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Tsunami Hits Hawaii – Forex Opportunity?

It’s now 12:30 pm in Hawaii and a Tsunami is expected to hit any any moment.The tsunami heading for Hawaii is the result of a massive 8.8 earthquake in Chile earlier this morning. This story has received nationwide news coverage, and you can learn more about the details of the chile earthquake hawaii tsunami at cnn.com.

Fortunately, I live in the mountains with a nice safe view of the impending tsunami. As the tsunami heads for me in Hawaii, it causes me to think about the implications of the forex market.

Currently the forex market is closed since it’s saturday. The forex is so huge that the tsunami will likely not directly affect the exchange rate of the USD (us dollar). If the tsunami does massive damage (in the Billions) then there could be an impact when the foreign exchange market opens tomorrow.

Riding The Wild Wave

Just like the ocean, price movement in the forex market moves in waves.  The market moves in normal waves. Occasionally there is a major event (a forex equivalent of an earthquake) that causes a MASSIVE change in the forex market. After the impact of this MAJOR event happens, the prices will settle down and stabilize.

In the FOREX, any MAJOR news can cause a forex tsunami. Of course this news isn’t always predictable, but when it happens you need to be able to go with it (or else it’ll wipe you out).

As the tsunami approaches towards Honolulu, Hawaii you can see several surfers out in the water trying to “catch the big wave.”  While it is a safe bet in the forex market to avoid the tsunami, it can be a great thrill to try and ride the wave. Capturing an insane forex price movement would be just as exciting as riding that big tsunami wave heading towards me now…

Fortunately for us forex traders, we can anticipate forex tsunami’s on a regular basis. While we can’t predict MAJOR news events like earthquakes or political chaos, we can follow fundamental announcements that are known to repeatedly cause major forex price movements.

When the US non-farm payroll payroll information is released (usually the first friday of each month), the EUR/USD will often react wildly and unpredictably. There are other economic events that cause major forex price actions to occur (you can look at the major ones at this forex economic calendar.

I’ll be sharing more about the Hawaii tsunami and fundamental forex announcements on this blog. If you register for the free 20 part eCourse at the upper right of this website, you’ll learn more about how to trade forex economic announcements.

Posted in News

The Anatomy of a Japanese Candlestick

In this blog post, I’ll continue to explain how Japanese candlesticks work. As a forex trader, it’s essential that you understand how this works. Soon I’ll show you how you can trade the forex market by using the wealth of information available in each candle at a mere glance.

At first glance, candles tell you which team won the period’s tug-of-war.  That is, a candle will tell you whether the bulls succeeded in getting the market to close at a higher price than it opened, or the bears succeeded in getting the market to close at a lower price than it opened.

You can identify the game’s winner by its candle – specifically, whether its body is filled in or not.

Looking more closely, the candle offers additional information.  Not only will it reveal whether prices closed lower or high than they opened, but it will also give you an idea of the period’s high and low prices.

The high and the low prices are revealed in the candles upper and lower wicks.  If the candle has a very long upper wick, for example, then prices went very high during that period’s trading but returned back to a much lower close.  If the candle has a very long lower wick, then the opposite is true.

Take a look at Figures 1 and 2, which reiterate the anatomy of a bullish candle and a bearish candle:

A candle, then, can tell you a lot about the trading activity that occurred in a given period (again, candles can represent periods of one minute, five minutes, fifteen minutes, one hour, one day, one week, etc.).

The benefit of candles over bars or lines is precisely that – that each candle reveals so much information about a period’s trading in a very clear, succinct way.

For example, imagine that you are looking at a chart displaying one minute candles.  Looking at the chart, you can easily identify minutes where the bulls won (unfilled, outlined in blue) and where the bears won (filled and outlined in red).

You can see from the length of the upper and lower wicks how high and low prices went during the session, and you can see the distance between the session’s opening and closing prices.  All this information is summarizing what is actually going on within that one minute period.  Within that period prices are going up and down, higher and lower, moving in a bunch of vertical lines.

If you were looking simply at those lines (as you would be if you were looking at a line chart) it would be very hard to break apart the one minute sessions and determine whether the bulls or the bears won, how high and low prices went, and at what price the market closed an opened during that one minute.  Instead, this nice little candle figures all of that out for you and presents it to you in a very readable, friendly way.

What About Bar Charts?

