Here’s a view of the USD Index on a one hour chart.

The patterns and trend-lines suggest this yet another important juncture and pivot point.

Price action of rejection or continuation at this point should determine the larger trend for the next 24 hours or so.

In the previous post I provided a review of how to read a candle identifying the high, low, open and close levels. Now let’s examine how we can identify those candles that offer the best potential. If the wicks of a candle show us the extremes then candles with very long wicks provide a view of where price action is potently rejected.

There are multiple candle patterns that offer potential reversal signals but let’s start with the most basic. A candle with a small body and large wick where the wick is 50 % or more than that of the body and it pierces or roughly touches and retreats from a barrier or trend-line where a reversal would be expected. This provides an entry point and the stop is placed at the extreme of the candle.

Tip: Remember to wait until the candle has closed to make your trade. Also, this works on all time frames but becomes more effective from the 1 hour candles and greater.

Here’s an example on the EUR/USD 1 hour chart from just last week: You can see where a barrier had rejected the price on two previous occasions and the the trade would have produced a substantial risk reward ratio.

I think it important to begin with the basics on Candles. So here is a quick review.

Candles are in a way a miniature chart within themselves. The wicks (or tails are they are sometime called) represent the high and low of the period and the body shows open and close levels. The color represents if the price was rising or falling.

I bring this up because of the very strong move down on the EUR/USD. Let me explain the big picture “sentiment” and then I will offer some explanation on how to take advantage of a strong tide flow.

How many times do you find yourself trading against the current market sentiment? Are you long when the market is going short? Are you trying to trade a trend when the market is range bound?

If you know something about tides you know that there are smaller ebb and flows as well as much larger highs and lows. Think of the market as tidal so that you don’t find yourself trying to swim against the tide.

The two most important questions that I have had to learn to teach myself to ask before every trade (trading session) are:

1. What is the general sentiment of the market – (Range-bound or trending)

2. What is the current session sentiment – (Up or down)

When I feel reasonably confident I can answer these questions for myself, then I decide to go long or short. Otherwise what I tend to do is see every correction as a potential reversal. This causes me to try and trade against the tide.

So what I focus on is:

Buy on dips in a rising market

Sell on tops in a falling market

The next blog will show how to do this using candle patterns and types as points for these tops and dips.

Cheers

The Dollar is due for a correction however the index could be on it’s way to re-visit 87.00.

I’m sure however the path there will be choppy.

Please visit this week’s report.

http://www.fxstreet.com/technical/analysis-reports/fx-weekly-report/2009-03-30.html

The Dollar Index is still restrained by several trend-lines. The break should result in a substantial move

I have a bias as to the direction I think it should go however when I think I’m right I get caught in a bad postion. So… I will wait for a clear direction to trade.

I wrote yesterday that the USD/Index could be forming a triangle. Indeed it appears that this is the case. The triangle is not symmetrical however it is forming following a strong thrust which is the correct position.

The triangle itself should have 5 waves as its internal pattern. At this time, it is difficult to clearly see if it is best counted as 3 waves or 5. So whether it is complete is still subjective. The other thing I am observing is the confluence of several trend-lines and barriers and I am watching to see if the price action will challenge 84.50 one more time.

These triangles usualy give way to continuation. Do remember however that sometimes what looks like a tirangle may in fact be a combination of patterns that is not yet complete and the triangle patterns fails.

The $/Index has for several days now formed inside candles. Meaning price action high/lows, is less each day.

This is a bit like a spring being wound up and when it gets too tight it will let go. The candles could be a forming triangle that usually gives way to a sudden thrust in the preceding direction and then a reversal.

So be cautious around these levels until direction is clear.

Cheers

The index is just what the name implies in that it is like any other index that uses multiple currencies/securities in order to establish an average to create a value. It is measured against six other currencies. Click here to learn more. http://en.wikipedia.org/wiki/US_Dollar_Index

1. I use it to help guide my view on whether the USD is likely to to strengthen or weaken. I don’t trade it specifically (although there may be some ETF’s available).

2. Some chart providers provide a feed so you can view it. But it is an option that not all providers have.

3. I use the same technical analysis as I would on anything I trade.

4. This helps in trading against all pairs where the counter currency is the USD. Such as EUR/USD, GBP/USD,  USD/CAD.

Cheers