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April 4, 2012

What is Foreign Exchange Market Sentiment?

In this post I’d like to address the question, ‘What is foreign exchange market sentiment?’ This might be useful if you’re thinking about changing currencies, but have heard that sentiment toward the UK pound or euro or whichever currency you’re trading is negative, and want to know what this means.

Foreign exchange sentiment is the general feeling toward a currency at a particular time, among investors on the foreign exchange market. It’s a summation of how the countless millions of investors in foreign exchange feel about one currency at present. Sentiment can become more upbeat or downbeat, depending on what’s influencing that currency on a certain day or month. It can also be used to describe the mood on the foreign exchange market as a whole.

For instance then, when looking at sentiment on the foreign exchange market as a whole, one very common way is to describe the market as either having risk appetite or being risk averse. This tells us whether foreign exchange investors are feeling brave (i.e. there is risk appetite) meaning they’re more likely to invest in small or riskier currencies, or whether they’re being cautious, and hence putting their funds in strong and stable economies believed to be safe (i.e. they’re risk averse.)

Depending on whether there is risk appetite or not, the entire outlook for the foreign exchange market can change. The US dollar for instance tends to strengthen when there is risk aversion (i.e. there’s a big political or economic threat in the world) because the US economy is the backbone of the global system. It’s hence a safe place to put money. The UK pound too tends to benefit in times of risk aversion, because it’s thought stable. On the other hand, currencies in smaller and less stable economies such as New Zealand and Canada (whose prospects are tied to the price of commodities) tend not to benefit when there is risk aversion.

In addition to looking at sentiment on the foreign exchange market as a whole, you can also look at sentiment concerning a specific currency. This tends to reflect not the global outlook, but the factors affecting that particular currency at a certain time. These factors tend to be political or economic. For instance then, if you’re looking at the euro right now, you might say that sentiment is cautious but optimistic, because Greece has just received its second EU bailout. This has cheered investors. On the other hand, cautious remains because Europe is in recession right now. This is reflected in euro weakness.

You should now have a better idea what foreign exchange market sentiment is. If you have any other questions about foreign currency exchange then visit foreign exchange specialists Pure FX. 

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March 29, 2012

The 3 Chart Patterns You Can’t Afford Not to Trade

Chart patterns are specific price-action patterns in stock prices that have repeated themselves for decades, giving prudent traders many profitable trading opportunities. However, there are many chart patterns that are unreliable and not profitable. In this article we will cover the 3 highest win rate patterns that almost guarantee long-term profitability and gains.

Pattern #1: Head & Shoulders
The Head & Shoulders is one of the most reliable chart patterns, having accuracy of almost 90% and generating profits for decades. The head & shoulders is a reversal pattern, that indicates a shift in trend and beginning of a reversal.

We will usually trade this pattern when the neckline is broken, and will join the trade right at the breakout. However, for even more accurate entry it is recommended to wait for price to pull back to the neckline, and begin the new trend. The pullback entry is even more accurate than the breakout one, reaching around 95% accuracy. This is a chart pattern you must trade and master.

Pattern #2: Double Top
The Double Top is another pattern which you must trade, as it provides very good win rate (around 76% winning trades) and very consistent profits in many stocks and Forex pairs.

The Double Top is created when price tries to break a resistance level twice and is unable to, creating a shape resembling the letter ‘M’. Eventually price breaks the neckline downwards, which is the sell signal for chart traders. We will also enter a short trade if price pulls back to the broken neckline from below.

Pattern #3: The Channel
The Channel is one of the most accurate chart patterns that appears in almost any Stock or index, and are the foundation of trends. The Channel consists of two parallel trend lines in a certain direction – it can be either ascending or descending.

The Channel symbolizes a healthy trend in which price moves forward in a certain rythem. We can trade the channel in several methods: The first one is to take trades on the trend lines themselves (make sure to enter only with the direction of the trend and not against it).

Another trading method that is particularly powerful with channels is to enter after it is broken: entering short when an ascending channel is broken and entering long when a descending channel is broken. For extra accuracy we recommend not to enter the breakout itself but wait for the pullback.

Conclusion
Chart patterns are a very reliable and consistent way of trading, and if you focus just on the 3 patterns mentioned above, you will generate stable profits from any market you trade. Choose one pattern at a time, learn to identify it on historical charts and then proceed to master it in real trading.

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