As described in previous materials, candlestick formations are the way the market portrays its emotions. In this presentation I would like to present the most significant of such formations and how they can be interpreted by investors to undertake decisions on the market.
• Hammer
- What are the characteristics of the hammer formation?
+ Formation is made up of one candlestick.
+ Small upper body with long bottom shadow. The body should not represent more than 1/3 of the entire formation. Little or no upper shadow.
+ The color of the body makes no difference.
+ Appears on bottoms and signals trend reversal.
The long bottom shadow depicts the power of the bulls who are not willing to fall beneath a certain market level. What this means is that the low of the hammer formation could be a significant support level.
• Shooting Star
- What are the characteristics of the shooting star formation?
+ Formation is made up of one candlestick.
+ Small bottom body with long upper shadow. The body should not represent more than 1/3 of the entire formation. Little or no bottom shadow.
+ The color of the body makes no difference.
+ Appears on tops and signals trend reversal.
The long upper shadow depicts the power of the bears who are not willing to rise above a certain market level. What this means is that the high of the shooting star formation could be a significant resistance level.
Examples:
On this EURUSD chart we can see many hammer or shooting star formations. Some of them were followed by a trend reversal (pink rectangles), whilst others were not (yellow rectangles). What you have to keep in mind is that all the characteristics should be remembered, especially the information about where these formations should be forged, and secondly and most importantly investors should keep in mind that candlestick formations should not be the only source of information when making decisions on the market. They should be treated only as confirmation to our analysis. Therefore, if with accordance to our analysis we are awaiting a trend change at some level a candlestick formation will be a confirmation to that. Personally, I believe transactions should seldom be opened without confirmation from candlestick formations. Candlestick formations are also a very good source of information to where a stop loss could be assigned. This matter will be discussed in further materials.
Omar Arnaout
X-Trade Brokers Dom Maklerski S.A.
Omar.arnaout@xtb.com