Articles

THORN

This model is encountered quite frequently, but, unfortunately, it is difficult to discern it during the formation process. Unlike other reversal models, which reflect gradual changes in a trend dynamics, the thorn is a sharp jerk of the price in some direction, immediately followed by a jerk in the opposite direction without any pause. Thorns often appear in low-liquid markets or after some news release.

Such situations can be explained from psychological point of view. At a certain moment market participants get seized with emotions, and they can trade according to “a great fool theory”—they pay much and hope to meet a greater fool who will pay them even more. It is look like net marketing—the last one who joins the movement, loses. Logical calculations made in a quiet room before the work beginning are completely forgotten and irrational decisions come to the forefront.

And in case if the market is thin, i.e. there are few participants in it, the movement is developed with acceleration, like it occurred with EURUSD (Fig.1) on Christmas Eve at the end of 2008. It looks as if the market situation was beyond control, the market surpassed all conceivable and inconceivable expectations. An experienced trader knows that it is required to keep alert in such situations.

Fig. 1.  December 2008. At first the model of triangle was broken in the framework of technical analysis. Then the principle “of great fool” worked in the thin market. After that the appearance of the shooting star marked the stop of the price growth.

Any trader apparently dreams of riding the leading horse during this wild galloping. However, at some moment in the course of a trend development even the most inexperienced trader may suddenly feel that something is going wrong. .Here the comparison with riding a tiger is more suitable. It is not enough to catch a tiger and to climb it.  It is more difficult to dismount the tiger without losing your face and with keeping your hands and legs safe and sound.

So, how to learn to recognize this model?

Firstly, always pay your attention to the movement inclination angle. If a trend inclination (in the core, the trend line) angle gets unnaturally steep, it means that the movement is accelerating from one hand, but, on the other hand, this is an evidence of the market possible overheating. A great possibility of correction comes. If a position is already opened, it is recommended to use protection stop-signals and to draw up the stops.

Secondly, if the thorn in the price graph appears after the release of some unexpected news (the so called “news thorn”), in this case always define the general trend direction in the superior scale of the price graph. A news thorn against the trend provides a good opportunity for opening a position with the trend, which is done by experienced traders, unlike budding ones, who are frequently deceived by such false movements against the main trend, forgetting the classic phrase that “a trend is our friend”.

Thirdly, in the graph the thorn can be discerned after formation of such candle reversal models, as Hammer, Shooting Star, Engulfing pattern. Let us consider them in more detailed way. The model names have been taken out of the method of Japanese candles analysis.

Fig.2. Candle models

• Shooting Star warns about possible stop of the price growth. A shooting star body is small and located in the lower part of the candle price range; the upper shadow is long, the lower one is small or does not exist at all. The colour of a shooting star body does not have any determining value, however, the signal becomes stronger, if the body is bear one. The candle displays that the trading session opened near the minimum, then the price vigorously flied upwards and fell down again, so the closing price approached the opening price. In other words, the price growth turned out to be false during the trading session - Fig. 1
• Hammer often precedes the stop of the price falling. A hammer body is also quite small, located in the upper part of the candle price range, the lower shadow is long, the upper shadow is small or absent. A hammer body colour does not have any determining value, however, the signal is stronger if the body is bull one. Appearance of such a candle signals during descending trend that its prevailing in the market comes to its end.
• Bull and Bear Engulfing Pattern. The Hammer and the Shooting Star are separate candles, which, as indicated above, send important signals about the market “health state”. However, most of the signals emerging in Japanese candle graphs are based not on individual candles, but on their combinations. One of such combinations is the Engulfing Pattern. It appertains to the most essential reversal signals formed at the end of the Thorn model and is formed with two candles with bodies contrast in colour. The second body must engulf the first one (shadows can be engulfed or not engulfed) - Fig. 3.

On the market top there emerges the Bear Engulfing Pattern, when the second bear candle body is entirely engulfed by the first bull candle body. Bull Engulfing appears on the market base, when the second bull candle body completely overlaps the first bear candle body.

Fig. 3 Thorn and Bull Engulfing

After formation of the Thorn model, as a rule, the price vigorously returns to the beginning of growth or falling. Rushing downfall is strengthened by those who are trapped at the very top of the market. Now they turn themselves inside out in their attempt to eliminate their losing positions. Moreover, there are no support levels in their ways. Fig.3 shows that the situation looks as if the market went mad after the channel lower line breakthrough, unnaturally steep trend inclination angle gave a signal about a thorn appearance, after which the candle model of Bull Engulfing formed the market bottom. Then the prices returned quite quickly.

However, while working with the model of Thorn it is required to remember that not every vigorous movement implies formation of the model. Sometimes after the price vigorous growth or downfall there is a pause in the movement, after which the trend continues. Trend continuation models we will discuss later can help recognize such a situation.

While finishing the discussion of main reversal models, it is worthwhile reminding that no changes in the trend dynamics can occur in one moment, as if with the wave of the magic wave (excepting the Thorn). For large changes in the market, as a rule, there is some transient period, but such changes are not always followed by trend reversal. Sometimes they may imply just a pause, some consolidation, after which the existing trend development will go on. In such a situation, price models may appear to be determining for the current market situation analysis and prediction of the trend further direction. By learning to discern price models, you receive a powerful tool for technical analysis for work in financial markets. As we have already mentioned, as price models reflect mass human psychology, which does not change with years, it is possible to make a conclusion that the models will work in the future as well as in the past.

Alex Sabodin.
Pro Finance Group Inc.