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Skip to primary navigation Skip to main content Skip to primary sidebar Skip to footer The History of Forex Trading. The History of Forex Trading Forex trading as we know it today has been shaped and created by some large global events.
Where Forex Trading All Began Barter systems have been used for thousands of years. Major Events in the History of Forex There have been a lot of major historical events that have shaped the Foreign exchange markets and how we know them today. Below I run through a few of the major events; — The Bretton Woods Agreement As World War II was nearing its end, the United States, France and Great Britain met at the United Nations Monetary and Financial Conference in Bretton Woods.
This changed the markets and how they operate forever. The Future of Forex Trading The Foreign Exchange market that we know today is the largest market by far in the world. About Johnathon Fox Johnathon is a Forex and Futures trader with over ten years trading experience who also acts as a mentor and coach to thousands and has written for some of the biggest finance and trading sites in the world.
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History Of Forex Trading PDF Download If you are looking for an up-to-date and informative book on History Of Forex Trading then this book, written by a leading expert in the field, is an ideal choice. About the author. The Editorial Team at Infolearners. com is dedicated to providing the best information on learning. These traders are now pleading for help because with their current system, they keep on losing money and have no idea how to make it back. A fair question is, did the system truly fail or was it the system found between their ears that failed?
You must be taught how to use the best tools available for whatever profession you want to pursue. If you are going to be a ditch digger, you need to be taught how to use a backhoe as well as a shovel and be taught in which situations one or the other should be used. Learning to trade on Forex, from someone who is already successful at trading, is critical.
Finding out which trading tools they use is equally important. Now is not the time to go bargain hunting for tools. Bargain hunting for free or low-cost trading tools is like learning to navigate on the ocean with a compass in a foot canoe—clearly the wrong vessel for the environment. A solid built, 1,foot, state-of-the-art cruise ship with all the latest gauges for weather would be wiser. With so much at stake, do not take a shortcut on paying for quality trading tools. When it comes to trading on Forex, I highly recommend the MTI 4.
These systems can be back-tested over many years instantaneously, allowing a trader to see if their trading strategy is a good one, or if they are working in the wrong direction. You can create a trading strategy that aligns with your personality, program it into a system, back-test it, and, if it is productive, have the trading system send you alerts via e-mail or cell phone when an entry and or exit signal is triggered see Figure The most important part about a trading system is that it must be simple and easy to use.
Whether it is done visually or created by a trading system, your trading strategy must have three very important components: 1.
It must be able to find the current market direction. It must have a consistent entry strategy that works consistently. It must have two very clear exit strategies, one for protecting you against major losses and one for capturing a profit. In Figure , you can see a line that goes above and below the price movement against time that is monitored by a computer creating a candlestick formation candlestick formations are a way of monitoring the open, high, low, and close market prices in any given time period.
This line is called a moving trend line; a visual indicator of market direction or perhaps the current trend. When you turn on your computer and begin to review your charts on any time frame, if the current candle is above that line, the market on that time frame is in a potential uptrend, and if the current candle is below that line, the mar- ket on that time frame is in a potential downtrend.
No matter what time frame you trade in, this simple exercise accompa- nied with this system can help you determine trend direction. Before you use an autopilot program, you need to understand how it has been programmed. Looking at the moving trend line, on any time frame, can help you deter- mine market direction on that time frame. One mistake traders often make is believing that a trading system created for a minute chart will work on all time frames, such as a one-hour chart or a daily chart.
Sometimes it does work, but typically, as you move a trading system from one time frame to another, you may want to adjust the settings of such a system to optimize its performance on that time frame. It is vital to find trading software that will not only allow you to change these settings but also instantaneously back-test the results as found incorporated in MTI 4.
Every trader wants the market to move in his or her direction from entry—there is nothing worse than get- ting in a trade and having the market run in the opposite direction. One of the most important traits of a successful person is that when they are trying to make a productive, empowered decision, they gather facts.
