usually demonstrate in which direction prices are moving.

An interval from 0 up to 100conprises all the indicator's possible values. While

building an indicator the two control levels are set on the chart where the top level is
set at 80 and the low level is set on the 20. If it is crossed by STOCH lines
demonstrate the oversell or overbuy situation in the market. The indicator
demonstrates oversaturation with sell trades in the market, so the zone of purchases is
started if STOCH lines shift below bottom control level. And the indicator
demonstrates oversaturation with purchase trades in the market, so the zone of sales is
started if the STOCH lines shifts over the top control level. As a rule, they use the
following interpretation of the indicator:
- If the curve %K crosses the curve %D from below upward you should purchase.

- If the curve %K crosses a curve %D from top to downward you should sell.

- If oscillator - %K or %D - shifts below the line, and then again crosses the bottom
level upwards you should purchase.

- If oscillator moves above the line, and then crosses the top level downwards you
should sell.

- The presence of discrepancy is the situation when, for instance, the prices have
reached new highs, and the values of oscillator turned out to be too weak for reaching
new peak values.

MACD

Moving Average Convergence Divergence (MACD):Ref

This indicator involves plotting two momentum lines. The MACD line is the
difference between two exponential moving averages and the signal or trigger line
which is an exponential moving average of the difference. If the MACD and trigger
lines cross, then this is taken as a signal that a change in trend is likely.

MACD
The calculating of The Moving Average Convergence/Divergence (MACD) is
carried out by subtracting a 12-day exponential moving average value from a 26-
day exponential moving average value.
The sense of MACD, the most well-known indicator, is the basis of average values
variety. The idea of the difference between two averages that are smoothed
exponentially (EMA) was founded and put into practice by Jerald H. Appler.

MACD = MA(P, nlong) - MA(P, nshort),

MACD Signal = MA(MACD, n),

where MA(P, nlong) - moving average of the price P within nlong periods (usually
26),

MA(P, nshort) - moving average of the price P within nshort periods (usually 12),

MA(MACD, n) - moving average MACD within n periods (usually 9).

Thus, The Moving Average Convergence/Divergence (MACD) is calculated by

subtracting the value of a 26-day exponential moving average from the value of a
12-day exponential moving average.

The calculating of The Moving Average Convergence/Divergence (MACD) is carried

out by subtracting a 12-day exponential moving average value from a 26-day
exponential moving average value.

The MACD value existing at the beginning of a data series is supposed to be equal to
zero. The starting values of MACD are thought to include zero as far as it is based on
exponential moving averages. Under these circumstances it is possible to omit the
values before the 26th value in case the longer moving average has not got any
importance yet.

General usage of the MACD, a particular example of a Value Oscillator, is detecting

price trends through forex market closing prices. In case of MACD growth the prices
go up and they go down while MACD decreases. A 9-day exponential average against
which the MACD is generally traded is its signal line. This value is generated by the
MACD Signal Line function. MACD increasing over the signal line makes a signal to
buy. MACD falling lower the signal line produces a signal to sell.

The curves are varying at the area near zero. Standard oscillator researching methods
are used in MACD analyzing. The value crossing the line shows whether to buy or
sell. The Divergence is described greatly by this indicator. Zero level crossing
signalizes a possibility of trend changing. In case it is crossed up from below, it is a
buy signal, otherwise if it is crossed downright it is a sell signal.

The process when a slower line is intersected by a faster one is not senseless either. In
case the faster line crosses the slower one up from below it is a buy signal. If the
situation is opposite and a slower line is intersected by a faster one downright it is a
sell signal. The signal is developed in case of its confirmation, which is a continuing
lines motioning in a parallel way towards and crossing the zero point. The basic trend
confirmed by such signal is the most reliable and significant.

Weighted Moving Average

The Weighted Moving Average WMA is measured by averaging all the previous
values over the given period, (also the ongoing value). These values are weighted
linearly (the oldest value gets a weight of 1, the next value gets a weight of 2, and so
on up to the ongoing value, which gets the same weight as the period). Until there are
enough values to fill the given period the moving average at the start of a data series is
not determined.

It's important to remember that for more exaggerated weighting on the ongoing
values, you may use an EMA. You could also average 2 or more WMA together.

By looking at the moving average of the price, a more general picture of the basic
trends can be seen MA are useful for smoothing raw, noisy data, such as daily prices.
Price data can change greatly every day without demonstrating if the price is
increasing or decreasing.

