The Ultimate Guide to the Best Forex Candlestick Patterns from freeamfva's blog

The Ultimate Guide to the Best Forex Candlestick Patterns

Both the hammer and the hanging man are probably the most basic, but at the same time, the most efficient candlestick patterns to trade Forex with if your goal is to jump in a trade when the market is about to reverse. That is why they belong to the category of one-candlestick reversal patterns. The hammer is the bullish pattern that appears at the bottom of the trend after a substantial price decline, whereas the hanging man is a bearish pattern that can be seen at the top of the uptrend. Both these patterns are tradable on any time frame higher than 15M.To get more news about Forex Tips, you can visit wikifx.com official website.
　　The ability to recognize and trade off these patterns is invaluable for any successful Forex trader because they hint at the probable top, or the probable bottom, of a trend and signal that traders should start looking for the most optimal exit or entry points.
The hammer pattern emerges when a currency price drop substantially lower than the opening price of the day, but then the buyers step in and drive the price back to the level near the day‘s open, thus forming the one-candlestick pattern with a large lower wick (shadow), a relatively small real body at the absence, or a very small, upper wick. The color of the real body doesn’t bear much significance - it can be red (black) at the bottom of the downtrend or green (white) at the top of an uptrend. Certainly, a green body of a candlestick that flags the possible trend reversal might look more reassuring, but in reality, there have been many strong uptrends that stemmed from the hammer with the red body.
　　It‘s important to know that the proper hammer pattern should have the lower wick at least twice as large as the candle’s real body; otherwise, that Forex candlestick pattern must be deemed as neutral. Also, remember that the real body of either a hammer or a hanging man must stay close or be within the upper (lower) price range.
　　When this formation appears, traders say that the market is hammering out, and the reversal could be in the making. But the real essence of this candlestick pattern is best described by its Japanese name, “takuri”, which can be roughly translated as “testing the depth of the water by trying to reach for the bottom with a leg,” which makes a lot of sense when you look at its structure.
　　The rule of thumb for using both these patterns is quite simple: the strength, or the reliability, of a hammer or a hanging man depends on the length of the lower wick, the size of the real body, and the presence of the absence of an upper wick and its size. The most meaningful patterns have a very long lower wick, small bodies, up to the point where they look like a dragonfly doji, and a very little or no upper wick.
　　There is another hint regarding this pattern that we‘d like to share with you: when the hanging man appears at the presumed top of the uptrend, don’t rush into selling your position because the market is still running on the bullish steam, especially if the price movement is supported by the increasing volume, and there is a good chance that it would eat up the hanging man and continue pushing northward. Instead, wait for the next session to see whether the Forex market opens lower than the previous day‘s close. If that’s the case and the price drops with a considerable gap, the viability of the hanging man increases dramatically, and you can consider going short on that particular Forex pair.
Shooting star and inverted hammer point at the exit/entry points
　　A shooting star and an inverted hammer are basically a hanging man and a hammer turned upside down that also act as the reversal patterns that emerge at the probable finale of a strong trending movement. The pattern is formed when the price of the particular Forex pair opens slightly above the close of the previous day, rallies strongly at first, but then gets pressurized by the sellers almost to the open of the trading session, thus forming the pattern with a long upper shadow, a small body, and little to no lower shadow. Please remember that the shooting star pattern can be considered as tradable only in trending markets, especially during powerful rallies, or at the top of the congestion zone. A shooting star and an inverted hammer in the ranging market has little to no significance with regard to forecasting the upcoming price movement.
　　An inverted hammer, on the other hand, appears at the potential bottom of a downtrend and indicates that the buyers are seizing the initiative, and the price action might start going in the opposite direction. Both these patterns indicate that the market participants couldnt sustain the rally or the downslide.
However, as with any other individual Forex candlestick pattern, it is highly advisable to exercise patience and wait until the market reacts during the following trading session, whether it‘s on an hourly or a daily time frame. If the price starts moving in the direction opposite to the trend, preferably with a gap at the session’s open, the probability of a full-fledged reversal increases substantially. Also, when trading the shooting star pattern, you can get the confirmation by means of momentum indicators, such as MACD or RSI, which come very handy when determining when the shift of power takes place within the market. If the shooting star pops up when RSI, for instance, is deep in the overbought area (above 80), consider going for a sell or entering a short position. Moreover, when there is a divergence shown by any of these indicators (a discrepancy between the direction of the price action and the movement of indicators moving averages), the shooting star pattern at the top of the price swing would constitute a mighty strong sell signal.
　　As for the inverted hammer, it has a similar confirmation scheme: the gap to the upside on the back of the growing bullish momentum and rising price, but here it‘s important to take into account the color of the real body and the time during which the price holds above the hammer’s body and within the upper wick - the shorter it is, the higher is the probability that the reversal will pan out.