Bar charts have benefits similar to candles, in that they represent the trading activity during a given period in a very succinct, readable way.  A bar represents price movement with a vertical line (compared to the candle, which represents price movement with the candle body and wick).

The top of the bar’s vertical line indicates the high price during that trading period (just as the top of the candle’s upper wick indicates a high).  The bottom of the bar’s vertical line indicates the low price during that trading period (just as the bottom of the candle’s lower wick represents a low).

On a bar chart, the period’s opening and closing prices are displayed by horizontal ticks jutting out from the bar’s vertical line.  The ticks jutting out to the left represent the opening price, while the ticks jutting out to the right represent the closing price.

The downside to bar charts is that you have to look much closer to determine whether the market closed higher than it opened (bulls won) or closed lower than it opened (bears won); because, on a bar chart the open and close are marked by lines jutting out from the bar’s body to the right or the left.  The fact that a candle is filled or unfilled depending on which team won the session makes it much easier to read and understand at a glance.

Posted in Japanese Candlesticks, Technical Analysis

Understanding The Forex Game

A Very Profitable Game

Speculating on the price of one currency in relation to another is like betting on a game; in the Forex market, the game is between the bulls, who want to pull prices up, and the bears, who want to pull prices down.  The most successful trader will not put himself in the middle of that game just as you or I would not go onto the field in the middle of a professional football game (unless, of course, you happen to be a professional football player).

Instead, the successful trader will stand above the game for the best view and the best chance to bet on the team with the winning play.  With over 1.5 TRILLION dollars traded each day in the Forex market, it’s IMPOSSIBLE for us to influence the outcome of the game between the bulls and the bears – so we don’t try; instead, we take our best, informed, educated guess at who will win a given play, and we bet on it – we speculate.

The fact that we are not actually able to influence the outcome of the game, we are simply speculating “betting” on it, is very important to remember, because it means that what matters to us is not so much who has a better quarterback, or whose coach makes better plays.  Instead, what matters is what other people think.  Which team are other traders going to bet on?  The bulls may be superior in a certain play but if everyone bets that the bears will win, then . . . the bears win.

Trading the Forex IS NOT as much about picking the strongest currency, identifying which country’s particular economic, social, and political situations make its currency the best buy that day.

Trading the Forex market IS about foreseeing which currency the crowd will pick, picking it before they do, and being right.  You want to be able to predict where the herd is going, but you don’t want to get trampled by it in the process.

Trusting the Indicators

That’s why judgment-based indicators (charts) and mathematics-based indicators (technical indicators) can work so well in the Forex market if you do it right – because you are not betting on which currency is stronger, but on which currency the crowd will think is stronger and, in turn, bet on themselves.  The Forex indicators we’ll talk about in this book don’t lead to winning trades 100% of the time.

They lead to winning trades more often than not.  That’s because people are predictable.  Based on history, which tends to repeat itself, we can make well-informed, and educated guesses about which team the crowd will pick based the crowd’s past picks in similar situations.  In essence, trading the Forex spot market is much more about speculating on people’s behavior than on the strength of one currency relative to another.

Bulls Vs Bears in the Forex

In the Forex market, a bull refers to increasing prices, where the trading period’s close is higher than its open.  This means that in that trading period the bulls won the tug-of-war: they succeeded in getting the market to close at a higher price than it opened.  A bear is the opposite; it refers to decreasing prices, where the trading period’s close is lower than the open.  In a bearish period, the bears succeeded in getting the market to close at a lower price than the open.

There is not, unfortunately, any way to guarantee that your trades will be profitable 100% of the time.  In fact, they ABSOLUTELY won’t.  Even the most experienced, disciplined traders take losses.  The difference between experienced, disciplined traders and reckless novice traders is that the disciplined, experienced traders trade based on sound equity management principles so that in every trade they are managing their potential loss (the risk).

While no one can show you a way to make profitable trades 100% of the time, you can greatly increase the probability that many of your trades will be profitable.  You increase the probability that you will profit overall by educating yourself.

1. Learn to Read Charts (I’ll be blogging about this a lot)
2. Learn to use chart-based indicators and technical indicators to know when to enter and exit the market

If you educate yourself on the ways to maximize the probability that you will profit, and if you follow the lessons you are now learning on the rapid forex blog, then you should profit on more trades than you lose.

Posted in Forex Basics