The candlestick chart patterns cover a broad cross section of many different kinds of charts. Here is a look at some of the most commonly traded patterns using the daily charts:
Engulfing: This one has two key candles, the white one engulfing the black one in case of bullish charts. The opposite happens in the case of bearish sign where the black engulfs or outsides the white one.
Hammer & Shooting Star: Hammer forms at the bottom of bear markets and Shooting Star at the top of bull markets.
Harami: This particular candlestick is perhaps one of the clearest indicators of market swing. In the case of a bullish Harami, you have a long black candle followed by short white one denoting improvement in sentiment. The exact opposite happens in case of a bearish one.
Piercing & Dark Cloud cover: This one indicates potential reversals in the market. This too involves two candles to bring out the exact trend in the market. When you have a bullish formation, day 1 candle shows the sellers are in control; the second day’s candle, which closes halfway into the day 1’s range, indicates shortcovering and initiation of buying momentum. The bearish candle pattern is almost the mirror image and is known as dark cloud cover. In this one, sellers take control on day two.
Doji: This one is a very commonly used candlestick chart pattern and signals indecision and rangebound market action. Many a times a Doji could also be seen as the catalyst triggering potential reversal in the forex market.
Kickers: This is a multiple candle pattern that can have both bullish and bearish patterns. In this day, two sees gap-up opening for the entity in case of a bullish kicker. The sellers are almost forced to cover shorts and make way for new traders with a long bias. The bearish kicker is the complete reverse of the bullish variant.
2. 50-Day and 200-Day Moving Averages
From swing indicators, we now graduate to volume indicators based on the same daily charts. Moving averages constitute one of the oldest type of forex market analysis using technical tools. Very commonly used by traders, it helps in reducing the noise in chart patterns and enables you to interpret real-time rates. Moving averages are best known as indicators of the trend reversal and timing buying and selling of positions in the forex market using the daily charts.
The 200-day Moving Average is one of the most popular variants with a high degree of accuracy rate in identifying trends. It is also considered as the ideal measure of the health of the overall market based on the number of entities trading above this crucial mark.
This also is extensively used for identifying the support and resistance levels during a particular trading session using the daily charts. These also form the basis of long-term chart trends seen in the market.
The other commonly used variant of a moving average is the 50-Day Moving Average. This is a very important chart as it also acts as the dividing line between the healthy and unhealthy market entities. Higher the number of currencies trading above this crucial line, better the chances of an overall improvement in sentiment across forex market.
The 50-day moving average also acts as an important indicator of the entry and exit points in the market for forex traders. It gives a fair idea about the kind of price range that one should enter to constructively add to profits and the price range where it is best for traders to exit to minimize the loss or preserve the existing profit levels
3. Bollinger Bands
Bollinger Bands is the next key strategy on our radar. It uses the daily charts to assess the volatility level of a specific currency pair that is under consideration. Volatility forms an important trading catalyst and a sudden change in it could have long-term implications on the trading positions. Also, the volatility trends most times are also precursor of potential trend reversals in the market. The Bollinger Bands thus when placed above a daily price chart along with a moving average gives you a fair view of the pricing channels.
What the Bollinger bands do is add bands over and under the basic moving average line to give shape to a certain limit or rate of upper and lower boundaries that then become strong measure of the overall market volatility:
The next key strategy, that extensively uses the daily chart, is the RSI or the Relative Strength Index. Essentially a momentum indicator in the forex market, the RSI was first introduced by Wells Wilder. It responds to the changes in the market rate and oscillates in tandem with this change in pricing.
Its key function includes a study of oversold and overbought market conditions in forex trade. A reading of 30 and below conveys oversold positions while that of 70 and above indicate overbought market position.
The MACD or the Moving Average Convergence and Divergence is considered as one of the most reliable forex market indicators using the daily charts. While candlesticks and Bollinger Bands continue to be the key tools to identify trade set ups, the MACD charts act as the safety valve for traders and prevent getting in or exiting a trend too early. This is useful especially for those who are new to forex trade.
The fact that the MACD is a lagging indicator adds to its key charms. While the patience, that it expects you to exercise, can be at times frustrating but this also acts as your secret weapon while dealing with false breakout or sudden rallies in the market.
Though not exactly a magic tool, it acts as one of the most reliable indicators of the buy sell signal in the forex market.
6. Fibonacci Retracement
This is one of those trading strategies using the daily charts that work best when the forex market is trending. The basic idea that is conveyed by the Fibonacci retracement levels indicates that traders must go long in case of a retracement of the Fibonacci support point in an upward trending market and one should go short when the retracement of the resistance level is seen in a market that is trending lower.
Many traders also use the Fibonacci retracement levels for identifying resistance and support levels for key currency pairs that they might be trading in. Given the huge trading activity at these support and resistance zones they become prominent tools to identify trends and market direction themselves.