Last time we touched on The Fundamentals of Reading Candlestick Patterns. This week we are going to learn how to read candlestick patterns to identify potential market moves. By potential market moves, we are referring to the direction the market is likely to take. If you haven’t read the fundamentals post from last week, I strongly suggest that you go back and read the post-otherwise you’ll be lost like you’re walking through a maze.
Anyways,back to today post. Single candle patterns are just that, single. They are formations consisting of just one candle. And, just like I mentioned, they are useful in helping you identify potential market moves. These are four single candle patterns that you need to know like the back of your hand. The first pattern is
If you’ve walked in here thinking I’m talking about Hammer the famous rapper.,Sorry, you’ve dialed the wrong station: This is a different kind of hammer. This hammer is very similar to another candle called The Hanging Hammer, except they post different results depending on previous price action. As you can see both have small bodies (black or white) supported by long skinny lower shadows and almost non-existent upper shadows. Now let’s take close look at both the hammer and hanging man on price action duty.
As you see the hammer is circled in red on the left. The hammer is also known as a bullish reversal candle. And anytime the hammer shows up at the bottom, just know that the bulls are about to start their climb again. The long shadow says the sellers depressed price, but that buyers withstood the pressure of the sellers and closed their session at the open
. A word of warning! Just because you see a hammer in a downturn does not mean you throw your buy order into the hat. You risk being eaten alive by the market.Instead, get more confirmation from the bulls before placing your buy order,as indicated by the two bullish harami candles. If you want to find out how to get confirmation on trades read up on Confirmation Signals:How to Weed the Chaff From The Good.
So here is a recap of the things to look for in a hammer
- It has a long low shadow three times that of the body
- It has next to no upper shadow
- The actual body is at the upper end of the trading range
- The color of the hammer is irrelevant. If it satisfies the above criteria, it’s a hammer.
We can’t forget the hanging man in this conversation. Can we? The hanging man is a bearish reversal pattern, as indicated by the red circle. The formation of the hanging man pattern means the sellers are outnumbering the buyers.
The long skinny lower shadow reflects sellers sending the price into depression mode during the trading session. Buyers then fight back by pushing prices back up, but only near the open area. Unfortunately this momentum is short-lived as there are no more buyers in the neighborhood to keep the price staying up. So the bears(or sellers) fill in to send the .price further down.
So here is a recap of the things to look for in a hanging man.The criteria is similar to that of the hammer
- A long skinny lower shadow three times the size of the body
- Next to no upper shadow.
- The actual body is at the end of the trading range.
- The color is irrelevant. A hanging man is a hanging man. However, a hanging man is more of a bear than a hammer.
Last but not least:
The Inverted Hammer and the Shooting Star are also identical twins. The difference being that the inverted hammer is a bullish reversal candle,while the hanging man is a bearish candle. Now let’s see both candles on price action duty.
The inverted hammer is circled in red right in front of us. Whenever it shows up at the tail end of the bearish trend, it can only mean one thing: The bulls are getting ready to take over. In other words, a reversal is about to occur. Price has been falling,but the bears are starting to lose steam. So it’s only right that the bulls take over the show. The long shadows tell us that the bulls tried to force the price further up.
But then, the sellers are like “Not so fast.” And so in an act of desperation, they tried to force the price down. Fortunately the bulls have enough energy in reserve to close the session near the open area. Since there are no more sellers left, it can only mean that all the sellers have jumped off the train,leaving the buyers to pretty much run things.
Now the shooting star is a bearish reversal candle, circled in red, at the end of the uptrend.Although it shares the same inverted personality as its hammer sibling, it shows up after the bulls run comes to an end. With its shape you can tell that the price opened low but pulled back at the bottom. This means the bulls tried to force the issue but the bears reacted and overwhelmed them. Since there are no buyers available, The only solution here is for the bears to take over from the bulls.
If you’re looking to refresh on your trend trading, revisit Trade Trends With Price Action Analysis
That’s a wrap for ”How To Read Single Candlestick Patterns To Identify Potential Market Moves .” Hopefully can recognize hanging man and co anytime a reversal is imminent. Next time we’ll touch on dual candlestick patterns.
Til next time take care.
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