"OK, I am convinced about the importance of shaven candlesticks when trading forex. But why are they so accurate in predicting the direction of forex exchange rates?"
The answer is because shaven candles indicate strong momentum in price movements. In the example of a bearish shaven candlestick there was no shadow because the sellers completely overwhelmed the buyers. The buyers didn't have the capacity to drive the price up at all!
And once the buyers are temporarily defeated, the exchange rate will continue to free-fall until the buyers can regain their strength and start pushing prices back up again (in which case we would see the shadows re-appear).
Are shaven candlesticks 100% accurate in predicting future forex movements?
Nope...not a chance. If this was true all the forex traders would be rich by now.;)
Sometimes shaven candlesticks are immediately followed by prices moving in the opposite direction, during the release of major economic data for example.
So if you come across a shaven candlestick during a period where important news are to be released, do yourself a favour and ignore it. Shaven candles are good indicators of future market direction only when they have been generated by "normal" market activity.
Of course, shaven candlesticks are not the only strong indicators of momentum in the market. There are other good indicators of market strength you can use to profit from foreign exchange. However, shaven candlesticks are one of the strongest indicators I've come across.
Most technical analysis indicators tell you roughly what's happening in the market. The problem though is that they cannot pinpoint exactly when to enter a trade.
The reason technical indicators fail in helping traders making accurate investment decisions is they all lag behind market movements. The only true indicator of where the exchange rate is going right now are candlesticks.
Stay with me and I'll be telling you more about how to use candles to identify exactly when to enter and exit a trade.
Building a profitable forex trading strategy can be boiled down to two key factors - knowledge and testing.