Forex Investment and Currency Trading

Hammer and hanging man

A hammer and hanging man are single-candle formations that indicate that a reversal is likely taking the place. Both candles have the same form – a small real body at the upper end of the candle, with a long lower tail (at least twice the height of the real body) and little or no upper tail. The color of the candle can be either light or dark. The pattern is called a hammer when it appears after a down move and is a bullish reversal signal. The formation is called a hanging man after an uptrend and is a bearish reversal pattern.

A hammer has a long lower tail, and the real body is at the upper end of the range, which are both bullish signs after a downtrend. You can trade a hammer without confirmation. A hanging man, on the other hand, requires confirmation by the next candle because the long lower shadow and the real body at the top of the range in an uptrend are generally bullish signs. Look for prices on the next candle to open below the real body of the hanging man, or close below it, to signal confirmation.

A hammer formation signals a downside move is likely set to reverse higher.

Harami and harami crosses

Harami and harami crosses are two-candlestick formations that indicate a reversal – a bearish harami occurs after an uptrend, and a bullish harami comes after a downtrend. The formation is called a harami cross if the second candle is a doji (the cross) or a candle with a very small real body. A harami cross is considered a more powerful signal of a reversal than a regular harami due to the doji.

Also, the formation usually requires that the body of the second candle be completely overlapped by the body of the first candle. But because currencies typically open where they closed (in most cases), the ideal overlap may not occur. Instead, look for small real body at the extreme end of the second candle.

• Bullish harami: A long-bodied dark candle followed by a relatively shrot candle with a small real body of either color. If the second candle is a doji, or nearly so, the potential for an upside reversal is higher.
• Bearish harami: A long-bodied light candle followed by a shorter candle with a small real body of either color. If the second candle is a doji, or nearly o, the potential for a downside reversal is greater.

Spinning tops

Spinning tops are single-candle formations that have a small real body and typically short upper and lower tails, though the size of the tails is secondary. The formation gets its name because it resembles a child’s toy top. The significance of a spinning top is that it has a small real body, which represents a drop in directional momentum after a series of up or down candles.

Spinning tops can be seen in other reversal formations, such as harami and hammer or hanging man, and can be though of as resembling a fatter doji as well. Spinning tops require confirmation by subsequent candles, but be on alert for potential reversals if you spot a spinning top.

A bearish harami cross (followed by a hanging man in this case suggests an up move is set to reverse lower.

Spinning tops are similar to doji both in shape and in that they suggest a potential reversal of the prior directional move. The example shown here could also be viewed as a double doji.

A pair of spinning tops after a large move lower signals that the downtrend may reverse. These could also be looked at as a double doji reversal pattern.

Engulfing lines

Engulfing lines are two-candlestick patterns that can be either bullish or bearish, depending on whether they come after a down move or an up move:

• Bullish engulfing line: The first candle is dark, followed by a large light candle, the body of which completely engulfs the body of the dark candle. The smaller the body of the first candle (thing spinning top), the more significant the reversal signals. Also, because currencies generally open where they closed, the second candle may not completely engulf the body of the first but only match the high.
• Bearish engulfing line: The first candle is light, followed by a long dark-colored candle that engulfs the body of the first candle, as shown in the chart above. Again, the body of the second candle may not completely engulf the first but only match the high.

A bearish engulfing line signals the end of the prior uptrend and later goes on to make a double top. This is a good example of candles and traditional chart formations being used together.

Tweezers tops and tweezers bottoms

Tweezers formations are two-candlestick patterns that get their name because they resemble the pincer end of a pair of tweezers. Tweezers tops and bottoms correspond to double tops and bottoms in traditional chart analysis, and they mean the same thing – a reversal after failing to make new highs or lows.

• Tweezers top: The first candle is long and light-colored, while the size and color of the second candle do not matter. What matter is that they have the same highs, or nearly so, as indicated by the upper tails.
• Tweezers bottom: The first candle is dark with a long real body, followed by a second candle that has the same, or nearly the same, low. The color and size of the second candle do not matter.