The more facts they can gather, the more informed their decision. Trading is 10 percent skill and 90 percent emotion, which is why our emotions frequently stand in the way of making good decisions. Anytime you need to make a decision, do yourself a favor and do not make it while you are in an emotional state. Take the time to calm down and place your- self in a logical state of mind. If you do that, you will open up the left side of your brain, where all your knowledge is stored, where all your intellec- tual recall is, and you will have access to everything you have learned in your past that is productive.
You will begin to make an educated, positive, and productive decision. Trading indicators can keep you from using the right side of your brain, where all your emotions are stored. You can program buy and sell signals that have no emotion, they just monitor price movement against time. Using different indicators together can create effective entry points, like the ones found in Figure , but they need to be manually monitored.
The trading system you are looking at in Figure is called the MTI Trend Scalper. The two moving lines overlapping the candles are moving trend lines, which can act as buy and sell signals. The line closest to the candles is a moving inner trend line and the other one is a moving outer trend line. In Figure top , you can see that if you used the moving trend lines as your entry and exit signals, right around March 10, , you would have bought the euro at approximately 1.
But where do you get in if the moving trend lines have already crossed? Do you have to sit there for another three to six months before they cross over again to find another trading opportunity? The answer is no. You can have two options. You either educate yourself how the markets move without using indicators or you learn to add additional indicators to your trading system like the waving line you see at the bottom of the chart in Figure This indicator, called the MTI Trend Tracker, monitors the waves of the market.
As the market moves, it resembles the waves of the ocean. The greatest part about a trading system is that it is constantly moni- toring the movement of the market, projecting directions with entry and exit points 24 hours a day even while you sleep or work.
Using a trading system allows you to control your trading in the market, rather than the market controlling you, and to come and go, or turn off your computer, without having to do all kinds of new technical analysis of the market to catch up from where you left off. If the lines overlapping the candles crossed while you were away, the MTI Trend Tracker allows you to enter the market at a price point where the market will more than likely reverse and rally back up in your buying direc- tion from entry, which is what every trader wants.
Look at the MTI Trend Tracker indicator where you see the bold up-arrows see Figure , bot- tom. When the moving line is going south and then U-turns to the north, the market should follow. Look at the price movement of the market and how it began to rally again.
This trading system works just as effectively in a downtrend as it does in an uptrend, as you can see in Figure All the rules are the same but in the opposite direction. When the lines overlapping the candles cross from the north to the south, it is time to sell.
Once again, if you turn on your charts and the mov- ing trendlines have already crossed, giving a short signal, you can enter when the MTI Trend Tracker indicator moving north U-turns to the south.
Look at the market movement on the charts after the U-turn toward the south. Using trading indicators eliminates a lot of the guessing and allows you to focus on developing a trading strategy that works consistently, on a time frame that suits your personality.
Some traders like fast action and want to turn their computer into a video game—they want to quickly scalp the market. In and out, in and out, perhaps 10 times a day. If you enjoy day trading, use this trading system on one-hour to four-hour time frames, and if you enjoy long-term trading, use this trading system on four-hour, daily, or weekly charts In any of these cases, you let the computer do the majority of the work.
Just like an autopilot system. If it were that easy, however, we would all be living in gated communities and flying our jets to our beach-house estates every weekend.
Most traders make their money during trends and lose it when the market gets turbulent or begins to go sideways. What if you were just starting out and the market began to go sideways, or consolidate, as shown in Figure Just about every time the computer gave a buy signal, the market went south, and just about every time the computer gave a sell signal, the market reversed and went north.
When most people board an airplane and look inside the cockpit, they are intimidated by all the gauges they see. How do I know? Just like when I turned on my computer back in the s and looked at charts, I, too, was extremely intimidated. But believe it or not, sideways movement can potentially offer the trader more trading opportunities than trends.
Envision buying all the lows as seen in Figure and exiting at the highs and then reversing your position, shorting the market by selling all the highs taking a ride across the trading channel and exiting at the lows. It is clear to see by continually repeating this process that there is profit to be made. Conversely, when going short or selling first to enter the market, every sell entry order needs two buy exit orders, one for profit and one for loss.