Moving averages can be used to see trends, that's why they can also be used to predict
if data is bucking the trend. A weighted moving average is measured by multiplying
each of the previous day's data by a weight. The weight in its turn is based on the
number of days in the moving average. In this example, the first day's weight is 1.0
while the value on the most recent day is 5.0. This gives 5 times more weight to
today's price than the price 5 days before.

Candle Sticks
Japan gave birth to candlestick charts more than five hundred years ago. The technical
analysis was first used by the Japanese in late 1600s at Dojima Rice Exchange while
trading rice. The first trader who has reached the fortune by forecasting prices using
the past price data was Munehisa Homma, a famous trader of this exchange. Homma
has created a number of principles that are used in Japan nowadays. The set of data
containing open price, high price, low price, and close price is traced in the chart as a
candlestick.

The candlestick turns hollow (white or in some cases green) if the close price exceeds
the open price. A filled (black or red) candlestick is seen when the open price exceeds
the close one. The body (either filled or hollowed) of the candlestick is formed out of
the difference between the open price and close price whether the shadows, which are
thin lines at the top and at the bottom of the candlestick, give the information about
the trading range during the candlestick's period. The upper shadow ends at the level
showing the high price of the period and the lower shadow ends at the level of low
price.

Technicians use candlesticks. Such popularity of candlesticks can be explained by

their pleasant and comfortable outlook unlike any other techniques using bar or line
charts. Candlestick chart can give some additional info about the prices concerning
the correlation between the high and low and the open and close. Candlestick charts
uncover the data of the possible market strength as well as of its overall structure. You
should remember only 12 general patterns concerning Candlesticks. There are about
40 patterns of reversal and continuation that can be trading signals for you while using
Japanese Candlesticks. Any of these patterns may possibly predict future price
movement. This dozen signals are the ones you are likely to remember.

Most investors consider only these signals of Japanese Candlesticks usage enough for
planning profitable trading decisions. They are the ones that watched by most of the
traders most of the time. But reading this you shouldn't think that other patterns don't
worth your attention. You can effectively make profits in case you follow these other
signals. But they occur really seldom in actual trading. Their showings are thought to
be not as reliable as of the major ones despite they can show very strong possibility of
reversal.

The pattern when open and close prices are equal of very close is called Doji. In
this situation shadows length is not taken into consideration. Japanese explain
this situation as the conflict of bears and bulls. Doji indicates the general
hesitation of investors.

The Gravestone Doji appears when both close and open become the low of the
day. This is the sign of possible tops despite it's located in the market bottoms.
This signal looks like a gravestone, that's why it is called Gravesone Doji.

When the candlestick has one or two very long shadows, the situation is called the
Long-legged Doji. It signalizes that the market has reached its tops.

The Rickshaw Man occurs when the open and close are located in the session's
trading range middle. It is thought that this situation shows the trend losing its
direction.

The end of the downtrend forms the Bullish Engulfing Pattern. The white
candlestick has its open price below and the close price above the ones of the
previous day black candle body. This total exceeding of the previous day's values
says that that the enormous pressure of the buyers overcomes the one of the
sellers.

The Bearish Engulfing Pattern is an opposite process to the bullish one. It occurs
when an uptrend comes to an end. The black body of an actual candlestick gets
longer than the white body of the previous day one. This process is the sign of the
bears winning.

When a bearish pattern lasts for two days and reaches the end of an upturn as
well as the highest level of an overloaded are of trading, then the Dark Cloud
Cover occurs. In this case the first day gives a reliable white candlestick and the
second day opening price exceeds any of the values of the previous day.

The bottom reversal may be accompanied by the Piercing Pattern. It consists of

two candlestick patterns that are located at the declining market end. The
candlestick of the first day is black whether the one of the second day
corresponds a long white candlestick. This day has an extreme low opening price
that is even lower that any price traded the day before. The patter closes at a
price which is higher than the middle of the "black day" candle.

If candlesticks have long shadows at their bottom along with the small size of
real bodies, it is called Hammer and Hanging-man. These bodes form high price
of the session. A Hammer occurs when the pattern described here takes place
when the market trends down. This shows the trends looking for the base.
Japanese call this process "trying to gauge the depth" or takuri.

In case the market is trending down, the Shooting Star Formation is a signal of
bullish market approaching. This is also called an inverted hammer. Still, you
should be patient until the bullish market gets verified. Now after we have learnt
about some major signals, it is time to see how useful some other formations may
be.

