Having reviewed the basic shape of the Japanese candlestick concept of the Hanging Man and the Hammer let us now turn to a recent demonstration for the visualization of the concept of market reversal in a daily Forex chart.
For reference please look at the EUR/ USD daily chart below where market reversal can be portrayed.
On the 15th October 2014 the EUR/USD posted an ominous dark shaded upper body succeeding the preceding day heavy volume positive trading results. The first week of October saw the EUR/USD make an indication that the market was oversold given the 4 preceding months where the EUR/USD fell from the 1.38 range.
Markets do not move in a single direction forever. The result was a pullback on the shorts and profit taking by the large specs in the market. This gave a change for the longs to enter into the market and push the receding shorts back. However the Forex markets thrives on news and no meaningful outflow of positive news for the EUR saw the longs waiver. although large volume trade preceded the appearance of the Hanging Man the market was simply out of favorable EUR views hence the appearance of the warning signal on the next day with large volume shorts entering the market on the 15th October.
The 3 critical days range ran as follows
14th - H. 1.28870 L. 1.26245 with the open at the low of the day
15th - H. 1.28448 L. 1.27057 a narrow inside day trading range with Hanging Man appearing.
16th - H. 1.28367 L. 1.27486 a partial Japanese Shooting star failed attempt at pushing the market back up.
Notice that the 14th and 15th heavy volume of longs and then shorts set the tone for the failed upwards push on the 16th and the eventual collapse and retreat of the longs in the market.
As a result, the Hanging Man pushes the market down to a brief pause at 1.26313 on the 28th October, and then 1.23801 on the 5th November where the market settled until its recent fall last week to the 1.21 range.
For the purposes of the small time trader, given the demonstration of short pressure on the EUR/USD, a short future on the 17th October, with hedging of an at-the-money call option would have generated a strategic short trade to the 1.22 at the close of the year. The purposes of using the call option would be to add cover and allow the option to expire worthless whilst the gains in the short would carry the trade to a net gain. The whole idea of hedging with options is to minimize losses in the event of a pullback. Currency options mechanics will be discussed at a later date and their usefulness cannot be understated in assisting strategically placed trades to reach their target goals.
The trading of spot fx and futures can be risky to the trader that does no full understand how to take a position in the market and suitably hedge himself to reach a pre-dermined target.
To be continued...
Further recommended readings -
http://forexeducationperspective.blogspot.com/2014/12/article-markets-and-battlefields-2.html
Pieter Bergli - DeLoren Trust Holdings
School for Forex Education for free
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