After you enter the market, you need the two exit points, one for profit and one for financial protection should the trade not work out. The fact of the mat- ter is that no one knows where the next pip will go. The best you can do is to understand how the market works and learn how to go with it. But success comes to those who understand how it works—just look at the people who have been able to create great compa- nies that haul freight, passengers, or oil over the ocean.
After the market has moved in your direction from entry, as planned, the question is where do you get out? The last thing in the world you want to do is guess what the market is going to do next.
Let a simple mathe- matical calculation of price movement against time tell you instead. Remember the two indicators—the moving trend lines that are overlapping the candles and the MTI Trend Tracker at the bottom of the chart? If you take a long position and want to become a long-term trader, you may want to stay in until the moving trend lines cross over.
However, if you only want to grab a few pips, and you entered using the indicator below, you may want to get out after that line has moved from the south to the north and is beginning to U-turn back south see Figure Some traders use the movement of their indicators as their protective stop loss orders—they let the indicators make their decisions regarding when to reverse their positions.
Your hope and or fear will get the best of you. What is critical is finding and calculating where your pro- tective stop order needs to go as you are making your trading plan. Once you find that location, after you enter the market, place that order immediately and do not move it if you are trading an OCO one cancels the other order.
Trading is about keeping your losses small and letting your profits run. The problem with most Forex traders is they hold onto their losses and quickly dump their profits for fear the market will take them back. They have the definitions of hope and fear backwards. They will hold a losing position for days, sweating it out, walking through the valley in the shadow of death, praying, hoping, promising God and everyone else that will listen to just help them get back to breakeven and once they do, they dump their position after only capturing a few pips.
Some traders will go pips in the red to only exit after a brutal ordeal and capture only 2 pips. Learning where to place your protective stop loss orders and creating a trading plan before you trade is of critical importance as a novice trader.
Trade a simple strategy with a clear entry order accompanied by two exit orders trying to capture a profit of perhaps 10 to 20 pips. Your aim should be to establish the habit of winning more than you are losing. After you get in the habit of winning more than losing, and realizing that losing is just as much a part of this game as winning, you will then be able to move to a larger time frame to capture more pips, perhaps capturing 40 to 80 pips at a time, consistently, 7 out of 10 times with some losses.
After you get the simple basics down of winning more than losing, you can start learning more advanced exit strategies. Take two different time frames, for example, a daily time frame and a four-hour time frame, using the same MTI Trend Scalper trad- ing system on both time frames. Remember the MTI Trend Tracker at the bottoms of the charts, which monitors the wave movement? Look what happens to the price movement on a four-hour chart when the indicator U-turns on a daily chart, as seen in Figure Remem- ber, prices on a smaller time frame respond to the movement on a larger time frame.
This works the same on all time frames and is a great way to trade. The MTI checklist cross-checks important points for your entry and exit. These seven points are graded, indicating the odds of your making money, and include the use of indicators, candlestick formations, Fibonacci Fib numbers, coun- tertrend lines, and more. Trading needs to be fun and simple. Anyone who tries to impress you with all their knowledge and indicators see Figure will only confuse you.
A confused mind is going to take you down a path of financial destruc- tion. Stay clear from using too many indicators or complicated indicators. Keep it simple! Candlestick formations are the sign language of the mar- ket. They frequently tell the trader where U-turns or reversals are and where the market is going. Most beginner traders prefer learning how to read charts using what is called a Japanese candlestick, which monitors price movement against time.
There are three types of charts traders can refer to: a line chart, a bar chart, or a candlestick chart. Military confrontation had become a way of life in that country as feudal lords fought for control of rival territories.
Once somewhat relative peace had been established, several new opportunities for expansion developed. It was during that the concept of the Japanese candlestick was being explored, tested, and used in monitoring prices in the rice markets. Because there was no standardized currency, the price of rice became the predominant medium of exchange, or currency. In the late s, the Rice Exchange was formed to regulate trading proceedings.