Being an important component of technical analysis, Candlestick chart patterns

have a considerable popularity among forex traders. Users can see chart modules
represented as bars, lines or candlesticks.
There are two parts of the candle: its body and the shadows. The open and close prices
of the set period are represented by the candlestick's body. In case the open price
exceeds the closing one, the body of the candle turns black and the opposite situation
gives the white body. High and low trading prices within the period are reflected by
the shadows of the candle. Most common periods used in candlestick charting are: 5
min, 15 min, 1 hour, daily and weekly. Vast trading prices within the period are
represented by the long shadows whether short shadows explain that the trading was
held close to closing and opening prices.

Long and Short Bodies

In case the candlestick body is white and prolonged then the strong pressure of
buyers is seen. The closing exceeds the opening as much, as long the candlestick body
is. This situation is explained by the aggressive buyers' trading that makes closing
price go much higher than the opening is. Long white candlestick usually represents
the bullish market though the situation worth watching in wider technical frames. A
long white body may be the point of a possible turning point as well as a level of
support in case of declining extended. A high aggression of the buyers following the
long uptrend may cause an excessive bullishness.

A strong influence of the sellers is seen when the candlestick turns long and black.
The length of the black candlestick depends on how far the close price is below the
open price. This indicates the aggression of the sellers that causes a considerable
prices reduction. A long black candlestick following the long uptrend may forecast the
turning point as well as the resistance level that is to exist in future. A long black body
following the long downtrend may show the panic of the participants as well as
capitulation.

Marubozu Black and White long candlestick are even more important. There are no
shadows in these candlesticks and the high and low are derived out of the open or
close.
Long and Short Shadows

The session heights are shown by the shadow on the top whether the one on the
bottom describes the lows of the session. In case the trading was held not far from its
open and close prices, the shadows are short. Long shadows say that trading was held
in high range referring the session's open and close price. In case the shadow on the
top is long and the one on the bottom is short then we are supposed to think that the
buying pressure is strong and they managed to raise the prices, but the sellers later
made the prices go down to the low closing price, but its movement has formed a long
upper shadow. The opposite situation (with long shadows on the bottom and short
ones on the top) explains that the sellers managed to drive prices down while
dominating the market, but the buyers forced the prices up back closer to the end of
the session that has left a long shadow on the bottom of a candlestick.

Another situation worth describing is called spinning tops and occurs when the
candlestick has long both upper and lower shadows along with the short body of the
candlestick. While one long shadow is a sign of the reversal, the situation when both
shadows are long indicates participants' hesitation. Small body size, despite its color,
describes that the price has moved slightly from the open price to the close one. Long
shadows show an extreme activity of both buyers and sellers through the session.
Prices fluctuation has been considerable within the period despite open and close are
not far from each other.

A spinning top following the long uptrend (represented by a long white candlestick)
may be the sign of the bulls' weakness and possible inversion or interruption of the
trend. In the opposite case a spinning top appearing after a long black candlestick, or
decline, may show the bears' weakness and forecast possible trend inversion or
interruption as well.

Candle Stick Patterns

This section will cover some basic candlestick patterns, but first you should become
familiar with some basic candlestick terms.

A long candle is a very long body when compared to other most recent candles.
A short candle is of course, just the opposite and usually indicates consolidation. It
occurs when trading was confined to a narrow range during the period. The term
white bodies refer to periods of extreme buying pressure.

Black bodies refer to just the opposite, period of extreme selling pressures.

Long Days Pattern

Candlesticks in a long days pattern are shorter than the actual body. They indicate
the large differences between the price at the time the market opened for the day and
the price at which is closed.

Short Days Pattern

Candlesticks in short day patterns will be short lines within a short body. These
lines represent the minimal changes between prices at the time the market opened for
the day and the price at closing.

Marubozu Pattern

A Marubozu pattern indicates that there are no shadows present in the bodies.

A White Marubozu is represented by a long white body that doesn't contain any
shadows. It's usually the first indication of a bullish trend, but can indicate the trend
will continue or reverse.

A Black Marubozu is represented with a long black body and generally indicates a
bearish continuation period or reversal pattern.
Spinning Tops Pattern

When the shadows are longer than the body itself, it's referred to as a Spinning Tops
pattern. In this type of market pattern, the color of the body isn't actually important.
The pattern is an indication that there is a lot of indecision between the bearish and
bullish market trends.

