Future‘s trading is one of most dynamic and fascinating subjects in the world. There are number of theories that came across in last couple of centuries to anticipate the direction of Futures market. The technology in the developed countries have come to an extent that trading can be done without the presence and observation of trader with the usage of Automated Trading System (ATS). If a trader gives the instruction to the system to follow certain technical theory as per his comfort, ATS will do the trading automatically as per the technical indicator instruction suggested by that particular trader. The only challenge here for the trader is to identify the successful technical theory for the currencies he is doing in the trading. Analysts over the years have introduced number of technical theories for the betterment of a trader. Candlestick is one of the oldest and highly followed technical analysis theories used by number of short term traders all over the world. Increasing volatility in exchange rates in last few years has led to increase in risk when trading in Futures market of Currencies. This project has been taken by me to identify a formula to minimize the risk when trading in Foreign Exchange Market. .


The foreign exchange market, which from this point on will be referred as forex, is a market that trades currencies from different countries. In this market two currencies are traded against each other according to what the market believes to be the relative strength between these two. This market was chosen due to one main reason: it does not require a substantial amount of initial investment capital to be profitable in a practical amount of time, compared to other markets such as the stock or bond market. The expectations for this project were high since the beginning, because after one year of substantial research and practice, this could be applied to manage personal capitals. On the other hand, it is important to take into account that even though the forex market has an advantage in terms of the capital needed compared to other markets; the risks attached to it may be higher as well.

The subject of financial management is of immense interest to both academicians and practicing managers. It is of great interest to academicians because the subject is still developing and there are still certain areas where controversies exist for which no unanimous solution has been found yet. Practicing managers are interested in the subject because among the most crucial decisions of the firm are those which relate to finance, and an understanding of the theory of financial management provides them with conceptual and analytical insights to make those decisions skillfully.

1. Forex market

The forex market is the world’s largest financial market. Over $4 trillion worth of currency are traded each day. The amount of money traded in a week is bigger than the entire annual GDP of the United States. The main currency used for Forex trading is the USD.

Because of its impact on global economy the volume of trade and volatility in exchange rate is more in USD than in any other currency. To identify the direction of volatility no of technical theories has been developed by the analysts has given below.

2. Technical analysis

Technical analysis involves a study of market generated data like prices and volumes to determine the future direction of price movements.

Dow Theory: – the Dow Theory has been around for almost 100 years, yet even in today‘s volatile and technology-driven markets, the basic components of Dow Theory still remain valid.

Elliot wave theory:- The Elliot wave theory represents a development of the well-known Dow theory. It applies to ant freely traded assets ,liabilities or goods. The wave theory was proposed by account and business expert Ralph Nelson Elliot in his study titled ‘the wave principle‘‘ published in 1938

Fibbonaci theory:- Fibonacci is a sequence of integers followed by algorithms framed in 1 2th century by Abacci. F=0, F=1.

Bollinger bands: It is a technical analysis tool invented by John Bollinger in 1 980;s as well term trade marker by him in 2011.

3. Review of literature

Christopher J. Neely* Paul A. Weller July 24, 2011 has introduced the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. Technicians view their craft, the study of price patterns, as exploiting traders‘ psychological regularities. The literature on technical analysis has established that simple technical trading rules on dollar exchange rates provided 15 years of positive, risk-adjusted returns during the 1 970s and 80s before those returns were extinguished. More recently, more complex and less studied rules have produced more modest returns for a similar length of time. Conventional explanations that rely on risk adjustment and/or central bank intervention do not plausibly justify the observed excess returns from following simple technical trading rules. Psychological biases, however, could contribute to the profitability of these rules. We view the observed pattern of excess returns to technical trading rules as being consistent with an adaptive markets view of the world.

Academic research on the profitability of technical analysis tends to confirm the idea that foreign exchange markets trend particularly well. After reviewing the literature on technical analysis in a variety of markets, Park and Irwin (2007) conclude that technical analysis is profitable in foreign exchange and commodity futures markets but not in stock markets. Readers‘ interested in learning more about technical methods should consult technical analysis textbooks such as Murphy (1986), Pring (1991), or Elder (1993). Readers wishing for a detailed literature review of technical analysis in currency markets should go to Men khoff and Taylor‘s (2007) excellent survey.

