In todays article we will take a look at the forex market and have a forex review over information that has been provided in previous articles. Forex trading is very different from the stock market for various reasons. For instance, the forex market has no central exchange. Trading can take place around the clock and there is no regulatory commission such as the Securities Exchange Commission (SEC) that oversees the market.
As part of the forex review you will remember that it is the most liquid market in the world and you can trade forex 24 hours a day. The FX market is not commission based and it is a principals-only market. The brokerage firms for forex are actually dealers rather than brokers so the dealers assume market risk, unlike regular stock brokers and they make their money through the bid-ask spread, instead of through commissions.
The major currencies that are traded on the forex market are seven of the most liquid foreign currency pairs in the world. These seven currency pairs account for more than 95% of the trading that takes place in the currency market, along with their various combinations of pairing.
USD/JPY dollar/Japanese yen
GBP/USD British pound/dollar
USD/CHF dollar/Swiss franc
AUD/USD Australian dollar/dollar
USD/CAD dollar/Canadian dollar
NZD/USD New Zealand dollar/dollar)
As part of the forex review you also learn that the forex market is the most accessible market in the world. It rarely has any gaps in price and it large size equals about $2 trillion dollars each day in U.S. dollars. As mentioned above, forex brokers make their money though the bid-ask spread. The bid-ask spread is the amount in which the ask price exceeds the bid price when trading forex. In other words, it is basically the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price in which a seller is willing to sell it.
Keep in mind, as you learn about forex currency trading, that it is a purely speculative market. There is no actual physical exchange of foreign currencies that ever takes place. The trades are only computer entries that are handled according to the current market price.
Market Direction: Why is it important to see what candlestick signals occur at the end of the each time frame? Today's trading produced a perfect example. The Dow had been trading down around 100 points most of the day. Had the markets closed near the low end of their trading range, the Dow would have formed an Evening Star signal. This would now have led to the possibility of a slow uptrend finally being over. The NASDAQ would have shown weakness that would have confirmed the start of a potential downtrend had it closed near the low end of the trading range. This would have put the NASDAQ and the Dow right on their tee lines. A weak open tomorrow would have confirmed the bears were in control. This was the likely prognosis for most of the day.
The Bulls stepped back in during the final hour. Both indexes closed relatively flat. But the important information revealed was the lack of bearish control. The Doji that formed in the Dow provides a very simple trading platform. If the premarket futures reveal strength in the morning, the uptrend will have a high probability of moving steadily higher. A lower open will still have the support potential of the moving averages. Unless severe selling is witnessed tomorrow, the uptrend is still considered to be in progress. Why is this trend analysis important? Knowing that the uptrend is continuing allows investors to take advantage of high profit price move potentials created by the candlestick patterns.
LDK had a strong day as it was nearing the end of a rough Fry pan bottom formation. Prices coming out of identifiable patterns allows for a number of strategies to be put in place. Because signals and patterns have expected results, a stock position can be greatly enhanced by simple option strategies in conjunction with a stock purchase. A major advantage of candlestick analysis is having a grasp of when a price move should occur and how powerful that move will be. The illustration of the LDK confirmation of a Fry Pan bottom pattern can be used in anticipation of a strong price move. With that analysis in place, due to the consistency of results demonstrated by a Fry pan bottom breakout, an investor can exploit that move with various stock/options strategies.
Most investors have a problem with just identifying the direction of a price move. That problem is greatly resolved when using candlestick analysis. Trading off of high probability reversal signals or price patterns greatly reduces one of the variables in any trade. Candlestick signals and patterns put the probabilities of being in the right place at the right time greatly in your favor.
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