Trading the Bullish Hammer Candle

Interpreting Japanese candlesticks can give a trader important insight into market momentum. By understanding how to read candles, traders can often include them in their analysis to find areas of price continuations and possible reversals. Today we will focus on one candle that can help validate a charts reversal point. Let’s learn to identify and trade the bullish hammer candle.

What is a bullish hammer?

A bullish hammer differs from other candle patterns as it is a single candle hinting at a turn during an established downtrend. Pictured above the hammer is interpreted by understanding a candles particular open, low high and close levels. To create a hammer price must first significantly sell off to create a new low for a currency pair. However, after this decline, prices must significantly rally causing prices to have a small body and close near its opening price. It should be noted that hammers should have long wicks at least twice the length of the candle body. As well, the candle itself can either be red or blue depending on the strength of the reversal.

Often the bullish hammer is confused with a bearish hanging man candle. The misrepresentation is logical because both candles look identical! The difference between these two candles lies in their placement in a trending market. The hanging man has a small body and lock wick but is found hanging at the conclusion of an uptrend. Bullish hammers have small bodies and long wicks also, but are only seen at the end of a downtrend.

 

Uses in Trading

Bullish hammer candles can be found on a variety of charts and time frames. Depicted above is an example of the hammer on the AUDUSD daily chart. From February the 29th through June 1st the AUDUSD rallied as much as 1276 pips. This downtrend was concluded with a bullish hammer candle, and price has subsequently rallied a total of 1033 through today’s price action.

As the strength of a hammer depends on its placement on the graph, normally traders use this candle in conjuncture with other indications of price support. This includes using tools such as fib lines, pivot points and psychological whole numbers. In an ideal scenario, the wick of the hammer will penetrate a support level but the body will close above support on renewed buying sentiment. With a new buying opportunity presented, traders may then choose to place stops under the created wick below support.

How to Read a Moving Average

Technical traders are confronted with many choices when it comes to which indicators to use in their trading. More often than not Forex traders, at one point in their career, turn to Moving Averages (MVA’s) for finding market trends and momentum. Surprisingly after learning to analyze MVA’s, traders often find they are able to quickly identify different types of price action they could not pinpoint before without technical indicators on their charts. 

Using Moving Averages can help give a trader an advantage when planning a trading strategy. So let’s get started learning about how to read moving averages.

How to Read Moving Averages

The image above represents some of the more commonly used Moving Averages including a 30 (Green), 50 (Black), and 200 (Red) period MVA. These indicators are technical tools that simply measure the average price or exchange rate of a currency pair over a specified period of time. If we are looking specifically at a 200 period moving average the indicator is adding the closing price of the last 200 candles on the graph. Then that total is divided by 200 to pinpoint where the indicator is plotted on the graph. 

Because Moving Averages represent an average closing price over a selected period of time, they do have the ability to filter out excess market noise. For example, we can see on the EURUSD chart below that price is under the 200-period MVA. Since price is trading above this Moving Average traders may prefer opportunities to buy while avoiding selling opportunities. The same can be true for smaller period Moving Averages as well. As price crosses either above or below these plotted levels on the graph it can be interpreted as either strength or weakness for a specific currency pair.

Moving Average Crossovers

Some traders may choose to use more than one Moving Average as depicted in our primary graph. When using a series of moving averages traders can employ a crossover trading strategy. These traders will choose a series of averages and view the trend as down when the shorter period (faster) moving average is residing below the longer period (slower) moving average. This method of using more than one indicator can be extremely useful in trending markets and is similar to using the MACD oscillator.

 

It should be noted that Moving Averages will move sideways in a ranging market. In these conditions moving averages will begin to bunch together as no new pricing highs or lows are created and lose their effectiveness. In the event of this occurring traders should consider another indicator based off of prevailing market conditions.

How to Trade a Bearish Flag Pattern

Technical analysis allows for the study of a variety of different trading patterns to assist traders timing their entries and exits. One of the most useful patterns in a trending market environment is used to spot continuations in price. Today we will look at identifying and trading the bear flag pattern in an established down trend.

Identifying the Pattern

Identifying a bear flag can be easy once you know what you’re looking for. The pattern itself is divided into three parts. First we need to find the flag pole which will be identified as our initial decline. This decline can be steep or slowly sloping and will establish the basis for our trend. Next we have the flag itself. This is identified as a period of consolidation after the completion of prices initial decline. During this period, prices may slowly channel upward and retrace a portion of the initial move. At this point traders will wait for price to break to lower lows in the direction of the trend.

After price begins to move lower again, we can then find the final component needed for trading a bearish flag pattern. The profit target is a potential value to take profit after a currency pair’s next decline in price. This pricing level can be identified by first measuring the distance in pips of our initial decline. This value can then be subtracted from the peak resistance line formed from our consolidating flag. Now that we know what we are looking for, let’s look at an example.