By , there were more than 1, rice dealers. Rather than just deal in actual rice, rice coupons were issued, and these became one of the first forms of futures contracts ever traded. Similar events took place in other parts of the world. There was the Tulip Mania that swept The Netherlands in the early s, which also involved a form of futures contract.
During this period, tulips became the standard medium of exchange and became even more valuable than gold there. The popularity of these Tulip coupons were drawing attention around the world and other countries began to catch on to this effective way of trad- ing.
Rice coupons in Japan became significant, with a bale of rice being the standard amount to be traded. An empty rice coupon became a form of a futures contract—a coupon for rice that may not even be planted or harvested yet. The rice is traded for a specific future date, as if it was grown and going to be delivered to that person on that future date.
Today, futures trading is a multibillion dollar industry. In America, most futures trading for commodities occurs in Chicago, at the Chicago Mercantile Exchange, or CME.
But where do Japanese candlesticks fit in? Munehisa Homma was born into a wealthy Japanese farming family in Homma had an aptitude for business and would eventually become a dominant trader in the Japanese rice market.
Although candlesticks were not actually developed by Homma, he studied the psychology of investors and formulated several key trading principles. These concepts evolved into the candlestick charting techniques that we know today. Candlestick charts were originally plotted painstakingly by hand. This labor-intensive step, as well as the fact that many Japanese traders could not properly communicate or share their trading methods due to language barriers, meant that the use of Japanese candlestick formations could not become widespread until recent times.
As the candlesticks form, they begin to tell a story of the activity in the market, as well as reflect the mood of the market during that time. Candlesticks become the sign language of the market, communicating via certain forma- tions the future potential moves of the market, which is how profits are made—by projecting correctly where the market will go, not where it has been.
Successful traders take the time to study and understand this visual lan- guage. Candlestick formations indicate clear buy and sell signals, commu- nicating to the trader when it is time to enter the market or to get out.
How well you understand candlestick formations can give you a significant advantage in the market. They will appear in the form of a single candlestick or a combination of more than one candlestick. There are hundreds of formations, yet only a handful of formations carry substantial weight when looking for a good entry point. A good entry point is described as a location where the market goes your way from the beginning.
Let us see what a Japanese candlestick looks like and how it forms see Figure Candlesticks, which are composed of full bodies and wicks, measure price fluctuations within a certain period of time. As prices move up or down from the opening, the body begins to form.
If, from the opening price, prices move up and then close higher than the opening, it is a bullish candle. If prices begin to fall from the opening price and close lower than the opening, it is a bearish candle. For example, you can set your charts to provide you with 5-minute candlesticks, , , or minute candlesticks, even hourly, daily, weekly, monthly, or yearly.
Candlesticks monitor price movement against time, providing traders with four key pieces of information for that specific time period: the opening price, the closing price, the highest price reached, and the lowest price reached. Trading is a financial game involving two opponents: the bulls and bears. We all know that there are not actual bulls and bears trading in the market, but investors and traders who have invested either in a bullish direction or a bearish direction.
Both sides have clear objectives and want the market to move in their direction: bulls want the market to go up, or rally, to make higher highs, whereas the bears want to take the market down, or have it dip to make lower lows. The numbers to the far right indicate the price and the numbers at the bottom of the chart indicate the time period. The very last candle to the right is the current candle, indicating the current price. All the previous candles, to the left of the current candle, have recorded the historic price movement during that time.
As you see in Figure , all the icons to the left, top, and right of the actual chart are your trading tools. HOW TO FIND A HIGH Highs are defined as a level where the market ceases to rally and U-turns in the opposite direction.
A high can be considered a new level of resistance, or a higher price level achieved by the bulls that is interrupted and reversed by the bears. However, not all highs are major levels of resistance. Only highs that are higher than the current market can be considered a level of resistance see Figure The levels of resistance noted in the above chart as R1, R2, R3, R4, and R5 become future price targets for the bulls to chase and move higher.
