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Key Candlesticks in Forex Trading
- By Business World
- Published June 28th, 2010
- MoneyWorld
- Unrated
TODAY I am tempted to look at some key candlesticks in forex trading. As the old Chinese proverb goes……….”the tree that must tower above its peers must first take its roots deep down the earth”. This Chinese proverb underscores the importance of having a good understanding of candlesticks and candlestick patterns in order to do well in forex trading.
Last week, a lot of key candlestick and patterns played out in the FX market and I feel it will be timely to look at a few of these candlesticks this week.
The first we are going to look at is the Hanging Man formation.
A Hanging Man formation is a candlestick which has the shape of a crucifix (cross) or a hammer with a small upper thread or wick. It is of immense significance when it forms at the top of a rally (uptrend).
The top of the uptrend may not be the top of the uptrend unless you have enough experience and training to find out if the bullish momentum has faded….and the way to go about this is to deploy your indicators to check if the market is overbought and/or to ascertain if the momentum is waning. The way I go about this is to deploy the RSI and I am encouraged to sell into the rally ONLY if the RSI marker lifts clearly above the overbought line…..herein lies the snares that leads to “abandoned babies syndrome”. Naïve traders jump into the fray when the RSI barely touches the overbought line and what happens in such scenario usually is that the market forms a cycle low and the rally continues and then the naïve trader begins to ask what went wrong.
A Hanging Man formation hold in all time frames, provided it is not an isolated signal although the longer the timeframe, the more reliable. For instance, a Hanging Man in a daily chart is likely to be a stronger signal compared to that on a 4 hourly chart. A Hanging Man in a 4hourly chart will of course hold more water than that in a 1hourly chart etc. In the above 15min USD/JPY chart I pick from my archives, you will notice that the market did an extended rally and a Hanging Man was formed at the top of the uptrend and the RSI indicates that the market was overbought and then the market turned south over 40pips.
A bullish engulfing at the bottom of the downtrend took the market on another rally of about 35pips and then you have a Hanging Man there- but the RSI is barely touching the overbought….the temptation will be strong to sell but if you are experienced, you will stay in the sidelines and watch….oh my God it was a cycle low in formation and the market continued its rally for a further 35pips before the momentum faded as evidenced by the formation of a Hanging Man and the RSI indicating that the market is overbought.
This is another point of entry and the market did almost 50pips slide. And you will probably have been home and dry with 90pips if you noticed this currency pair on this particular day.
Until we meet here next week, keep trading profitably!
Dr Ima is an alumnus of the Market Traders’ Institute (MTI) Dubai, a legendary FX Trader and a former Roundtable Chairman of The Pretigious MoneyMaker Group (MMG). He is listed inthe FXCast Traders’ Hall of Fame. He is accessible at www.ephrathahwealth.com & ephrathahwnltd@yahoo.com
Last week, a lot of key candlestick and patterns played out in the FX market and I feel it will be timely to look at a few of these candlesticks this week.
The first we are going to look at is the Hanging Man formation.
A Hanging Man formation is a candlestick which has the shape of a crucifix (cross) or a hammer with a small upper thread or wick. It is of immense significance when it forms at the top of a rally (uptrend).
The top of the uptrend may not be the top of the uptrend unless you have enough experience and training to find out if the bullish momentum has faded….and the way to go about this is to deploy your indicators to check if the market is overbought and/or to ascertain if the momentum is waning. The way I go about this is to deploy the RSI and I am encouraged to sell into the rally ONLY if the RSI marker lifts clearly above the overbought line…..herein lies the snares that leads to “abandoned babies syndrome”. Naïve traders jump into the fray when the RSI barely touches the overbought line and what happens in such scenario usually is that the market forms a cycle low and the rally continues and then the naïve trader begins to ask what went wrong.
A Hanging Man formation hold in all time frames, provided it is not an isolated signal although the longer the timeframe, the more reliable. For instance, a Hanging Man in a daily chart is likely to be a stronger signal compared to that on a 4 hourly chart. A Hanging Man in a 4hourly chart will of course hold more water than that in a 1hourly chart etc. In the above 15min USD/JPY chart I pick from my archives, you will notice that the market did an extended rally and a Hanging Man was formed at the top of the uptrend and the RSI indicates that the market was overbought and then the market turned south over 40pips.
A bullish engulfing at the bottom of the downtrend took the market on another rally of about 35pips and then you have a Hanging Man there- but the RSI is barely touching the overbought….the temptation will be strong to sell but if you are experienced, you will stay in the sidelines and watch….oh my God it was a cycle low in formation and the market continued its rally for a further 35pips before the momentum faded as evidenced by the formation of a Hanging Man and the RSI indicating that the market is overbought.
This is another point of entry and the market did almost 50pips slide. And you will probably have been home and dry with 90pips if you noticed this currency pair on this particular day.
Until we meet here next week, keep trading profitably!
Dr Ima is an alumnus of the Market Traders’ Institute (MTI) Dubai, a legendary FX Trader and a former Roundtable Chairman of The Pretigious MoneyMaker Group (MMG). He is listed inthe FXCast Traders’ Hall of Fame. He is accessible at www.ephrathahwealth.com & ephrathahwnltd@yahoo.com
