How to call a jittery market

Last week the big story was silver …

… this week it’s the euro.

The joint currency suffered its biggest two-day fall since the credit crisis in 2008, as fears of the Greek debt crisis hit the headlines again.

When markets start swinging wildly based on news stories and rumours, trading indicators like moving averages and oscillators can’t offer up a great deal of advice about what traders are thinking at that moment.

When traders get really jittery, for me, the best place to read it is in the candlesticks.

As we’ve discussed in Trader’s Bulletin many times, charts are full of emotion – those little green and red candles show us greed, fear, complacency, panic, euphoria, despondency …

Which is why today I thought we’d take a look at a candlestick pattern that is one of the most reliable in showing us a change of market sentiment.

Two very reliable candlesticks

The indicator I’m talking about is the star pattern.

And in particular, the morning star and the evening star.

A morning star is a three-candle pattern, beginning with a candle that is strongly down. The second candle’s real body should be small and should not touch the prior candle’s real body. The third candle should be strongly up.

An evening star is the same idea, just in reverse. Therefore, its first candle is strongly up. Its second candle’s real body should be small and should not touch the first candle’s real body. And the third candle should be strongly down.

The small body of the star represents indecision by both the bulls and the bears.

While the larger trend may be strongly up or strongly down, the presence of the star indicates that the prevailing direction may have come under profit taking or that the other side has actually taken control. Remember, the previous bar should be a strong bar in the direction of the trend which indicates that the bulls (in an up-trending market) or the bears (in a down-trending market) are in control. This strength in direction is what makes the appearance of the star that much more important as this conviction has suddenly evaporated.

Evening star on the euro

Here’s an example of a major turning point in the euro last year.

As you can see, we have a strong upward candle, in the direction of the trend, followed by a gap up to a small candle, showing indecision. The next candle, moving strongly downwards confirms the morning star signal. And traders who spotted this evening star reversal signal will have enjoyed a big downward swing.

The best place to find profits

At the moment, there’s no doubt that forex markets are where the best trading action is to be found.

The equities markets have been somewhat stagnant, struggling to maintain the momentum of their big upward bull run over the last two years. It is always tougher to find profits in a market that lacks direction.

And so far this year, we’ve seen a couple of really sound forex trading strategies, and I know that many Bulletin readers have been able to take advantage of these.

Of course, I’m always on the hunt for the best products – and will pass on my findings to you.

Until next week,

Mark Rose

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Best candlestick patterns: morning star candlestick pattern Candlestick of the week: the harami