Once they regain control of the market, they will aim to make higher highs and higher lows. The bears are maintaining control in the above chart, as the market is making lower lows and lower highs. HOW TO FIND A LOW A low is defined as the level where the market ceases to drop. A low can be considered as a new level of support, or a lower price level that was achieved by the bears and then interrupted and reversed by the bulls; however, only lows that are lower than the current market level can be considered a level of support see Figure Once they gain control of the market again, they will aim to make lower lows and lower highs.
The bulls control the above market example. Although candlesticks may look alike, the 20 formations listed in Figure will provide you with a solid understanding of candlestick formations and their meanings. This is a bullish line if it occurs after a significant BULLISH PATTERN downtrend.
If the line occurs after a significant uptrend, it is called a hanging man. A hammer is identified by a small body a small range between the open and closing prices and a long lower shadow the low is significantly lower than the open, high, and closes. The body can be empty or filled in. PIERCING LINE. This is a bullish pattern and the opposite of a BULLISH PATTERN dark cloud cover. The first line, on the left, is a bearish line, and the second line is a bullish line.
The second line opens lower than the first line's low but closes more than halfway above the first line's real body. BULLISH PATTERN BULLISH PATTERN BULLISH ENGULFING LINES. This pattern is strongly bullish if it occurs after a significant downtrend it acts as a reversal pattern.
It occurs when a small bearish line is engulfed by a large bullish line. MORNING STAR. This is a bullish pattern signifying a potential bottom. The star, at the bottom between the two lines, indicates a possible reversal; the bullish line confirms this. The star can be empty or filled in.
BULLISH DOJI STAR. A star indicates a reversal and a Doji BULLISH PATTERN indicates indecision. Thus, this pattern usually indicates a reversal after an indecisive period. You should wait for a confirmation, as in the morning star in the previous pattern, before trading a Doji star. The first line can be empty or filled in.
HANGING MAN. These lines are bearish if they occur after a BEARISH PATTERN significant uptrend, and if the pattern occurs after a significant downtrend, it is called a hammer. They are identified by small real bodies a small range between open and closing prices and a long lower shadow, that is, the low was significantly lower than the open, high, and close.
The bodies can be empty or filled in. This is a bearish pattern that is more significant if the second line's body is below the center of the previous line's body as illustrated. BEARISH ENGULFING LINES. This line is strong and bearish if it occurs after a significant uptrend—it acts as a reversal pattern. It occurs when a small bullish line is engulfed by a large bearish line. EVENING STAR. This is a bearish pattern signifying a potential top. The star indicates a possible reversal, and the bearish line confirms it.
The star can be empty or filled in or it can be a Doji star. DOJI STAR. A star indicates a reversal and a Doji indicates indecision. You should wait for a confirmation, such as an evening star illustration, before trading a Doji star. BEARISH PATTERN BEARISH PATTERN BEARISH PATTERN SHOOTING STAR. This pattern suggests a minor reversal when it appears after a rally. The star's body must appear near the low price, and the line should have a long upper shadow.
LONG-LEGGED DOJI. This line often signifies a turning point. It occurs when the open and close are the same, and the range between the high and the low is relatively large. DRAGONFLY DOJI. This line also signifies a turning point.
This pattern occurs when the open and the close are the same and the low is significantly lower than the open, high, and closing prices. This line signifies another turning point. It occurs when the open, close, and low are the same, and the high is significantly higher than the open, low, and closing prices. Stars indicate reversals. A star is a line with a small real body that occurs after a line with a much larger real body, where the real bodies do not overlap, although the shadows may.
SPINNING TOPS. These are neutral lines. They occur when the distance between the high and the low, and the distance between the open and the close, are relatively small. This line implies indecision because the security opened and closed at the same price. These lines can appear in several different patterns. DOUBLE DOJI. This implies a forceful move will follow a breakout from the current indecision.
This pattern indicates a decrease NEUTRAL PATTERN in momentum. It occurs when a line with a small body falls within the area of a larger body. In this example, a bullish line with a long body is followed by a weak bearish line and implies a decrease in the bullish momentum. When it moves, the candlesticks provide a visual sign that monitors the strength or weakness of the market in a certain direction. However, there are two basic types of candlesticks: 1.