The widespread use of technical analysis in foreign exchange (and other) markets is puzzling because it implies that either traders are irrationally making decisions on useless information or that past prices contain useful information for trading. The latter possibility would contradict the efficient markets hypothesis, which holds that no trading strategy should be able to generate unusual profits on publicly available information—such as past prices—except by bearing unusual risk. And the observed level of risk-adjusted profitability measures market (in) efficiency. Therefore much research effort has been directed toward determining whether technical analysis is indeed profitable or not. One of the earliest studies, by Fama and Blume (1966), found no evidence that a particular class of TTRs could earn abnormal profits in the stock market. However, more recent research by Brock, Lakonishok and LeBaron (1992) and Sullivan, Timmermann and White (1999) has provided contrary evidence. And many studies of the foreign exchange market have found evidence that TTRs can generate persistent profits (Poole(1 967), Dooley and Shafer (1984), Sweeney (1986), Levich and Thomas (1993), Neely, Weller and Dittmar (1997), Gençay (1999), Lee, Gleason and Mathur (2001) and Martin (2001).

More recent surveys have investigated the educational background, experience and psychological biases of foreign exchange traders, including technical traders. Menkhoff (1997) refutes the notion that technical traders lack the experience or education of their peers who trade on fundamentals. The surveyed German technicians do not differ from non‑technicians regarding age, education, position, seniority, their firms‘ trading turnover or assets under management. Menkhoff and Schmidt (2005) investigate the use of buy-and­hold, momentum and contrarian trading strategies by fund managers. Momentum traders are the least risk-averse and contrarian traders show signs of overconfidence. Oberlechner and Osler (2008) use survey evidence from 400 North American foreign exchange traders to establish that respondents underestimate uncertainty and overestimate their own abilities. They argue that their findings help to explain the high volatility of floating exchange rates, the profitability of trend-following strategies and the apparent irrationality of exchange rate forecasts.

Research methodology

Sources of data:

Primary Data: Primary data collected through live trading system of Meta Trader Terminal.

Secondary data: The secondary data is mostly collected from Websites, Books, Journals and Forex trading companies

Research method: Observational research

Sampling method: Convenience sampling

Sample size : 300*3(300 samples for each company)

Calculation Methods:

Simple statistical tools like percentage method

Accounting tool like Net profit calculation method

Formula of Percentage calculation formula



The Doji is a powerful Candlestick formation, signifying indecision between bulls and bears. A Doji is quite often found at the bottom and top of trends and thus is considered as a sign of possible reversal of price direction, but the Doji can be viewed as a continuation pattern as well.

A Doji is formed when the opening price and the closing price are equal. A long-legged Doji, often called a “Rickshaw Man” is the same as a Doji, except the upper and lower shadows are much longer than the regular Doji formation.

The creation of the Doji pattern illustrates why the Doji represents such indecision. After the open, bulls push prices higher only for prices to be rejected and pushed lower by the bears. However, bears are unable to keep prices lower, and bulls then push prices back to the opening price.

Of course, a Doji could be formed by prices moving lower first and then higher second, nevertheless, either way, the market closes back where the day started.

The chart below of General Electric (GE) stock shows two examples of Doji’s:

In a Doji pattern, the market explores its options both upward and downward, but cannot commit either way. After a long uptrend, this indecision manifested by the Doji could be viewed as a time to exit one’s position, or at least scale back. Similarly, after a long downtrend, like the one shown above of General Electric stock, reducing one’s position size or exiting completely could be an intelligent move.

It is important to emphasize that the Doji pattern does not mean reversal, it means indecision. Doji’s are often found during periods of resting after a significant move higher or lower; the market, after resting, then continues on its way. Nevertheless, a Doji pattern is a great sign that a prior trend is losing its strength, and taking some profits might be well advised.

Two intra-day examples of how a daily Doji formation is created is presented next.

Intra-day Doji Formation

The first Doji outlined on the daily chart of General Electric on the previous page was a high-low Doji, where prices made the highs for the days first, and the lows for the day second. The intra-day chart (15-minute) of this occurrence is given below:

Doji A

At the opening, the bulls were in charge; however, the morning rally did not last long before the bears took charge. From mid-morning until late-afternoon, General Electric sold off, but by the end of the day, bulls pushed GE back to the opening price of the day.

The second Doji daily chart on the previous page is shown next. In the intra-day chart below (Doji B), the Doji was created the exact opposite way as the chart shown above (Doji A) was created; Doji B made its day’s lows first, then highs second.

At the opening bell, bears took a hold of GE, but by mid-morning, bulls entered into GE’s stock, pushing GE into positive territory for the day. Unfortunately for the bulls, by noon bears took over and pushed GE lower. By the end of the day, the bears had successfully brought the price of GE back to the day’s opening price.

As was presented above, the Doji formation can be created two different ways, but the interpretation of the Doji remains the same: the Doji pattern is a sign of indecision, neither bulls nor bears can successfully take over.


The Hammer candlestick formation is a significant bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends.


The Hammer formation is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, twice the length as the real body.

