Now that you’ve learned how to spot basic candlestick patterns like spinning tops, marubozus, and dojis, let’s move on to single candlestick patterns.
When these candlesticks appear on a chart, they can indicate possible market reversals.
The four fundamental single Japanese candlestick patterns are as follows:
Hammer and Hanging Man
The Hammer and the Hanging Man appear identical but have very different meanings depending on previous price movement.
Both have adorable small black or white bodies with extended lower shadows and short or missing upper shadows.
During a downtrend, the Hammer is a bullish reversal pattern that appears. It gets its name from the fact that the market is pounding out a bottom.
When the price is decreasing, hammers indicate that the bottom has been reached and the price will begin to rise again.
The extended lower shadow suggests that sellers pushed prices lower, but purchasers fought back and closed near the open.
If you observe a hammer form during a decline, don’t immediately put a buy order! More bullish confirmation is required before pulling the trigger.
Waiting for a white candlestick to close above the open to the right side of the Hammer is a common illustration of confirmation.
Recognition Criteria for a Hammer:
- The long shadow is about two or three times of the real body.
- Little or no upper shadow.
- The real body is at the upper end of the trading range.
- The color of the real body is not important.
The Hanging Man pattern is a bearish reversal pattern that can potentially indicate a top or a strong resistance level.
The creation of a Hanging Man while the price is rising signals that sellers are beginning to outnumber purchasers.
The extended lower shadow indicates that sellers drove down prices during the session.
Buyers were able to raise the price slightly, but only near the open.
This should raise red flags since it indicates that there are no more buyers to provide the necessary momentum to keep rising the price.
Recognition Criteria for a Hanging Man:
- A long lower shadow which is about two or three times of the real body.
- Little or no upper shadow.
- The real body is at the upper end of the trading range.
- The color of the body is not important, though a black body is more bearish than a white body.
Inverted Hammer and Shooting Star
The Inverted Hammer and Shooting Star also have the same appearance. The only difference is whether you’re in a decline or an uptrend.
A bullish reversal candlestick is an Inverted Hammer.
A Shooting Star candlestick represents a bearish reversal.
Both candlesticks feature small, filled, or hollow bodies, extended upper shadows, and small or absent lower shadows.
Inverted Hammer
When the price has been declining, the Inverted Hammer indicates the chance of a turnaround. Its extended top shadow indicates that purchasers attempted to outbid each other on the price.
However, when sellers saw what the purchasers were doing, they exclaimed, “Oh hell no!” and attempted to lower the price.
Fortunately, the purchasers had consumed enough Wheaties for breakfast and were able to close the session near the start.
Because the sellers were unable to drop the price anymore, this is a good sign that everyone who wanted to sell had already done so.
And who will be left if there are no more sellers? Buyers.
Shooting Star
The Shooting Star is a bearish reversal pattern that resembles the inverted hammer but happens when the market is rising.
Its shape suggests that the price began at a low, rallied, and then fell back to the bottom.
This suggests that buyers attempted to raise the price, but sellers intervened and defeated them. This is a clear bearish sign because there are no more buyers because they have all been overpowered.
Next Lesson: Dual Candlestick Patterns