Decision candlesticks 2. Indecision candlesticks Decision candlesticks are full-bodied bullish or bearish candles with rela- tively small wicks on either side.
They communicate to the trader that either the bulls or the bears are in control. The indecision candlestick formation is exactly the opposite, with small bodies and, in some cases, no bodies at all—just a line where the open and the close were at the same price with large wicks on either side or on both sides see Figure As the market moves, it creates visual waves, and the candlesticks form different patterns. Movements are caused by investors entering and exiting the market.
When there are more buyers than sellers, the market begins to rally; when there are more sellers than buyers, the market begins to dip, or decline; and when there are equal numbers of buyers and sellers, the market goes sideways. These patterns communicate the strength or weakness of the continued move. As the market moves, it waves, and the can- dlesticks form bullish and bearish reversal patterns. These patterns are the sign language of the market and the buy and sell signals for the traders.
The patterns communicate when it is time to get in and when it is time to get out. These patterns can become invaluable whenever they appear at the end of a downtrend in a smaller time frame, which many times is nothing more than the end of a retracement in a larger time frame. It is imperative to note that as the market moves sideways in a to pip trading range, the market may form all kinds of bullish and bearish candle- stick patterns, which should be ignored.
It is imperative not to trade these candlestick formations in small consolidated or sideways movement. The charts being used in this book have black and white candles— the black candles are bearish and the white are bullish. THE MORNING STAR BUY SIGNAL Figure A clearly shows the formation of the morning star.
What is important to note is that in the formation of morning stars, they start out with a bearish decision candle, followed by one, two, three, or even four indecision candles before the decision bullish candle appears. In Figure B, a morning star appears at the bottom of the chart, signifying the end of the recent dip. A morning star forms when you have a large bear- ish decision candle followed by one or more indecision candles, which are followed by a bullish decision candle that closes beyond the 60 percent mark, or beyond the top half of the beginning bearish decision candle.
It indicates the market is U-turning. Investor Psychology Behind the Morning Star The bears are losing control and investors are no longer selling when you spot a morning star. More buyers have come into the market, which creates an equal number of buyers and sellers. In the end, more buyers step in and take control of the market. Bears are placed in hibernation, and bulls come out of their corrals in herds. The final bullish candle of the formation sends ripples of greed throughout the trading community and a major rally takes place, especially when accompanied by significant trading volume.
THE BULLISH ENGULFING PATTERN BUY SIGNAL A bullish engulfing candlestick formation often signifies the end of a down move, or a reversal. It can also be the turning point or the end of the retrace- ment in an uptrend see Figure A. An ideal bullish engulfing candle is formed when the candle opens lower than the close of the previous bearish decision candle, engulfing the previous two or three bearish candles.
This is a strong sign of a U-turn. The bulls are clearly taking control, as seen in Figure B. Traders with short positions make a quick dash to cover their exposure, and their rush to exit their positions adds power to the creation of the pattern. The volume on the uptake component shows that the majority of traders have changed camp from bearish to bullish within the duration of one period. TWEEZER BOTTOM BULLISH FORMATION BUY SIGNAL Tweezer bottoms form when bears lose control.
Buyers step in and create an environment of equal buyers and equal sellers, which forms two or more indecision candles. Figure A shows the formations. When the market has been falling and a clear decision has been made by the bulls to take over, tweezer bottoms are formed.
The market contin- ues to move down, and bearish candles are formed. All of a sudden, an indecision candle appears, which means more bulls have started buying. We now have equal buyers and sellers. When bears attempt to take prices lower and bulls step in and buy more than bears, a long wick on the south side of a small-bodied candle forms. A second attempt is made by the bears to take prices lower, with the same results, leaving another inde- cision candle with a long wick on the south side of the small body of the indecision candle, next to the last one.