Stars and Rain Drops Patterns, along with reversal patterns are some of the more
complicated patterns in the market.

A Star pattern forms whenever a small body peaks above the long body of the
previous market day.

A Rain Drop pattern depicts a drop; it appears when small bodies fall just below the
lowest peaks on the long body of the previous day.

There are also several types of reversal candlestick patterns within Forex trading, as
defined below.

• Dark Cloud Cover

• Engulfing
• Evening Star
• Harami
• Morning Star Doji
• Piercing Line
• Three Black Crows
• Three White Soldiers

Dark Cloud Cover

What Does Dark Cloud Cover Mean?
In candlestick charting, a pattern where a black candlestick follows a long white
candlestick. It can be an indication of a future bearish trend.

Investopedia explains Dark Cloud Cover

Essentially, the large black candle is forming a "dark cloud" over the preceding
bullish trend.
The dark cloud must have a closing price that is:
1) within the price range of the previous day, but
2) below the mid-point between open and closing prices of the previous day.

This candlestick pattern occurs in an uptrend.

Engulfing Pattern
What Does Bullish Engulfing Pattern Mean?
A chart pattern that forms when a small black candlestick is followed by a large white
candlestick that completely eclipses or "engulfs" the previous day's candlestick. The
shadows or tails of the small candlestick are short, which enables the body of the large
candlestick to cover the entire candlestick from the previous day.
Investopedia explains Bullish Engulfing Pattern
As implied in its name, this trend suggests that the bulls have taken control of a
security’s price movement from the bears. This type of pattern usually accompanies a
declining trend in a security, suggesting that a low or end to a security's decline has
occurred. However, as usual in candlestick analysis, the trader must take the
preceding and following days' prices into account before making any decisions
regarding the security.

Engulfing Pattern
What Does Bearish Engulfing Pattern Mean?
A chart pattern that consists of a small white candlestick with short shadows or tails
followed by a large black candlestick that eclipses or "engulfs" the small white one.

Investopedia explains Bearish Engulfing Pattern

As implied by its name, a bearish engulfing pattern may provide an indication of a
future bearish trend. This type of pattern usually accompanies an uptrend in a security,
possibly signaling a peak or slowdown in its advancement. However, whenever a
trader analyzes any candlestick pattern, it's important for him or her, before making
any decisions, to consider the prices of the days that precede and follow the formation
of the pattern.

Doji
Doji
What Does Doji Mean?
A name for candlesticks that provide information on their own and also feature in a
number of important patterns. Dojis form when a security's open and close are
virtually equal.
Investopedia explains Doji
A doji candlestick looks like a cross, inverted cross, or plus sign. Alone, doji are
neutral patterns.

Bearish Harami
What Does Bearish Harami Mean?
A trend indicated by a large candlestick followed by a much smaller candlestick whith
a that body is located within the vertical range of the larger candle's body. Such a
pattern is an indication that the previous upward trend is coming to an end.

Investopedia explains Bearish Harami

A bearish harami may be formed from a combination of a large white or black
candlestick and a smaller white or black candlestick. The smaller the second
candlestick, the more likely the reversal. It is thought to be a strong sign that a trend is
ending when a large white candle stick is followed by a small black candlestick.

Bullish Harami
What Does Bullish Harami Mean?
A candlestick chart pattern in which a large candlestick is followed by a smaller
candlestick whose body is located within the vertical range of the larger body. In
terms of candlestick colors, the bullish harami is a downtrend of negative-colored
(black) candlesticks engulfing a small positive (white) candlestick, giving a sign of a
reversal of the downward trend.

Investopedia explains Bullish Harami

Because the bullish harami indicates that the falling trend (bearish trend) may
be reversing, it signals that it's a good time to enter into a long position. The smaller
the second (white) candlestick, the more likely the reversal.

This pattern occurs when a candle body of the days market completely engulfs the body of the previous day. There are also
several engulfing patterns, white engulfing candles are bullish, black engulfing candles are bearish. A bullish engulfing
commonly occurs when there are short term bottoms and a bearish engulfing will occur when the market is at the top. Many of
the other candlesticks, such as Dojis, Hammers and Hanging Man, require the confirmation that a trend change has occurred that
follows an engulfing pattern. This pattern indicates a bullish trend and has a high reliability rate.

