Also know is the “Pin Bar”. The hammer and Hanging man look exactly alike but have completely different meanings. That again depends on the earlier Price Action. Both have small, cute little bodies (green or red), long lower shadows and no or almost none upper shadow.
A Hammer is a reverse signal at the end of a downwards trend. IT’s called a Hammer since the markets “Hammers” from the bottom. When the price is going down a hammer well give the signal that the jar is almost empty, the bottom is within sight and the price well likely go up again (the jar needs to be filled). The lower shadow gives us the information that the Bears have tried to lower the price even more but the Bulls were simply to strong and lift up the price a little over the opening level again. Call it survival mode. We all tend to be much stronger as soon as our live is at danger.
Just to be careful, once you’ve spotted your Hammer, don’t rush in to placing your buying order. You will need more Bullish information to decide the market will go up again. Use the Hammer as a warning or signal of a potential upwards trend reversal.
How to recognize a Hammer in the Japanese candlestick reversal pattern? It’s pretty simple to be honest. The long shadow is twice or three times as long as the candlesticks body. There is no or almost no upper shadow. The real body is at the upper side of the trading range. The color doesn’t really matter. However, a green body tends to be a stronger confirmation.
Want to know more about candlesticks/forex or do you want to join the forex group? The forex group is mainly English! Please contact me so that I can explain to you much more about what we have to offer. And all your questions can be verbs.
Price Action Candlesticks The history of the Forex candlestick takes us back to Japan, pretty interesting right? Candlestick charts go back as long as 500 years from now. Used by Japenese traders to analyze the price on the rice market. Off course techniques have developed and evolved and candlestick was used by lots of other traders around the world. Now you know how and where the important candlestick was born.
Price Action Candlesticks
The western approval of the Japanese candlestick charts was just 25 years ago. Step by step it gained popularity in the trading community of the USA. It wasn’t as well known before because people thought it was hard and complex to master the Japanese candlestick technique.
Candlesticks are the most pure form of Price Action that give us a visible view what’s happening in the market. Signals at a candle chart are exactly the same as on a bar graph. However, candle charts tend to be more trustworthy and are more visual.
Candlestick pattern is a repetitive returning formation of the price that suggests future prices. They will canalize your thinking process of the market as well.
Patterns in this lesson show us how traders acted earlier and what were there believes in that moment at that specific time frame?
Normally candlestick traders talk in the “Candle slang”. Candlesticks form the basics of your thinking process and trading decisions.
Identify Candlestick Patterns
It’s important to point out that attempts to identify candlestick patterns without trend, Support and Resistance are completely useless. There are more than 50 candlestick patterns for Bullish and Bearish.
Some traders remember all the names. This is not necessary since every candle is telling a different and unique story that will give you new information to think about.
By observing charts it’s important to ask yourself questions that can be used to back up your recent opinion.
For example: Once the recent candle has a solid form, what does this mean for you? Does it confirm or go against your previous thoughts of the candlesticks?
Tips for Forex Analysis – Get Forex Trading Education
Forex Analysis checklist
1. Monthly main range (no more than 1000 PIPS). Measuring the range with the arrow tool. – Firstly add horizontal lines on the arrows. – Secondly add the thin rectangular strip on all key levels. – Add labels: “Monthly Key Support”
2. Step up to the weekly time frame. -Firstly use the Fibonacci tool: Click from the resistance (above) to support (bottom). – Secondly draw a horizontal line at the 50% (0.5) level. (Remove the Fib afterwards) – Do all three monthly series, leaving the weekly main levels as they are (no horizontal strip) -Label the weekly mid-range levels. For example: “Weekly mid-range Resistance 0,96 **” – Check the MA position (crossed up, cruised down / Bullish, bearish) and label.
3. Now step to the daily time frame. To draw keylevels with only the rectangular strip. Remember to use the 4-hour chart in line with the daily chart to do this.- Use a thin horizontal strip for the Daily / 4 hour key levels. – When it helps you, change the color. – If no key level can be seen, do not force it, stay at the week and monthly till the price action shows a key level. – Check the MA position (crossed up, cruised down / Bullish, bearish) label (weekly and daily) .
4. Mark the higher highs / lows higher (if in uptrend) or lower highs / lows lower (if in down trend) on the daily / 4uurs time frame. – Always think ahead when a new higher high / lower low can be expected.
5. Apply trend lines on the chart for assistance and to obtain a clearer picture which way the trend of the market will go. – Daily and weekly lines broadly assist in the general direction.Be aware of the 3rd trend line touch / bounce + trend line break rules (weekly and daily) 4 hourly + 2 hourly chart is for the application of the counter-trend lines.Add it if possible, once you have an idea of the general trend direction (Bullish or Bearish). Trading breakouts in the direction of the trend (MA crossover and breakout should work together).
