What does it mean to Trade Currency?

If you are interested in learning about how to trade currency, then you must first understand what foreign exchange trading is and how it works. The foreign exchange market is a market in which currencies are bought and sold against one another.  It is the largest market in the world and it includes all transactions that involve international trade and investing because these transactions involve currency trading. The costs involved if you want to trade currency are minimal and most discount brokers will provide you with the tools and information needed to make trading decisions for little to not cost. This market is also referred to as a forex market, or a currency market. In the forex market you can trade currency for 24 hours and can typically get in or out of the market at any time.  This provides a very flexible schedule for the forex investor.

If you are looking to participate in forex trading, you must follow one simple rule of thumb. That rule is that all trades must result in the buying of once currency and the selling of another, concurrently. The goal is to exchange one currency for another with the probability that the price of the currency will change. You want the price of the currency to change so that the currency you bought has appreciated relative to the currency you sold.  To trade currency means that when you take a long position, you are actually buying a currency. Conversely when you short a currency, you are selling that currency. You want to develop a forex trading strategy that allows you to lock in a profit when you trade currency.  In order to lock in a profit you have to close your open position (by selling the currency) after it has appreciated in value. If you sell if after it has depreciated in value, then you have lost money.

In order to trade currency, you must know the five major currencies.

1)  Euro – The Euro has a very strong international presence that stems from the members of the European Monetary Union.

2)  Swiss Franc – The Swiss franc is relatively small and is the only currency of a major European country that does not belong to the G-7 countries or to the European Monetary Union.

3)  Japanese Yen – The Japanese yen is very liquid and is the third most traded currency in the world.

4)  British Pound – The British pound is heavily traded against the Euro and the U.S. dollar and until the end of World War II, was the currency of reference.

5)  U.S. Dollar – The U.S. dollar is the world’s main currency.

Many successful forex traders like to trade currency simply because you only really have 5 major currencies to keep up with. Many forex traders only focus on three currencies at a time rather than all of them. This enables them to zero in on their forex trade even further and for many it increases their change of success remarkably.  Many participate in online forex trading as the internet has allowed the free-flow of information to anyone with a computer.  To trade currency is to trade in the most perfect market. The large number of buyers and sellers and the free-flow of information with little barriers make it one of the most popular markets to trade in.

Unfortunately, even as an experienced investor, fear can still greatly influence our decision-making. It comes in many forms. The fear of taking profits is a major impediment for investors to get out at the right time. What if we took profits now and the price continued much higher? Or what if I sold the sluggish sideways moving stock and it took off after I sold? These are questions that constantly nag at an investor's investment psyche. Candlestick signals create a great format for diminishing indecision. They show when to be out of a position. Simple analysis should reveal whether the probabilities are in your favor or not.

One of our chat room members asked about CRNT. The concern was about selling at the bottom. They would hate to sell and then have the price come right back up. This situation is being illustrated because it is a thought process that every investor goes through. However, it is a thought process that is irrelevant. What if "I sell" right here and the trend reverses. The concern is based upon what you as an individual might have happen to you. The true evaluation should be what are the probabilities based upon the signals and the confirming indicators that this is the time to be out of the position.

CRNT gapped down this morning. What did the gap at this level reveal? It can be observed that the 200 day moving average had acted as support in the past. However, notice the conditions of the stochastics at the time it supported in late November. The stochastics were in a general upward direction. Note the condition of the stochastics as the price came back down to the 200 day moving average on Friday. The stochastics were not in a bottoming stage. If you owned the stock, what should be expected today if you were going to remain long? The 200 day moving average should act as support. We would want to see a positive open or trading that indicated indecision at the 200-day moving average.

Also, it can be observed that a trend channel may be in progress. This would be another reason that a positive open on Monday would be required to maintain that trend channel. A gap down, as we saw in today's open, along with the weakness in the general market futures, should have provided more evidence that this stock was breaching a support level versus reaching a bottom. The conditions of the stochastics verified that assumption. Could the price have bounced after the open? There was always that possibility. But the accumulative evidence indicated that wave-three to the downside may have started. The position should have been sold immediately on the open.

CRNT

This analysis is based upon many years of experience. That experience is the hard-core realization that if you are 'hoping' for a result that defies probabilities, you will experience more pain. The benefit of candlestick analysis is being able to visually analyze positions you have been in and did not close at the proper time. In this case, after reviewing the chart, it becomes obvious where an investor should have closed this position prior to even having to consider what to do on the gap down today.

Let's analyze why this trade became painful. Once you have visually recognized why you should not have been in this trade, the pain of being in it will be stimulus for learning where an investor should have been out of the trade in the first place. This process develops a keener sense for cutting losses short.

Let us assume this position was bought a couple days before the end of October. A potential Jay-hook pattern was setting up after a Morning Star signal. The T-line was acting as support. It was bought on a strong close. However, the next day revealed a Bearish Harami, indicating the possibility that the uptrend had stopped. The rationale to hold was that it did not close below the T-line that day or the following day. The next day it should have been closed. A lower open, followed by continued selling. The rationale becomes "will the 50 day MA be the support, like it had been in the past?" A lower open showed the 50 day moving average or the trend line was not acting as support.

The human psyche always tries to find some reason that would support being in a position; "Hoping" that a trend line or a moving average is going to be where a losing trade will start to turn around. If you can identify where a reversal might occur, then you need to see the candlestick signals confirming. If a signal is not there and that support level is breached, close out the trade immediately. The trend is telling you something.

Good investing,

The Candlestick Forum Team