Technical Analysis, Major Candlestick Reversal Patterns 1

1- Hammer

In the image below, the hammer pattern is represented only by the last candlestick of the illustration.

Formation

Hammers have small bodies and long lower shadows (or wicks). It must have little or no upper shadow. The size of the lower shadow should be at least twice as big as the size of the body. The color of the body is not important, however a hammer with a white body (hollow) is considered slightly more bullish than a hammer with a black body (filled). Hammers are formed in downtrends or downside movements.

Psychology behind the Hammer and Example

In a downtrend or a downside movement (where bears have control over prices), a hammer indicates that at certain point buyers took command of the market attracted by lower prices. Bull aggressive buying plus bears taking profits in their short positions reduce the bearish sentiment, signaling a possible trend reversal or correction. Following candlesticks should be used as a confirmation.

Hammers are signals to go long!

Hammer in Action

In this chart (USDCHF 1 hour chart) the hammer bulls start opening long positions aggressively creating enough pressure to make the market head up (yellow box).

2-Hanging Man

In the image below, the hanging man pattern is represented only by the last candlestick of the illustration.

Formation

Hanging Mans (as well as hammers) have small bodies and long lower shadows and the size of it should be at least twice as big as the size of the body in order to be a valid signal. It must have little or no upper shadow. The color of the body is not relevant, however a hanging man with a black body is slightly more bearish than a hanging man with a white body. Hanging Mans are formed during uptrends or upside movements.

Psychology behind the Hanging Man and Example

In an uptrend or upside movement (where bulls have control over the market), a hanging man indicates that as the prices go up bears are feeling more and more comfortable taking short positions that high. Although bulls finally take command of the market, it is known that bears feel optimistic at those levels and might signal a trend reversal, correction or consolidation periods.

Hanging mans are signals to go short!

Hanging Man in Action

In this daily EURUSD chart, the hanging man appears at the top indicating bears are felt comfortable taking short positions that high. It has a small upper shadow and a long lower shadow falling inside hanging man criteria. Although the market has not moved much from (yet) from the signal, it now has a slightly bearish sentiment and this can produce a trend reversal, or a possible correction or consolidation period.

 Wait a minute (you should ask) so what you are saying is that hammers and hanging mans are exactly the same pattern? Yes, that’s right, by now you should know the difference between those two but there are other conclusions you can take based on this. Give it some thought and try to arrive at your own conclusions.

3- Inverted Hammer

In the image below, the inverted hammer pattern is represented only by the last candlestick of the illustration.

Formation

Inverted hammers usually have small bodies, long upper shadow (at least twice as big as the size of the body) and a small or no lower shadow at all. The color of the body is not relevant, however an inverted hammer with a white body is considered slightly more bullish than inverted hammers with black bodies. Inverted hammers are formed during downtrends or downside movements.

Psychology behind the Inverted Hammer and Example

In a downtrend or downside movement (where bears have control over the market), an inverted hammer indicates that as the prices go down bulls are feeling more and more comfortable taking long positions that low (trying to buy low and sell high afterwards). Although bears finally take command of the market, it is known that bulls feel optimistic at those levels and might signal a trend reversal, correction or consolidation periods.

Inverted Hammers are signals to go long!

Inverted Hammer in Action

In the USDCHF chart above, the inverted hammer is identified in the yellow box. It has long upper shadow and no lower shadow and it was formed in a downside move. In this pattern, bears notice bulls are feeling more and more comfortable buying at current levels.

4- Shooting Star

In the Image below, the shooting star is represented by the last candlestick of the illustration.

Formation

Shooting Stars have small bodies and long upper shadows (or wicks). It must have little or no lower shadow. The size of the upper shadow must be at least twice as big as the size of the body. The color of the body is not important, however a shooting star with a black body (filled) is considered slightly more bearish than a shooting star with a white body (hollow). Shooting stars are formed in uptrends or upside movements.

Psychology behind the Shooting Star and Example

In an uptrend or an upside movement (where bulls have control over prices), a shooting star indicates that at certain point sellers took command of the market attracted by higher prices. Bear aggressive selling plus bulls taking profits in their long positions reduce the bullish sentiment, signaling a possible trend reversal or correction. Following candlesticks should be used as confirmation.

Shooting Stars are signals to go short!

Shooting Star in Action

In this chart we see the shooting star after an upside movement, at that point bears are feeling comfortable taking short positions making the price quickly fall back down. This creates a “bearish” environment scaring longs and making them take profits.