6. Draw the Fibonacci on the chart. – Weekly + daily Fibonacci act as a guide for what direction the trend is going.Do not worry if you missed the C- Retracement; Use the D-extension targets as a potential directional bias. – 4 hourly + 2 hourly Fibonacci is very good for entry positions. Additional confidence is given as D-extension levels overlap any key level monthly / weekly as an extra confluence. – Trade thee Fibonacci with inside bars / counter trend line breaks + MA crossovers. Remember that 78,6% fib functions as a Stop-loss level (Not at the daily / weekly). – Improvise a closed line, up or below the 78,6% that can make the A, B, C, D move invalid.
7: An important entry strategy is the inside candle setup. IMPORTANT: double check your currency pairs, read the candlesticks and make use of all of the rules mentioned above to get the overall market direction / bias. – Look for inside candles to help with an entry point if there is already a trend direction.Maybe they break the two setups in your currency pairs. – Daily / 4 Hourly inside bars provide the most reliability.- According to the rules you should highlight the inside candle, step to the next period, waiting for MA crossover then you enter your trade on the final candle.
Forex Analysis / Tips:
– Don’t forget to place your Stop-loss at the daily and 4H chart at the HH-LL-HL-LH marks. – Not over two trades at once. – Keep track of your daily trade notebook and be honest with yourself. – Think in terms of percentages and PIPs. – Always save your work and stay organised.
Technical chart analysis is the multiple patterns the chart shows and all forms of price action. Also the overall analysis and the movement of the market over a certain time period. A soon you’ve learned to master the price action and how to determine the price action. You are ready to make a benefit of certain movements in the market.
Price Action is making the most of your trading decisions on a clean chart. Free of indicators and influences from the past. You could add the moving average for some extra help.
Since Price Action reflects al variables of a certain market over a certain period with the help of price indicators as Stochastic or MACD. You won’t need all the other indicators since they simply just distract you. Only information you need to make a winning strategy is the raw movement of the market.
Fundamentals of Price Action Strategy
As told before, economic variables will move the market as well. Think of what I told you about fundamentals. Movements like this are clearly recognizable. Just for the fun of it you should look up the chart of GBP/USD. Around the Brexit Referendum, you will see a clear drop in the value of the GBP.
Price action analysis make use of the overall cure price data. That’s why this strategy could be used on every trade at the financial market. Before starting Price Action strategy make sure you start with a clean sheet. Remove all other distracting indicators in the past.
Price action strategy
There is a big difference between charts with indicators and charts without. Example underneath will show you the difference. Take a look at both charts and tell me which one looks easier to analyze? Also charts with lots of indicators won’t give you more information. They only give you distracting information from the past that you really don’t want to know.
One of the most common chart patterns in Forex Trading is the Double Top/Bottom. This pattern is such a regular customer in the charts that it’s an easy manner of proof to show the Price Action isn’t as wild as many think. The Double Top/Bottom in special represent the re-testing of the highs and lows or better said the Support and Resistance.
-The double top:
Double Tops are mostly found during an uptrend, at the level where new highs are formed. Often followed by a pullback and retest of that same high. When the retest of the first high doesn’t succeed to reach over the price of the first high. So, the price bounces at the Resistance level. Mostly the letter “M” will be formed at the chart. The second high doesn’t have to be exact under the first high, but has to close to the same level. This pattern mostly indicates a weakened trend. The buyers will lose some ground like shown underneath.
After a confirmation signal for a short trade from the Double Top formation, the neck is used as a target. Always stay up to date on as well to confirm your decision.
A Double Top indicates a “Sell” opportunity
by showing us the price is struggling to break through the roof (Resistance level). The market will go up twice towards that important Resistance level and twice it shows a clear Bearish candlestick formation after. After the first rejection of the key Resistance level, the price will tend to go further down to create the neck. The price will go up for the second time and test out the same Resistance level that is marked as the blue bar underneath. Double Tops are good opportunities for a reverse on the weekly and monthly levels of Resistance. Also on the daily and H4.
-The double bottom:
A Double Bottom is the opposite Double Top. As said before, a lot of patterns and formations can be mirrored. The Double Bottom mostly occurs during a downtrend and is a reverse signal telling is the trend could go up. Easy to spot on the charts since it looks like the letter “W”. The initial downwards movement will find a Support at the bottom and will stew the Price Action of the Support towards a new formed high (he middle of the “W”). Another “Sell” wave happens and touches the same Support level as the first did. And so, lead to another increase of the price. This all is confirmed when the price breaks through the higher Resistance level. Take look at the chart underneath and you will understand.
These are the most fundamental patterns of Double Tops/Bottoms that can be found at the charts. As you can see, the Support and Resistance levels are extremely important. Especially when trying to recognize patterns and formations. Make sure your charts are clean as well. You don’t want to many distractors. Let’s move towards more advanced Price Action setups with Double Tops and Bottoms surrounded.
The second rejection confirms the Double Bottom formation: Ideal moment to buy or even exit when you’ve been in the “sell”/short action.
