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The Japanese candlesticks strategy has a relatively young history among Western traders, but its historical roots belong to an ancient past made of art and commercial trading techniques among Japanese merchants.
The forex market is the market par excellence when thinking of trading. It is open 24 hours a day from Monday to Friday with very wide liquidity and, above all, the same rules worldwide.
Japanese candles allow the trader to get not only an excellent visibility and graphic immediacy of the price trend, but also an identical use on different time frames.
Of course, the analysis time frame can range from 5 minutes to one month, but the choice of the optimal time frame depends on the sensitivity and especially on the adopted trading strategy (scalping, daily, etc…). Long-term investors will choose long time frames, scalpers will prefer 5 or 10 minutes candles.
Let's now see some of the most popular price patterns in the world of Japanese candlesticks. The hammer and the shooting star are the first choices all over the world.
Both candles have the same shape with small bodies (white or black); these bodies must be close to the top of the session or very close to it with very long lower tails (ideally three times the height of the body). Since both candles have the same shape but with different coloured bodies, the hammer is recorded close to a bottom, the hanging man close to a top. While the market strength signal that is close to the top on the hammer is remarkable, the hanging man needs a confirmation as the market has proved not to abandon the trend.
Above all, for the hanging man, the trader will have to wait for a closure below the low of the figure before taking a bearish position. The figure known as shooting star can be found close to the top, and it is nothing but an inverted hammer.
The shooting star, unlike the hammer, shows a long upper tail and its small body is close to the low of the session. The bodies of the shooting stars can be white or black. A shooting star represents the battle that grows on the market between bulls and bears. A top during the session far away from the opening, but a closure below the entry level is a clear signal of who is the market leader. If the next day the underlying cross falls below the bottom of the shooting star, that is the signal that the forex operator was waiting for to enter the market.
As always, something that really happened on the market can help to better understand the concept. Let’s take the EurAud cross and see what happened in August 2015. A large rise of EurAud with a long white candle was followed by a hanging man figure. Since that moment, EurAud started its bear market.
Another chart, another example. This time we look at UsdCad and a double hammer at the end of the correction in September 2015 that triggers the action of UsdCad. The end of the rise is announced by a shooting star whose shadow is only marginally overcome before the launch of a heavy bear market.