When engulfing occurs in a downward trend, it indicates that the the trend has lost
momentum and bullish investors may be getting stronger.

- The first day's color indicates the trend of the trading day.

- The second real body should have the opposite color of the first real body.

- The second day's body should completely engulf the previous day's body.

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Evening Star Pattern

What Does Evening Star Mean?

A bearish candlestick pattern consisting of three candles that have demonstrated the
following characteristics:

1. The first bar is a large white candlestick located within an uptrend.

2. The middle bar is a small-bodied candle (red or white) that closes above the first
white bar.
3. The last bar is a large red candle that opens below the middle candle and closes
near the center of the first bar's body.

As shown by the chart below, this pattern is used by traders as an early indication that
the uptrend is about to reverse.

When an upward trends occurs the market will get stronger, but as it gets stronger on a long white day, gaps will begin to open
on the second day. Second day trading on Forex, stays withing a small range and will close at or near what it opened at. This
pattern generally indicates that confidence in the current trend has eroded. When this trend reversal is confirmed, the third day
will be a black day. This pattern indicates a bullish trend and has a high rate of reliability..

- The first day is a long white day.

- The second day, gaps begin to open higher from the first day.

- The third day is a long black day and the close of market will be below the midpoint
of the first white day.

Harami Pattern

At the end of an upward trend which has a long white day, a black candlestick opens
that is lower than what the previous day closed at. Market trading is generally light
and the day will close lower than what it opened at. This signals that the current
upward trend is losing strength and this indicator is confirmed with the next trading
day seeing candlesticks following the reversal trend. This pattern indicates a bullish
trend, but it has a low rate of reliability..

When a long black day occurs at the ending of a downward trend, a white candlestick
will open that is higher than what the previous day closed at. Prices will rise and many
shorts are covered, this will encourage even more investors to buy. This pattern is
usually confirmed when the next trading day's candlestick follows the reversal trend.

- A long body followed by a short body with opposite color.

- A short body is completely within the previous day's long body.

- The color of the second candle is not important.

Morning Star Doji Pattern

In a downward trend, the market will support the bearish investing trend with a long
black day; gaps will begin to open on the second day of trading. The Forex market
will see trades that stay within a small range and it will close at or near where it
opened. This pattern generally indicates the potential for a rally since many of the
positions have changed. Confirmation of this trend reversal is marked by the third day
being a white day. This pattern also indicates a bullish trend and has a high rate of
reliability.

- The first day is a black day which indicates the trend of the market.

- The second day must be a Doji day.

- The third day is a white day and supports the reversal of the trend.

Piercing Line Pattern

This pattern occurs when gaps open in the market during a downward trend, but the
market gains enough strength to close above the midpoint of the previous day. This
pattern is a good indication that the opportunity for the bullish investors to enter the
market and help support the trend reversal. It's also the opposite of the Dark Cloud
Cover pattern. It's a bullish trend that only has moderate reliability.
- A long black body followed by a white body.

- The white body peaks above the midpoint of the prior white body.

- This pattern occurs in a downward trend.

Three Black Crows Pattern

This pattern is indicated by three long black days that each end with consecutively
lower closing rates. It generally indicates that the market rates have been too high for
too long of a period and the investors are slacking off to compensate. This pattern is a
bearish trend and has a high reliability rate.

- Three black days occur, each with a close below the previous day.

- Each day opens within the body of the previous day.

- Each day closes near or at the low of the day.

Three White Soldiers Pattern

With this pattern, there will be three long white days in a downward trend; each day
will close at consecutively higher rates. This usually reflects fortitude in the future
market, since a trend reversal is in progress that is building on moderate increases in
the market. This bullish trend offers a high reliability rate.

- Three long white days occur, each with a higher close than the previous day.

- Each day opens within the body of the previous day.

- Each day closes near or at the high of the day.

There are also several types of single candle patterns in candlesticks' theory, as
defined below.

- Dragonfly Doji

- Gravestone Doji
- Hammers/ Hanging Man

- Hollow Red Candles

- Filled Black Candles

There are some types of single candle patterns in candlesticks' theory. They are the
following:

• Dragonfly Doji
• Gravestone Doji
• Hammers/ Hanging Man
• Hollow Red Candles
• Filled Black Candles

Doji's

Doji's are reversal candlesticks that are formed when the market opens and closes at
the same level. This pattern indicates there is a lot of indecision in the prices of stock.
Depending on how long the shadows are and where they're located, Doji's can be
divided into different formations such as Doji, long legged Doji, butterfly, gravestone
and the 4 price Doji.