When the high and the close are the same, a bullish Hammer candlestick is formed and it is considered a stronger formation because the bulls were able to reject the bears completely plus the bulls were able to push price even more past the opening price.

In contrast, when the open and high are the same, this Hammer formation is considered less bullish, but nevertheless bullish. The bulls were able to counteract the bears, but were not able to bring the price back to the price at the open.

The long lower shadow of the Hammer implies that the market tested to find where support and demand was located. When the market found the area of support, the lows of the day, bulls began to push prices higher, near the opening price. Thus, the bearish advance downward was rejected by the bulls.

Hammer Candlestick Chart Example

The chart below of American International Group (AIG) stock illustrates a Hammer reversal pattern after a downtrend:

Hammer Image 2

In the chart above of AIG, the market began the day testing to find where demand would enter the market. AIG’s stock price eventually, found support at the low of the day. In fact, there was so much support and subsequent buying pressure, that prices were able to close the day even higher than the open, a very bullish sign.

The Hammer is an extremely helpful candlestick pattern to help traders visually see where support and demand is located. After a downtrend, the Hammer can signal to traders that the downtrend could be over and that short positions should probably be covered.

However, other indicators should be used in conjunction with the Hammer candlestick pattern to determine buy signals, for example, waiting a day to see if a rally off of the Hammer formation continues or other chart indications such as a break of a downward trend line. But other previous day’s clues could enter into a traders analysis.

Inverted Hammer

The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and is a warning of a potential reversal upward. It is important to note that the Inverted pattern is a warning of potential price change, not a signal, in and of itself, to buy.

Inverted Hammer

The Inverted Hammer formation, just like the Shooting star formation, is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, which should be at least twice the length of the real body.

When the low and the open are the same, a bullish Inverted Hammer candlestick is formed and it is considered a stronger bullish sign than when the low and close are the same, forming a bearish Hanging Man (the bearish Hanging Man is still considered bullish, just not as much because the day ended by closing with losses).

After a long downtrend, the formation of an Inverted Hammer is bullish because prices hesitated their move downward by increasing significantly during the day. Nevertheless, sellers came back into the stock, future, or currency and pushed prices back near the open, but the fact that prices were able to increase significantly shows that bulls are testing the power of the bears. What happens on the next day after the Inverted Hammer pattern is what gives traders an idea as to whether or not prices will go higher or lower.

Inverted Hammer Candlestick Chart Example

The chart below of the S&P 500 Futures contract shows the Inverted Hammer foreshadowing future price increases:

Inverted Hammer Image 2

In the chart above of e-mini future, the market began the day by gapping down. Prices moved higher, until resistance and supply was found at the high of the day. The bulls’ excursion upward was halted and prices ended the day below the open.

Confirmation that the downtrend was in trouble occurred the next day when the E-mini S&P 500 Futures contract gapped up the next day and continued to move upward, creating a bullish green candle. To some traders, this confirmation candle, plus the fact that the downward trend line resistance was broken, gave the signal to go long.

It is important to repeat, that the Inverted Hammer formation is not the signal to go long; other indicators such as a trend line break or confirmation candle should be used to generate the actual buy signal.

Summary of candlesticks

Candlesticks are formed using the open, high, low ad close.

If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn. If the close is below the open, then a filled candlestick (usually displayed as black) is drawn. The hollow are filled section of the candlestick is called the real body or body. The thin lines poking above and below the body display the high/low range and are called shadows. The top of the upper shadow is the high. The bottom of the lower shadow is the low. Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure.

Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers. Upper shadows signify the session high. Low shadows signify the session low. Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The pattern indicates the indecision between the buyers and sellers. Marabou means there are no shadows from the bodies. Depending on whether the candlestick‘s body is filled or hollow, the high and low are the same as it‘s open or close. Doji candlesticks have the same open and close price or at least their bodies are extremely short. The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom. The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level. The inverted hammer occurs when price has been falling suggests the possibility of a reversal.

