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Picking the right moment is the key to forex trading

SINCE Monday we have learnt that Japan exited recession in the second quarter, that German investors are more confident in August than they were last month, that UK inflation still stands at 1.8 per cent, and that three members of the UK&rsquo;s Monetary Policy Committee considered extending quantitative easing in this country to &pound;200bn. Today we&rsquo;ll get some indication of the US employment situation, learn how the UK&rsquo;s high street is faring, the state of Britain&rsquo;s government finances and Switzerland&rsquo;s trade balance. And that&rsquo;s just for starters.<br /><br />With all this information that has the potential to move currency markets, it can be overwhelming for foreign exchange traders to make sense of the fundamentals behind currency pairs, let alone time the entry and exit points of their trades.<br /><br />Technical analysis helps traders cut through the confusion. No seasoned currency traders would be without it, and that means that it is worth your while getting to know at least a few indicators that can add weight to your trading decision.<br /><br />But firstly, you need to make sure you are using the right timeframes for your trading. Unless you are jumping in and out of the markets in minutes, weekly and monthly candlestick charts are much more reliable than daily and hourly ones when it comes to spotting and using technical analysis as they allow you to see true changes in the markets rather than blips.<br /><br />There are dozens of Japanese candlestick patterns and market patterns, and learning them all would overwhelm you almost as much as all that economic data, selecting a few indicators can be extremely helpful as a means of tracking market sentiment and anticipating shifts in market mood.<br /><br />If you only know about three Japanese candlestick formations, these are the ones that you should be familiar with. Firstly, the doji candlestick, which represents the market opening and closing at the same level, and suggests that the trading session has seen very little progress and warns of uncertainty in the market. This appeared earlier this month in Australian dollar-US dollar.<br /><br />While the currency pair tried to push higher, momentum was limited and it failed to advance strongly. This is typical of doji candlesticks, which can indicate that the market may have reached a turning point or at the very least, that there is a pause for breath in the market.<br /><br />The second candlestick formation that traders should look out for at the moment is the marabozu candle, which warns of either a very positive or very negative market. It forms when the market opens at the high and closes and the low, and can be two to three times the length of a normal daily move. They indicate that the market is likely to retrace some of its gains in the next session as traders look to lock in their profits. Last October at the height of the market turmoil there was a bullish marabozu candle in dollar-rand which was followed by a retracement before a further move higher.<br /><br />Thirdly, you know your tweezer tops. These form when the price level finds resistance for two consecutive sessions (you need to be looking at two candles) and is extremely bearish, especially in combination with a bearish engulfing pattern, where the second candle opens above the previous session&rsquo;s highs and closes below its lows. For a tweezer top, the second session does not have to engulf the body of the previous session, but it adds strength to the indicator if it does. At the start of July, there was a tweezer top in Swiss franc-Japanese yen and was followed by five very negative trading sessions. <br /><br /><strong>PRICE TARGETS</strong><br />Of course, candlesticks aren&rsquo;t the only way to spot chart patterns. There are a lot of people sitting on the sidelines at the moment waiting to jump into the market, and the key to timing this right is spotting a pattern indicating a continuation of the recent rally. A sign that such a trend is developing is that the price breaks out of a continuation pattern in the same direction that it entered it.<br /><br />One continuation pattern that you should look out for at the moment is a bull flag. This is usually seen at the midpoint of an upward move in the market and usually takes between one and three weeks to develop. It tends to occur after a very steep advance, which forms the flagpole. The flag itself forms when the price stops its advance and consolidates.<br /><br />In general the price tends to fall, but don&rsquo;t let that put you off &ndash; as long as it is not at too steep an angle you should see a break out higher, which is the time to enter or add to new positions.<br /><br />The bull symmetrical triangle is another continuation pattern that foreign exchange traders ought to be on the look out for at the moment. It is formed between two converging lines and this pattern signal normally has at least five points of contact within these lines. A rule of thumb is that the break out occurs approximately two-thirds of the way into the pattern but this will vary depending on the market.<br /><br />However, it is the trader&rsquo;s responsibility to verify the break out and any potential price targets in order to avoid being caught by a fake out. Check the volume to see how strong the break out is.<br /><br />Spotting these patterns might seem hard enough, but successful traders will also use other indicators to add confidence to their trading. If you don&rsquo;t have confidence in your trade, you may find yourself moving your stop losses to run your losses or dither about whether a chart pattern is indeed showing what you think it is.<br /><br />The best traders are calculated and decisive and that means analysing daily charts to prepare yourself for a turnaround in market sentiment. And when that starting gun fires, you&rsquo;ve got be ready to go.