Doji's become more significant to the market when they appear after and extended
period of long bodied candles, whether they are bullish or bearish and is confirmed
with an engulfing. They follow a bullish trend and only have a moderate rate of
reliability.

Long-legged Doji

A long legged Doji candlestick forms when the stocks open and close prices remain
the same. This Doji is much more powerful if it is preceded by small candles. It
indicates a sudden burst of popularity in a stock that previously hasn't been very
popular, thus can imply the beginning of a change in trend.
Dragonfly Doji

Dragonfly Doji's are Doji's that opened high in the market, experienced a notable
decline, but received enough support to close at the same price at which it opened.
They are often seen after there has been a moderate decline and when they are
confirmed with a bullish engulfing, they are indicators of a bottom reversal.
Dragonfly Doji's indicate a bullish trend that offers moderate reliability.

The Dragonfly Doji has a higher reliability rate associated with it than the Hammer
does.

- The long lower shadow is about two to three times the size of the real body.

- There is very little upper shadow, or none at all.

- The real body is at the upper end of the trading range.

- The color of the real body is not important.

Gravestone Doji

Gravestone Doji's are the opposite of the Dragonfly Doji and when confirmed with a
bearish engulfing, are the top indicators for a reversal. Appropriately named, they
look like gravestone's and could forecast doom for the stock. When the stock opens
and closes at the same level after Forex trading, it's referred to as 4 price Doji's. This
very rarely occurs and is generally only evident with securities that are thinly traded.
This is a bullish trend that provides investors with moderate reliability.

- Small real body at the upper end of the trading range.

- Upper shadow usually at least three times as long as the real body.

- Very little lower shadow or none at all.

Continuation patterns

In the candlestick theory, there are two main patterns that are continuous, the Falling
Three Methods and the Rising Three Methods.
Falling Three Methods

A long black black day will occur in a downward trend and be followed by three days
of small real bodies that create a short upward trend. However, by the fifth day, the
bears will step in rather strongly and cause the market to close at a new low rate. This
small upward trend that occurs between two long black days reflects the consistent
behavior of the investors taking a small break. This downward trend will usually
continue for a time. It denotes a bearish trend and has a high rate of reliability.

1) The first day will be a long black day.

2) The second, third, and fourth days that follow will have small real bodies. The rates
will remain within the range of the beginning day and will follow a brief period of an
upward trend.

3) The fifth day is a long black day. When the market closes on this day, it will close
at rates that are below the rates the market closed with on the first day.

Rising Three Methods

During an upward trend, a long white day will occur that is followed with three days
in which small real bodies have fallen into a short downward trend. Again, this trend
is indicative of the investors taking a small break. At the close of the fifth day, the
market will close at a new high rate, this results when because the bulls have came in
strong. This method also indicates a bullish trend and has a high reliability rate.

1) The first day will be a long white day.

2) The second, third, and fourth days that follow small real bodies. The rates reflect a
brief downward trend, but still remain within the range that the market had on the first
day.

3) The fifth day is a long white day. At closing time on this day, the market will have
rates that are above those on the first day of closing.
Resistance & Support

One use of technical analysis is to derive "support" and "resistance" levels. The
underlying idea is that the market will tend to trade above its support levels and below
its resistance levels. A support level indicates a specific price level that the currency
will have difficulties crossing below. If the price repeatedly fails to move below this
particular point, a straight line pattern will appear.

Resistance levels on the other hand, indicates a specific price level that the currency
will have difficulties crossing above. Recurring failure for the price to move above
this point will produce a straight line pattern.

If a support or resistance level is broken, the market is then expected to follow

through in that direction. These levels are determined through analysis of the chart
and by assessment of where the market has encountered unbroken support or
resistance in the past.

Support can be defined as the level from which prices have fallen to, made a dip in the
market and then retraced. The reverse is true of resistance levels where price have
risen to, made a peak before retracing back to the downside. The more often
retracements happen at or around key levels the stronger the support or resistance
level becomes.

In psychological terms these levels work because buyers or sellers remember that
there was a sharp reaction from the same level last time it was seen. Therefore, at a
support level sellers are tempted to take profits, new sellers are reluctant to take
positions and buyers are keen to enter the market.

