Markets indeed are in a constant flux between opposing forces; like two sides of a coin or the twin sides of a cosmic Yin and Yang; whether it be night or whether it be day, the market will always be going somewhere.
The vast panorama of human opinion and judgement can uniquely be portrayed by a system of price tracking and charting invented by the Japanese in the 17th century to monitor rice prices.
Markets move in waves and cycles; they do not remain static and stagnant. The very pulse of human expectation and fear can be epitomized by the very shape of the Japanese candlestick that belies the heart of the day’s price action.
In our dynamic study of Japanese candlestick charts the very first patterns that we shall attempt to understand are the key reversal patterns; namely the Hanging Man and the Hammer.
1. The Hammer -
The Hammer in the candlestick chart is a signal mark for the beginning of an upwards price direction. You can immediately notice that within the context of a price chart that the Hammer represents a reversal point in a downwards trend to signal a reluctance of market traders to push any lower. The main body and shape of the Hammer is a thick and strong upper main body with a hanging lower and thinner shadow tail and indicates that the market close is higher than the market open.
The top and bottom of any candlestick represents the day’s trading range with the top representing the day’s high and the bottom representing the day’s low.
The Hammer distinctly shows the day’s close at the top upper end of the day’s trading range. Coupled together with a few elementary technical indicators such as RSI and MACD and simple 20 and 200 day MOVING AVERAGE, the Hammer represents an important change in market sentiment. The stubborn refusal of traders to dip any lower is a key point that must be noted for refusal to go lower means a change in perception of traders from negative outlook to positive outlook. The Hammer takes its name within context of the market attempting to reach and hammer out a bottom to establish a key reversal point.
Candlestick charts are used for day trading and longer term trading activity. Day trading professionals in the currency markets use 5 minutes charts over lay in tandem with day charts. However, once again I must be quick to point out that the use of forex trading platforms for day trading activity for smaller traders is ill-advised. The currency markets are the domain of the large professional traders who are paid to move money for commercial reasons as well as for larger investment reasons. The smaller trader who wishes to pursue a day time trading career is better off looking at the currency markets in terms of a position trade over a greater length of time using day charts as a point of reference, and always with the ability to hedge a position to minimize adverse whipsaw.
2. The Hanging Man -
The Hanging Man in the candlestick chart is a signal mark for the beginning of a downwards price direction.
The Hanging Man can be seen within context of a rising trend that suddenly stutters and stumbles and eventually falls. Preceding the Hanging Man is a rising trend of price action. However, the appearance of the Hanging Man with its lower thick body near the market close at the low of the day and an upward shadow tail, reminds us where the market high had been, and is a
key signal that the market is running out of steam.
Whilst the Hammer is a figure that is top heavy the Hanging Man is the opposite representing a bottom heavy figure. Together with a few other technical indicators like RSI, MACD and MOVING AVERGE, the Hanging Man can reveal a change in direction for a market reversal, or a sideways trading channel before a market reversal.
Candlestick charts epitomize the panoramic view of a market battlefield. But in seeking a clearer perspective from which to analyze the battle of opposing forces, such charts become much more useful in the longer run for those who are keen to position trade their entry and exit as in the longer run through daily and weekly charts. From a clear height a general can map his actions by judging the movement of opposing forces with keen insight into the overall market psychology and perception of market direction. But once in the thick and heat of the action, all perspective can be lost. Thus the field of vision is more suited for a longer term analysis of price direction than has a map marker for shorter term objectives.
In the coming weeks we shall analyze how the two key reversal figures act in the markets to signal changes in price direction. Part 3 to be continued.
Pieter Bergli - DeLoren Trust Holdings
Forex education lessons
Disclaimer - U.S. Government Required Disclaimer - Commodity Futures Trading Commission
Futures and Options trading involves risks of losses. No representation is being made that any reader and account will or is likely to achieve profits or losses similar to those that are being discussed on this blog http://forexeducationperspective.blogspot.com/. The past performance of any trading system or methodology discussed is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
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