Objectives of the study

To study the volatility in currency prices for currencies like EURO/USD, JPY/USD & USD/GBP for different time intervals. To study the correlations and covariance of currencies like EURO/USD, JPY/USD & USD/GBP in its price movements on different time periods. To identify the systematic way that will provide reasonable profits with minimum risk in intraday trading when trading in currencies like EURO/USD, JPY/USD & USD/GBP. To analyze the trends in movement of currency prices and identify the profitable trade rule for the currencies like EURO/USD, JPY/USD & USD/GBP. To analyze the current situation of demand and supply of currencies like EURO/USD, JPY/USD & USD/GBP. To identify the best market opportunities when trading in currencies like EURO/USD, JPY/USD & USD/GBP. To identify the constraints to be overcome when trading in live market conditions. To identify the success rate of Doji  when trading in currencies like EURO/USD, JPY/USD & USD/GBP. To identify the success rate of hammer when trading in currencies like EURO/USD, JPY/USD & USD/GBP. To identify the success rate of invert able hammer when trading in currencies like EURO/USD, JPY/USD & USD/GBP. To identify the overall success rate of candlesticks when trading in currencies like EURO/USD, JPY/USD & USD/GBP. To identify the best formation in candlesticks that will provide the best success rate for the intraday traders. To identify the currency pair that will give best success rate for candlestick in intraday trading. To identify the currency pair which will give highest profits when are using candlestick for intraday trading. To identify a way that will make decision making easy for intraday traders.

Scope of the study

Times are really quite exciting; an ever increasing plethora of events followed the global financial crisis. With globalization and innovation in the financial markets at its peak – it is very essential to study the market risks and requirements. Over the years, the Indian stock market has undergone major changes to remain at par with the global peers. With global trade and finance getting more dynamic day by day, the Indian stock market is not far behind to experience these developments. This has helped the financial structure of India get more innovative.

Need for the study

Indian exchanges have recently been permitted to offer currency futures on their platforms to the market participants. The paper outlines the contract, and charts the development and growth of currency futures in India since their inception in 2008. It emphasizes the existing close connectivity between commodity and currency markets. It highlights the increased exchange rate volatility of Indian exchange rate against US dollar (INRUSD) during conventional and non conventional trading hours and argues for the ability of the market to quickly adapt to extended trading hours.

Statement of the problem:

Currency derivatives and Forex trading are only two instruments that the importers and export have to avoid exchange rate risk. With globalization and innovation in the financial markets at its peak – it is very essential to study the market risks and requirements. The emergence and growth of derivative market has been witnessed by increased risk in the financial market. The derivatives market hedge the risk of traders, by providing a risk management tool in the market. It is characterized by high volatility in terms of prices and volume of contracts in the market.


Final interpretation:


(% & RS.)

EURO/USD 57.14 580 71.42 6,500 75.57 9,900
JPY/USD 71.42 -14,000 28.57 -9,2000 57.14 80,000
GBP/USD 64.28 790 35.71 -1,590 35.71 -1,100


5. Findings

From the study it is found that invertible hammer formation in EURO/USD is giving highest percentage of profits among the currencies we have taken for research. From the study it is found that invertible hammer formation in JPY/USD is giving highest profit in terms of Rupees among the currencies we have taken for research. From the study it is found that hammer formation in JPY/USD is giving highest loss among the currencies we have taken for research. From the study it is found that hammer formation in JPY/USD is giving lowest success rate among the currencies which we have taken for the study.

6. Suggestions

Trading decisions can take through Doji, hammer & invertible hammer analysis. The risk of investment is less in currency market as compared to others. Investment in EURO-USD has provided good source of investment. Even though the present study found reasonable success rate for the traders, traders has to be cautious about their trading, as success in this market cannot be guaranteed for future. It can be suggested the traders to follow least 2 indicators while taking a decision on their trades.


Based on the study it can be concluded that every currency pair is a good source for trading. Decisions can be taken through doji, hammer & invertible hammer analysis which is according to market movement. But a trader has to be disciplined about the decision making and volume of trade. Traders has to plan the trade and trade the plan without making any instinctive decisions at the time of trade.


Committee on Financial Sector Assessment, R. (2009). India’s Financial Sector – An Assessment. Mumbai: RBI and GoI.

Horvatic, D., Stanley, H. E., and Podobnik, B. (2011). Detrended Cross-correlation Analysis for Non-stationary Time Series with Periodic Trends. EPL Journal, 94, 18007.

Kaminsky, G. and Schmukler, S. (2002). Short and Long-Run Integration: Do capital controls matter. World Bank Discussion Paper.



-By M.Ranganatham and R.Madhumathi

Publisher Pearson Education 2006 edition


-By Prasanna Chandra

Publisher Tata Mcgraw Hill third edition


-By I M Pandey

Publisher:VIKAS Publishing House Pvt Ltd Ninth edition


-By John C. Hull

Publisher: Prentice-Hall of India, new delhi, Sixth edition


www.hotcandlesticks.com, www.tradingtips.com, www.stockcharts.com, www.forex.com,. www.brocotrader.com, www.nseindia.com, www.moneycontrol.co, www.bseindia.com, www.moneybhai.com and www.moneyplant.com

Author Bio

Qualification: Post Graduate
Company: Balakrishna and co
Location: BENGALURU, Karnataka, IN
Member Since: 25 Oct 2019 | Total Posts: 1

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