Using Technical Analysis to Approach the Forex Market II

By Bob1000pipbuilder | May 04, 2020 Using Technical Analysis to Approach the Forex Market II

In our previous post, we discussed basic candlestick patterns. By now, you should be able to identify them, the Spinning Tops, Marubozu, and Doji if you see them in charts. Beyond identification, you should also be able to discern what each means so that you can take smart decisions with them in the course of your trading.

Our discussion of candlestick patterns is not yet done. In fact, we have just started. And here, we will continue with the single types of them.

Single Candlestick Patterns
So named because they are composed of single candlesticks, single candlestick patterns are Japanese candlestick formations that help to predict market reversals. They are especially useful in that they take what you can do with charts to a higher level than the basic types. They can be traded independently and are of two types, each with a bullish and a bearish form:

–  Hammer (bullish) and Hanging Man (bearish)
–  Inverted Hammer (bullish) and Shooting Star (bearish)

In fact, those single candlestick patterns are so grouped together because they look alike.

Hammer and Hanging Man
Generally, both the hammer and the hanging man have the most important structural features in common, which are small bodies, short or absent upper shadows, and long lower shadows. As a result, there are only two effective ways by which you can differentiate them. First is via their colour. While the hammer should be expected to be either white or green, the hanging man, on the other hand, is either black or red.

©BabyPips

The former is a bullish reversal pattern and so is found at the beginning of a bullish run. Hence, it is formed at the end of a downtrend when sellers have pushed the price so low that buyers are beginning to take over again. The hanging man, on the other hand, is a bearish reversal pattern. It indicates the potential end of an uptrend, due to increasing selling pressure.

Thus, the formation of a hammer in a downtrend could be a good time to buy. Conversely, when a hanging man is formed, it could be a good time to sell. However, do not rush. Wait for more confirmatory signs before you act. For example, after the formation of a hammer, you should wait for the next candlestick to open higher before you buy. And for a hanging man, wait for the price to fall further before you sell.

Summary: Both the hammer and the hanging man have small bodies, short or absent upper shadows, and long lower shadows. However, that is as far as their similarities go. The hammer is a bullish reversal pattern formed during a downtrend to mark a strong support level. On the other hand, the hanging man is a bearish reversal pattern formed during an uptrend to indicate a strong resistance level.

Using Hammer and Hanging Man
So, how exactly do you use the hammer and the hanging man in your trading? Here is a step-by-step guide:

–  Both the hammer and the hanging man have small bodies, short or absent upper shadows, and long lower shadows Identify them.
–  If it is a downtrend, check for a hammer. If it is an uptrend, check for a hanging man.

©BabyPips.

–  If it is a hammer, wait for the next candlestick to close higher than the open. If it is a hanging man, wait for the next candlestick to open lower than its close.
–  For the former, buy. For the latter, sell.

Inverted Hammer and Shooting Star
The inverted hammer and the shooting star are structurally similar, too. They both have small bodies, short or absent lower shadows and long upper shadows. Hence, they are differentiated only based on their colour and where they are found. The inverted hammer is either white or green while the shooting star is either black or red. That said, both suggest potential reversals in price.

©BabyPips.

The inverted hammer is found at the end of a downtrend. Hence, it is a bullish reversal candlestick that is formed when sellers are losing steam and buyers are beginning to be in charge. On the other hand, the shooting star is formed at the end of an uptrend. It is a bearish reversal candlestick pattern that indicates when sellers are beginning to overpower buyers.

Hence, the formation of an inverted hammer in a downtrend often signifies that the end of the trend is nigh. As a result, it could be a good time to buy. The shooting star, on the other hand, is formed when an uptrend is beginning to wane and so, could be a good time sell. However, just like we advised for the use of both the hammer and the hanging man, never be in a haste. Always confirm the direction of the trend before you act.

Using Inverted Hammer and Shooting Star
Never be confused. Using the inverted hammer and the shooting star in your trading is easy. You can adopt the following steps:
–  Both the inverted hammer and the shooting star have small bodies, short or absent lower bodies, and long upper shadows.
–  On a downtrend, check for an inverted hammer. On an uptrend, check for a shooting star.

©BabyPips.

–  If it is an inverted hammer, wait for the next candlestick to open higher than its close. If it is a shooting star, wait for the next candlestick to open lower than its close.
–  For the former, buy. For the latter, sell.

Summary: Both the inverted hammer and the shooting star have little bodies, short or absent lower shadows, and long upper shadows. An inverted hammer has a white or green body and is formed during a downtrend. Hence, it is a bullish reversal candlestick pattern that marks a support level. On the other hand, a shooting star, whose body is either black or red, is formed at the end of an uptrend to indicate a level of resistance.

There you have them, the single candlestick patterns. If you enjoyed this article, start putting what you have learned to practice with our reliable, independently-verified signals. You can subscribe for them here. They are your ticket to Forex trading success.