So I was reading an explanation of a hammer candle using GBP/USD on M15 chart that states as follows:
“The market has been moving lower, so we know in general the UK pound is being sold and the US dollar is being bought. The price on this candle then opens, with selling of the pound continuing. However, at some point during this period, buyers come into the market, buying the UK pound and selling the US dollar. Ultimately, the sellers of the British pound are overwhelmed by the buyers of the US dollar, who stop the price moving lower, and start to take the pair back higher, to close somewhere near the opening price.”
My question is whether there is a typo in the above explanation. Shouldn’t the sentence read … “Ultimately, the sellers of the British pound are overwhelmed by the buyers of the British pound, who stop the price moving lower, and start to take the pair back higher …”
The original text makes it sound like the seller of the British pound is different from the buyer of the US dollar, but my understanding was that when you sell the British pound, you are buying the US dollar and when you sell the US dollar you are buying the British pound.
Do I have it wrong or was this just a mistake in the original explanation of a hammer candle.
You are correct, this reads like an error. If the GBP/USD exchange rate rises as is the case during the later part of a “hammer” session, it is because the sellers of the GBP have been overwhelmed by the buyers of the GBP
(or, equally possibly they have been overwhelmed by the sellers of the USD).
This is not always the case, it is better to think of the market in an auction context.
Imagine as you say that the Pound is being sold at auction - there are many lots for sale and all the assembled buyers have USD in their pockets
The auctioneer holds up a lot - he offers it a price (say 1.20) and waits for bids…
I’ll bid 1.19 shouts Jack and the trade is struck - the auctioneer is not done - he has more at t.20
“any more bids?” - silence - there are none.
The auctioneer cannot go home, he must do business and the hall is full so he does the sensible thing - he lowers the price… and then repeat until another deal is struck.
Soon price is much lower - now the guys in the room are competing at this lower price - it’s a bargain and they start to bid - the auctioneer senses profit so he raises his offer price each time to see can he get a higher bid … and so on.
Bottom line is that a turn in price (represented by a ‘hammer’ or ‘Doji’ on a chart) can reflect a lack of sellers/buyers at a given time/price - change the time or price or environment (f.a.) and that balance can also change.
Always good to give an example - i seldom look at 15mins but here is hr1 on Eur/Gbp
I put the crosshair close to a recent GBP event - the ‘surprise’ BOE rate reduction - that large top side wick represents not sellers overwhelming buyers - rather there were no buyers up there for Euro or more likely no sellers of GBP at that time - the push up was likely news algo driven.
What happened the next 2 days was that real GBP sellers came into the market (not algo driven) - how do I know this?
Check GBP/USD then check Eur/Usd - see the difference?