The lows of the two candles, as dis- played by the wicks, are usually at the same price or within a couple of pips difference, which now creates a new level of support. Anyone wanting to make a profit in this next rally needs to start buying right now! Because higher prices are likely to follow the formation of tweezer bottoms, as you see in Figure B.
Invester Psychology Behind the Tweezer Bottoms The bears have created lower prices, which have been tested, and new buy- ers have entered the market. As traders note more bullish participation, a rally is implied. The bears were unable to acquire the interest of more sell- ers and were not strong enough to hold prices down.
Several attempts for lower prices failed, as evidenced by the long wicks on the south side of the small-bodied candles. The tweezer bottoms are a sign of selling exhaustion. It is important to note that the tweezer bottoms do not need to be side- by-side; they can be several candles apart, as long as the lows of the wicks are close to each other, with only a difference of a few pips. Such a forma- tion will create a level of support.
These patterns can become invaluable whenever they appear at the end of an uptrend in a smaller time frame, which many times is nothing more than the end of a retracement in a larger time frame.
It is imperative that you remember not to trade these candlesticks formations in small consolidated or sideways movement. THE EVENING STAR SELL SIGNAL Figure A shows what an evening star looks like. What is important to note is that it starts out with a bullish decision candle, followed by perhaps one, two, three, even four indecision candles before the decision bearish candle appears. In Figure B, an evening star appears at the top of the chart, signify- ing the end of the recent rally.
An evening star forms when you have a large bullish decision candle, followed by one or more indecision candles, which are followed by a bearish decision candle that closes beyond the 60 percent mark, or beyond the bottom half of the beginning bullish decision candle.
It signifies the market is U-turning. If the last bearish candle closes above the halfway point of the first bullish candle of the formation, it is a sign of continued bullish sentiment. Investor Psychology Behind the Evening Star In Figure B, the bulls start out rallying like a rocket going to the moon, driving prices higher. Initially, it seems nothing can stop them. These initial candles reinforce the bullish sentiment.
All of a sudden, a spinning top appears—a sign of indecision—in the form of a small indecision candle. It is quickly followed by a bearish decision candle and the session quickly U-turns. The bulls lose control and investors are no longer buying. More sellers come into the market, which creates the dip in prices. Bulls run for cover and begin liquidating their bullish positions, which adds to the bearish momentum.
In the end, more sellers step in and take control of the market. Bulls are corralled and bears come out of hibernation. The final bearish candle of the formation sends ripples of fear throughout the trading community and a major sell-off takes place, especially when accompanied by significant trading volume.
THE BEARISH ENGULFING PATTERN SELL SIGNAL A bearish engulfing candlestick often signifies the end of an up move, or a reversal. It can also be the turning point or end of the retracement in a downtrend, as seen in Figure B. The opening price of the bearish engulfing candle must be higher than the close of the previous bullish candle and the closing price of the bearish engulfing candle must be lower than the open of the previous bullish candle.
The prototypical bearish engulf- ing candle occurs when the open of the bearish engulfing candle opens higher than the close of the previous bullish decision candles and engulfs several previous bullish candles. This is a strong sign of a U-turn when the bears are taking control. Investor Psychology Behind the Bearish Engulfing Pattern On an emotional level, a devastating blow has been swiftly delivered to the bulls when an engulfing bearish candle appears.
Those feeling optimistic and buoyant about the upward market direction have been proverbially kicked in the teeth. Traders with long positions make a quick dash to cover their exposure, and their rush to exit their positions adds power to the creation of the bearish engulfing pattern. Within the duration of one period, the majority of traders have changed camp from a bullish perspective to a bearish orientation.
TWEEZER TOP FORMATION SELL SIGNAL Tweezer tops form when bulls lose control. Sellers step in and balance out the numbers of buyers, which forms two or more indecision candles see Figure A. In Figure B, the market has been rallying, but a clear decision has been made by the bears to take over, observed via the formation of tweezer tops. As the market was moving up, bullish candles were forming. Then all of a sudden, an indecision candle appears, which means more bears have stepped in selling.
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