Double top and double bottom variations:
There are multiple Double Top and Bottom variations possible in the market. The Double Top/Bottom could be seen as a reverse of trend but also as a move of correction towards the ongoing trend as shown below.
Traditional DoubleTops / Bottoms:
Tend to have a bigger chance to break out counter trend wise.
Correctional DoubleTops / Bottoms:
Tend to move on with the ongoing trend. Especially when at the 50% or 61,8% FIB Retracement level (more on that topic later).
Overbalanced DoubleTops/ Bottoms:
The correction for this Double Top/Bottom is bigger than the previous correction and so has more potential to reverse counter trend wise.
Running DoubleTops / Bottoms:
These formations will eventually come to a new high or low when a reverse with the ongoing trend occurs. Especially if the Support and Resistance levels are at in the 50% of 61,8% FIB Retracement area.
DoubleTop and DoubleBottom breakout patterns (rectangles and wigs):
The Double Bottom reversal and breakout trade:
Mostly when the market has reversed and a Double Bottom appears, you have a change to buy at the first correction. Another chance occurs when the upwards going Price Action movement is more realistic.
Price Action moves all time and no movement is the same. The following patterns are most common at the charts. Let’s learn how to look at them and how to use and combine their specific rules with other aspects of our technical analysis.
The Head and Shoulders Pattern and Techniques:
This head and shoulders patterns shown is a signal that indicates a certain pair is a setup to go down and repeat the same pattern. Mostly seen at the highest point of an upwards trend. Off course there is a second version as with a lot of techniques and patterns. Since we have to see the market as a big mirror. Everything that happens on the upside can occur on the downside as well. The second version is known as the head and shoulder bottom or reversed head and shoulders. The reverse head and shoulders patterns are simply the opposite the normal head and shoulders pattern and indicate a certain pair will move up and repeat the same pattern. Both times, the head and shoulders suggest a reverse meaning the pair will move against the ongoing trend.
Both of the head and shoulder patterns have a likewise construction. Four compounds will make the head and shoulder pattern complete: Two shoulders, a head, and a neck. The pattern confirms a trade setup at the beginning of the neck/trend line, after the second shoulder has been formed. For example A period of consecutive upwards highs and retracements is seen as an uptrend, while a downtrend consists of consecutive lower peaks and pullbacks. The head and shoulder pattern illustrates the weakness of a certain trend.
Head and shoulders above:
– This pattern consists of four consecutive steps completing themselves to signalize the reverse.
– Left shoulder is formed when a pair reaches a new high and retraces to a new low.
– The head is formed when a pair reaches a new higher high and falls back around the level of the low formed at the left shoulder.
– Right shoulder is formed with a high a little lower than the high formed at the head. And again followed by fall back around the same low formed at the left shoulder.
– The Price breaks the neck/trend line. In other words the price drops under the Support and flows towards the level of the three lowest points before breaking through the head and left shoulder.
Head and shoulders bottom (Revearsed head and shoulders):
The reverse head and shoulder pattern is the exact opposite of the head and shoulder top, because it indicates the pair is setup to make an upwards move.
– Left shoulder is formed when a pair reaches a new low and pull back to a new high.
– The head is formed when a pair reaches a low that is lower than the low of the left shoulder and will pull back to the level of the around the latest high. This step towards the past high will create the neck for this pattern.
– The right shoulder is formed by a typical sell-off and is less bad as the low of the head. Followed by a pullback to the neck.
– The pair breaks above the neck/ trend line. The pattern is completed when the price above the neck breaks and creates an uptrend.
After the fourth step, when the neck is broken. The pair will most certainly move towards a new direction. It is that specific point that traders use to step in and open up a position.
The head and shoulders patterns are formed by three characteristics and can be spotted at multiple time frames. This setup achieves best results at the daily and H4 charts.
How to spot a head and shoulders formation:
Left shoulder: Going on trend has to be Bullish, with a price anticipating on the next movement at an important Resistance level. The Price action is often a bearish candlestick, as a catalyst for a deep pullback.
Head: Next wave will keep on going up till it reaches a new high before it forms a Bearish reversal. This peak is the highest point of this pattern.
Right shoulder: At the end, the price will move up a bit again. However, this time i won’t get higher as the head (past high).
What to do when Head and Shoulders occur?:
Once we’ve concluded the head and shoulder patterns is at the “neck” phase it’s now possible to predict a Bearish break out.
Reversed Head and shoulders:
The last shown pattern can also occur in a reverse aspect. Same rules are applied and it doesn’t matter if the state of the market is Bullish or Bearish. As long as you see the pattern and wait till the neck is broken to step in your good.
Once you’ve decided to setup a long term position, your Stop-loss has to be placed around the level of the right shoulder. Just like you’ve calculated the target level on the head and shoulder pattern, you should now measure the distance between the low of the head and neck. Don’t forget to duplicate it in the breakout point.
Underneath a clear example of the reverse head and shoulder formation.
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