The reason I have chosen this chart, is not because it is a currency pair I trade regularly, but simply because it has two excellent examples of a reversal that we can benefit from, provided we are paying attention and understand these classic candles. If we start with the top reversal at 78.50 on the 7th January 2009, following two wide spread up bars, we have a strong signal that prices are about to reverse with a shooting star, a candle with a small body and a long upper shadow or wick as in this case. This is the first signal that the move upwards has run out of steam. The bulls are in control initially and prices rise quickly, but gradually the bears begin to take charge, and bring pressure to bear in the market forcing prices back lower to close at or near the opening price. This is followed the day after by a wide spread down bar which confirms that we now have weakness in the market and therefore provides us with a possibility opportunity to short the market. Whilst one never trades one candle on it’s own, or indeed without the confirmation of Western Indicators, this is a classic candle that you can see in all markets in all time frames, and is one I trade more than any other. I will refer to this many, many, times as it is key to your success. Whilst Japanese candlesticks are a fantastic trading tool, you simply cannot use them in isolation, but have to be read with Western indicators which them confirm the signal. Whichever indicators you use, please remember this point, as it is key to the success of your charting skills. Personally I use simple moving averages, support and resistance, and trend lines.
To be honest, if you simply learnt how to trade using this one candle alone, you would probably make more money with this than any other. You do of course have to be patient and wait, but when they do arrive, they are one of the best candles I know, for being the first signal to a reversal and for us to make money. Now the other reason for showing you this chart is that this signal is then followed by another classic, the hammer, so called as the Japanese believe it is hammering out a bottom which we can see on the 23rd January 2009. This is identical to the shooting star, but in reverse. In this case it is the bears who have early control of the market, forcing prices lower, only for the bulls to take charge later, forcing prices to rise from the day’s low, leaving a candle with a small body and deep lower shadow or wick. Clearly the bulls have won the day, but will this continue? We do ofcourse have to wait and se, but this is the first sign that we are possibly looking at a reversal of prices in the daily chart, and to therefore pay attention. So there you have it – two great candles, the shooting star, and the hammer, both in the same chart and both indicting possible turning points for us to make money in our trading.