The US Dollar has been sabotaged by rising inflation, uncertain economic conditions, and the Fed’s call to lower interest rates.  Since mid-July, the US Dollar has gained back some ground against many major currencies, but have we reached a turnaround point?  Candlesticks provide some insight into the value of the USD against the major player. 

Candlestick charts provide unique visual signals that make analyzing and predicting price movements much easier.  By using recognized candlestick formations, you are better situated to understand market sentiment.  These types of charts offer a far greater amount of information than a traditional bar chart, which only emphasize the high and low prices for the trading period.  Candlesticks allow the individual trader to better understand the relationship between the open and close price, as well as the trading activity that has occurred.

The importance of candlesticks in Forex

The use of candlesticks can allow you to quickly ascertain the trend of trading activity, whether it is the continuation or reversal of a trend.  The ability to predict market movement is critical to successful trading, especially in foreign exchange markets.  When candlestick price formations are used in combination with other technical analysis indicators, investors can devise methods for profitable entry and exit points for trades.

One of the primary goals of technical analysis is to determine a reversal in the direction of price movements.  Because candlesticks not only clearly demonstrate trading activity for the time period under consideration, but also provide insight as to market sentiment, they are used by almost all successful traders for this purpose.  One of the most useful characteristics of candlestick analysis is its uncanny ability to suggest changes as to the attitude the market may have towards a particular investment.  When these reversal patterns occur, they represent an ideal opportunity for the individual to benefit from the anticipated change in direction.

Classic candlestick patterns via the US dollar

An examination of a recent Euro/US dollar candlestick price chart for the month of September, 2008, reveals certain classical candlestick formations, such as Advance Block, Dark Cloud Cover, and Evening Star patterns – which all signal a reversal in prices.  The Euro/US dollar FX price chart for this month clearly seems to show that the long-term decline of the dollar appears to have reached a bottom, and the currency has begun the process of a rebound.  However, short-term breathers are quite likely before the US Dollar fully recovers. 

While the candlesticks’ inverted hammer indicates that the US Dollar will continue to gain against the Canadian Dollar, the greenback does not fare as well against other major currencies.  With the hammer making its appearance in candlestick charts for the US Dollar against the Australian Dollar, New Zealand Dollar, Euro, and British Pound, expect these currencies to recapture some of the gains made by the US Dollar since July.