A support is a price level which is deemed attractive by buyers of that currency,

therefore preventing sellers from lowering the price below it. A support level is
usually identified once the market tests that level more than once before breaking
below it (broken support) or moving up and away from it (maintained support). A
recurring failure by the market price to move below the support level usually results
in a pattern that can be traced by a straight line.

Support levels are sometimes used to determine good buying opportunities since the
currency may be supported by that level and the currency's price may appreciate again
after testing it.

A resistance level shows a trendline whereby the sellers of that currency find those
prices along the line more attractive to sell and therefore prevent the buyers from
raising the price further.

Sometimes if a support level breaks, its role as a support will transform into that of a
resistance. If there is a falling market and a support level is broken, it could then serve
as a resistance for the downward trend.

On the other hand, in a rising market, once the trendline for a resistance level is
broken, it could turn into a support.
Understanding support and resistance levels is highly important for traders placing
Stop and Limit orders. For example, if a trader has an open buy position, he can use
the resistance level to serve as a reference point for placing the Sell Limit order and
use the support level to serve as a benchmark for placing a Sell Stop order.

Again, it is highly recommended that all traders hone their technical analysis skills
while paper-trading before committing to live-trading strategy using technical
analysis.

Support and resistance levels take on an added significance when used in

conjunction with momentum or relative strength, the latter two factors giving a good
indication whether a particular level will hold or be broken.

Fibonacci and forex

Amazingly, Fibonacci is the nickname of Leonardo Pisano, the renowned Italian

theorist of numbers. Though he is one of the pioneering mathematicians, his discovery
has tremendously boosted the forex trading by letting the forex traders make
enormous amount of profit through the assistance of its technique.
He was the prominent member of the Bonacci family in the 13th century and one of
the greatest mathematicians of the Middle Ages. At the same time, Bigollo was
another most used name by Fibonacci, which literally means good-for-nothing or a
traveler. Later, this pioneer played a pivotal role in conferring significant
contributions in the field of mathematics and eventually reviving its prominence.

Fibonacci's father Guglielmo Bonacci was a custom officer in Bejai, an Algerian

town. Before Fibonacci travelled to Mediterranean coast but his earlier education was
mostly North African type. During his interaction with innumerable merchants, he
later discovered different arithmetic logics and the benefits of Hindu Arabic system.
This system in the course of time proved to be very valuable and replaced the Roman
numeral system.

This technique is very similar to using speed resistance lines. Fibonacci numbers are
frequently used to hypothesize which rates particular assets will gravitate towards.
Use of these numbers is widely accepted in the currency market. There are four
popular types of Fibonacci studies, arcs, fans, retracements and time zones.

In 1170 A.D., Leonardo Fibonacci a mathematician, discovered the relationship that is

now referred to as the Fibonacci numbers while he was studying the Great Pyramid of
Gizza, in Egypt. The Fibonacci ratio exists between any two successive numbers in
the Fibonacci sequence. The numbers are a sequence of numbers for which each
successive number is the sum of the two previous numbers. For example: 1, 1, 2, 3, 5,
8, 13, 21, 34, 55, 89, 144, 233 etc.

When the market is moving rapidly in any given direction, it sometimes experiences
breaks where investors simply hold on to their profits. This phenomenon is known as
retracements and generally creates good opportunities for investors to re-enter the
market at some attractive levels before the move resumes. Retracements are usually
similar in size. Technical traders in particular, pay considerable attention to
retracements that are at the Fibonaccio ratios of 38.1% and 50%.

Fibonacci retracement is displayed by drawing lines between an extremely high

peak and an opposing extreme low peak A series of horizontal lines are drawn to
intersect the trend line at the Fibonacci levels of 0.0%, 38.2% with 61.8% or 33.3%
with 66.6%, 50%, and 100%. When a significant price move occurs, either up or
down, the prices will often retrace a significant portion of the original move;
sometimes prices will trace the exact move. As prices retrace their steps, support and
resistance levels will often occur at or near the Fibonacci retracement levels.

While retracement levels can be applied to both the price and the time, they are more
commonly used to determine price. The most common levels used in retracement
analysis are 61.8%, 38% and 50%. As a market move starts to reverse, the three levels
are calculated by drawing a horizontal line from low to high. It is interesting to note
that the Greek and Egyptian mathematicians also knew about the Fibonacci ratios.
The ratio known as the Golden Mean was applied in both music and architecture. A
Fibonacci spiral is a logarithmic spiral that is used to track patterns of natural growth.