Update: A decent rally from support put euro up at first resistance near 1.3820 yesterday. Price action is messy and hourly candles have been as large as 120 pips. Probably best to stay out, or try tiny shorts from 1.3800- 1.3850 after clear signs of reversal. Target remains at 1.3600.

This first series in articles appearing as part of the free forex service offered by The Traders Club will focus on Japanese candlesticks and how through their utilisation you can maximise your forex profits.  The hope is that these articles will give you a good introduction to the basic concepts behind the key skills of technical analysis, skills that can be honed and sharpened with the hours of additional videos, tutorials and ebooks available to members of  The Traders Club.

To discover the origins of using candlestick charts to predict market movements, you need to go back to the late 1600′s in Japan where the Japanese rice market was institutionalized as the Dojima Rice Exchange in Osaka.  It was under this new guise that rice merchants were able to come together to negotiate the selling price of goods based the quality of the harvest.  However, this early commodity trading was soon expanded, and in around 1710, the rice trading included the first form of future trading; the issuance and negotiating rice warehouse receipts of future crops known as rice coupons.  The Osaka rice brokerage became the foundation for the cities wealth and up to 1300 rice dealers would occupy the exchange.  Due to the debasing of coinage, rice became the medium of exchange and a daimyo (territorial lord in Japan) in need of money could send his surplus rice to Osaka in exchange for a receipt from a warehouse.  This receipt or coupon could then be sold eliminating the daimyo’s cash flow problem.

The rice coupons were also called ‘empty rice’ coupons as the rice was not in physical possession of the traders and by 1749 rice futures trading was so well established that 110 000 bales of rice were freely traded whilst only 30 000 bales actually existed throughout Japan.

It was during this period that the use of Japanese candlesticks was developed and refined to help predict the market movements and they were originally developed as a visual representation of the price movements of rice.  It was during this time, that the youngest son of the Homna family, Munehisa Homna, inherited his families business due to his extraordinary trading savvy.  He moved the business from the family’s home city, Sakata, to Edo (Toyko).  Homna conducted research into the historic price movements and weather conditions and established a more concrete interpretation of candlestick chart patterns.  This research and its findings became known as Sakata Rules and became the framework for Japanese investment philosophy.

Through his expertise in using candlestick trading techniques, Homna went on to dominate the Osaka rice markets as well as amassing a large fortune in the Tokyo exchanges; his trading abilities were legendary and it is said that he had over 100 winning trades in a row

Despite the effectiveness of the technique, Japanese candlestick analysis was never popular in the West and it was only in the 1980′s that it first made its way into the western trading community. The perception of candlestick trading was that it was difficult to learn and very time consuming, which may have been true until the advent of computers and computer programming which allowed for an advancement of candlestick analysis.

Modern interest in candlestick analysis in the United States and the West in general can be credited to Steve Nison.  Steve Nison conducted extensive research into candlestick analysis and in 1991 published his first work on the subject, Japanese Candlestick Charting Techniques.  This landmark publication on the background and history of candlestick trading forms the basis for much of the available information available on the subject of candlestick.

This concludes our brief introduction to the history of Japanese Candlesticks.  In the next few articles we will review some of the classic candlestick patterns that can help you predict changes in the forex market.

08 Feb

Weekly Trend direction: Bearish
Weekly trend reversal level: 1.4030
Key G7 resistance levels: 1.3720/50, 1.3800, 1.3860
Counter-trend opportunities: 1.3580/1.3600

Strategy: Whilst below the weekly trend reversal level sell rallies to resistance levels after an entry signal.

Today’s trade suggestion:
The Euro slipped further down on Friday after the jobs report, as I suspected it might. The 1.3580 level is such a key support area, that it was always likely to act as a price magnet as soon as 1.3800 was broken. This leaves the euro in an incredibly oversold position (the most dramatic since November 2008) and we are likely to get a bounce or spike low sometime soon – perhaps this week. We’re still looking to sell euros from the resistance levels overhead, but we need to be rather more cautious this week due to the factors just mentioned. Whilst on the topic of “oversold” and “bounces” it might be worth trying a small, counter-trend long trade from the vicinity of 1.3580/1.3600 (if you can get it) with stops below 1.3570. Overhead, resistance levels lie at 1.3720/50, 1.3800 and 1.3860. As always, watch and wait for a clear G7 entry signal before selling for a target of 1.3600.

Summary:
Sell on rallies to resistance levels after a clear G7 entry signal, or try tiny counter-trend longs from circa 1.3600,
stops below 1.3570.

Update 05 Feb: Well, I expected the euro to drop back from 1.4000, and it didn’t disappoint. We have had an excellent 8 days trading the euro, but it’s best to hang up the keyboard today, as it’s NFP Friday. If you MUSTtrade today, perhaps wait until 9AM Eastern before evaluating the impact of the news. Note that 1.3685 – 1.3650is key support, formed by two 100% Fib extensions, and presents the best opportunity to BUY the euro if youare wanting to trade