Candlestick patterns are an Asian favourite for technical currency trading. Many Japanese traders tend towards the technical side of trading than fundamentals according to research. Being in Australia you may be influenced by this concept of various charted signals and indicators. If you are you need to understand first what candlestick patterns are and then the different varieties. This particular article will look at hammers and shooting stars. It is a methodology you might like as an Australian trader who prefers technical data to fundamental data.
Defining Candlesticks in Currency Trading
Candlesticks are bar charts instead of line graphs. They are named because of the “wicks” the bar chart has. On each bar there is a top and a bottom wick. The size of the candle in between these two wicks is determined by several factors all to do with currency trading circumstances for the day. For instance you have a filled and non-filled bar, where one means the open and close was different for the day and the other means it was not.
Hammer and shooting stars are a type of candlestick pattern you might see on a chart. Candlestick charts are usually a month or two months in terms of time so that you can see the patterns and indicators being discussed. You could see more than hammers and shooting stars in the chart. In fact you might see a spinning top and a few dojis. The very reason that a chart can have more than one indicator is why you should understand each one to read currency trading with more accuracy.
Currency Trading with Hammers and Stars
Hammers and shooting stars are a single candle formation, where a reversal is indicated. Hammers are going to appear on a decline meaning a decline has been occurring in the currency pair, but then a hammer occurs. This hammer signals a reversal is going to happen for the trend. You will see a hammer because it looks like a longer lower tail with the body of the candlestick up towards the top. It can resemble a five pound hammer.
The shooting star is the reverse of the hammer in which the upper tail is longer with the smaller body at the other end. As with the opposite look, you have an opposite meaning in currency trading. A shooting star means the uptrend is going to reverse into a downtrend.
The colour of the candle body may be light or dark. It does not matter so much as what the overall formation looks like. You should consider hammers and shooting stars as a signal to exit the market position you hold. If you do not hold a position in currency trading, you can use these two indicators to enter the market. Since the direction is meant to reverse you would take up the reverse position and find a profit. You do not want to get stuck in a fake break out or reversal in which profit is taken but the main trend continues. You have to be careful when reading charts to keep abreast of the news that could continue a trend or end it.