Classic signs of market weakness you should consider in your Forex training

In your FOREX TRADING COURSE you should be taught that the study of market weakness is just as important as the study of its strength. In this article we are going to discuss a few factors that provide you with a clue of market weakness – a core subject that should continue to be part of your on-going FOREX TRAINING.

Why do we need to know about market weakness? The answer is simple – to help you make profit by identifying market entry opportunities or in some occasions – market exits. Whilst credible Forex traders have certain alerts programmed into their Forex trading software to inform them of pattern formations or price levels, we must not forget that identifying a weakness in the market can be a beneficial skill to have.

Long shadows

Throughout your Forex training, you should have been taught that the study of candlesticks' upper and lower shadows is of real significance. Shadows allow us to understand the volatility in a trading session i.e. how far the market went upwards and downwards. The longer the shadows the more volatile the trading session. Also note that the volatility may only occur in one direction rather than both. For instance, the market may not allow the price to go below $1.0000 but the session may have reached $1.0100 at some point in the day and then retreated back down and closed near the $1.0000 area. This would mean that the session's candle has a very long upper shadow as the bulls piled on the pressure but the bears were simply too strong and overcame demand.

So, how can we use shadows to identify market weakness? Let's take a very simple example of a market trending downwards. We are using a daily chart, the trend has been falling for 2 weeks and is at the $1.0000 level. Suddenly, the market starts trending upwards but once it reaches $1.0100 it runs into trouble as any progress past the $1.0100 level is rejected. Instead, the bears pile on the pressure and push the close near the open on the candles trying to go upwards. This creates long upper shadows and shows that the bears are still in control. This means that the slight upward movement was simply a covering or a lunch break in the trend going downwards. So, when we see long upper shadows in a small upwards covering in a down-trend, we know that the market is still prone to continuing the downwards move.

Doji candles

Any basic Forex trading course should teach students that a doji is a very significant candle. What is a doji? Simply put, it is a candle with the same (or very, very similar) open and close. Whilst there are different varieties of doji; for the purpose of this article we are not going into those details. A doji is one of the most important single candles a Forex trader can come across. On its own it creates a warning that the market may be losing steam as the bears and the bulls are at equilibrium. That is, the market cannot decide which side is the strongest. A doji also makes up two-part reversal patterns so a confirmation by an appropriate candle can signify a reversal in the trend.

Spinning Tops

In your Forex trading course you should have been taught that spinning tops are candles with small real bodies. This means that the open and the close are in close proximity to each other (not the same) signifying that market volatility is weak. That is, the trading session was slightly 'lazy' as the market tries to figure out which way to go. Similarly to the doji, when spinning tops comes into play take notice of your indicators and overall market conditions to confirm if you should prepare yourself for a market entry.