3.21 Candlestick Patterns – The Standalone Kind

 
Candlestick patterns may appear as singles, in pairs or as trios. We’ll look at each group separately, but right now let’s devote our attention to the loners – the single candle patterns, and as usual, these come with picturesque names!
 

Hammer and Hanging Man

 
Standalone (single) candlestick patterns - The Hammer and The Hanging Man.
 

The Hammer

 
Shape of hammer candlestick.This pattern is usually seen after a decline in the market and signals a bullish reversal of trend
 
It looks like a hammer, having a long shadow which is twice or even thrice the length of the body, and therefore the real body is found at the upper end of the trade range. The color of the body does not matter. There is no upper shadow, or at best a very small one. 
 
Like its name, the pattern reflects the market ‘hammering’ out a bottom after a decline. This also indicates a support level. The long lower shadow shows that the sellers pushed prices down significantly, but bulls were able to strike back and lift prices from the low, letting the session end on a strong note. If volumes are higher than normal, the pattern could signal a selling climax.
 
In simple words, just remember that the long shadow at the bottom i.e. a wide gap between the low and either the opening price of a green candle or the closing price of a red one represents the fear of going further downside which in turn suggests that traders may be reversing their positions for upside.
 
Traders are on guard and sense that the end of the long decline may be near. It’s prudent, however, to wait for a confirmation in the following session, such as a bullish green candle or an upside opening gap in prices, with attendant higher volume.
 

The Hanging Man

 
Shape of Hanging Man styled candle.This pattern is similar to the Hammer, but appears at the end of an upswing in prices, and signals a possible bearish reversal. The recognition characteristics are similar to the Hammer.
 
Like its name, it indicates that buyers in this perilous zone are likely to meet their fate by hanging. It shows that after a while, sellers are starting to flex their muscles, and dragged the price down significantly from the open. Granted, the bulls made a counter-assault and pushed prices back to the open-close region, but it’s time to acknowledge the power of the bears.
 
The pattern often signals a market top or a resistance level.
 
But don’t turn tail on the market right away! You need further confirmation of a bearish trend – this could be in the form of a gap-down opening in the next session, or a long black candle on high volume.
 
This pattern works best if the low of this candle is lower than at least the low of the previous candle and better if it is lower than the lows of previous couple of candles.
 
The hammer and hanging man are often discussed together because they look so similar.
 
Let's have a look on hammer and hanging man patterns on real trading charts:
 
Hammer candlestick pattern at the end of downtrend on a Forex chart. Hanging man candle at the end of uptrend on a Forex chart.
 

Difference between Hammer and Hanging Man Candles

 
Both Hammer and Hanging Man patterns are same in shape and both can consists of either the green or red candles. The differences are as follows:
 
  1. The pattern is called hammer when it appears during a downtrend and brings in the possibilities of a reversal to an uptrend. The same pattern is called a hanging man when it appears during an uptrend to indicate the possibilities of a reversal to a downtrend.
  2.  
  3. The long bottom shadow of a hammer represents the fear of further downward moves. A hanging man pattern also has a long bottom shadow i.e. a wide gap between the low and either the opening price of a green candle or the closing price of a red one. However, unlike the hammer it does not signify a fear for the downside but the following:
 
  • If the hanging man candle is a green candle then the small body and either no or an insignificant movement towards the upside, from the opening price, indicate a fear for upside and the long bottom shadow which extends below the previous candle represents the break of the previous support. The combination of these two facts indicate emerging bearish sentiments.

 

  • If the hanging man candle is a red candle then on one hand it represents a bearish move during the uptrend and again the long bottom shadow which breaks below the previous candle represents the break of the previous support. This combination again tells us that the uptrend may reverse.
 

Inverted Hammer and the Shooting Star

 
Inverted hammer and shooting star candlesticks

The Inverted Hammer

 
Shape of inverted hammer candlestickYet another picturesque name! Well, at least it will help you remember the pattern easily. The inverted hammer is just that – an inverted image of the hammer. Usually seen after a decline, this pattern, like the hammer, also signals the likelihood of a bullish reversal, and marks a support zone.
 
It comprises a small, insignificant real body, long upper shadow (at least twice or thrice the length of the body) and little or no lower shadow. It reflects the emergence of buying power, which took prices to a high, but sellers re-emerged from the sidelines and pushed back prices, giving the impression that the downtrend is still in force.
 
But the action by the bulls puts traders on notice, and they wait and watch to see if the preliminary bullish action by the bulls was a flash-in-the-pan or there is more follow-up strength. As in the case of the hammer, the confirmation comes in the next session in the form of a gap-up opening or a power white candle on high volumes. If you see this, you might consider taking a bullish position.
 
Similar to the hanging man pattern, the inverted hammer pattern works best if the high of this candle is higher than the high of at least the previous candle and better if it is higher than the highs of previous couple of candles. This fact represents the break over the previous resistances.
 

The Shooting Star

 
Shape of shooting start candlestick.This pattern looks just like the Inverted hammer but shows up after an upswing in prices. Why ‘shooting star’? Because it looks like a star falling out of the heavens, with a long flaming tail! Speaking of falling out of the heavens, this is what may happen to bulls if they disregard this pattern.
 
The pattern signals a bearish trend reversal or a resistance zone. The market action depicts a continuing advance by enthusiastic bulls, but the bears call ‘enough is enough’ and push prices down to the open-close level.
 
The pattern’s long upper shadow shows that prices closed well off their high, and that a buying climax may have taken place.
 
This exhibition of fire power by the sellers should put all remaining bulls on guard and watch for confirmation in the next session – if a gap-down opening or a power black candle forms on high volume, bail!
 
Well, that does it for the singles, and in the next episode we’ll see how it takes two to tango! More interesting names, I promise!
 
Let's have a look on inverted hammer and shooting star patterns on real trading charts:
 
Inverted hammer candlestick on a real trading chart. shooting star candle at the end of uptrend on a real Forex chart.
 
 

Difference between Inverted Hammer and Shooting Star Candles

 
Both inverted hammer and the shooting star patterns are same in shape and both can consists of either the green or red candles. The differences are as follows:
 
  1. The pattern is called inverted hammer when it appears during a downtrend. It indicates the reversal of downtrend to an uptrend. The same shape of candle appearing during an uptrend is called as a shooting star and indicates the trend reversal to downtrend.
  2.  
  3. The long upper shadow of a shooting star represents the fear of further upward moves. An inverted hammer pattern also has a long bottom shadow but in contrast it has the following psychological reading:
 
  • If the inverted hammer candle is a red candle then the small body and either no or an insignificant movement towards the downside, from the opening price, indicate a fear for further downside and the long upper shadow which extends above the previous candle represents the break of the previous resistance and hence the possibilities of further upward moves. The combination of these two facts indicate emerging bullish sentiments.

 

  • If the hanging man candle is a green candle then on one hand it represents a bullish move during the ongoing downtrend and again the long upper shadow which breaks above the previous candle represents the break of the previous resistance This combination again tells us about the emerging bullish sentiments.
 
 
 

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