CANDLESTICKS - Inverted Hammer & Shooting Star

Inverted Hammer

As its name implies, the inverted Hammer looks like an upside down version of the hammer candlestick pattern. The pattern is made up of a candle with a small lower body and a long upper wick which is at least two times as large as the short lower body. The body of the candle should be at the low end of the trading range and there should be little or no lower wick in the candle.

Like the hammer candlestick pattern, the Inverted Hammer consists of one candle and when found in a downtrend is considered a potential reversal pattern.After a decline, the long upper shadow indicates buying pressure during the session. However, the bulls were not able to sustain this buying pressure and prices closed well off of their highs to create the long upper shadow. Because of this failure, bullish confirmation is required before action. An Inverted Hammer followed by a gap up or long white candlestick with heavy volume could act as bullish confirmation.

Shooting Star

The Shooting Star is a bearish reversal pattern that forms after an advance and in the star position, hence its name.

A Shooting Star can mark a potential trend reversal or resistance level.

The Shooting Star looks exactly the same as the Inverted hammer, but instead of being found in a downtrend it is found in an uptrend and thus has different implications.

The candlestick forms when prices gap higher on the open, advance during the session and close well off their highs. The resulting candlestick has a long upper shadow and small black or white body. After a large advance (the upper shadow), the ability of the bears to force prices down raises the yellow flag.

As this occurred in an uptrend the selling pressure is seen as a potential reversal sign. To indicate a substantial reversal, the upper shadow should relatively long and at least 2 times the length of the body and like to see an increase in volume on the day the Shooting Star forms.Bearish confirmation is required after the Shooting Star and can take the form of a gap down or long black candlestick on heavy volume.

CANDLESTICKS - Hammer & Hanging Man

Hammer

This candle looks like a hammer, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be valid hammer most traders say the lower wick must be two times greater than the size of the body portion of the candle, and the body of the candle must be at the upper end of the trading range.

The Hammer is a bullish reversal pattern that forms after a decline.

In addition to a potential trend reversal, hammers can mark bottoms or support levels.After a decline, hammers signal a bullish revival.

When you see the hammer form in a downtrend this is a sign of a potential reversal in the market as the long lower wick represents a period of trading where the sellers were initially in control but the buyers were able to reverse that control and drive prices back up to close near the high for the day, thus the short body at the top of the candle.

While this may seem enough to act on, hammers require further bullish confirmation.The low of the hammer shows that plenty of sellers remain.

After seeing this chart pattern form in the market most traders will wait for the next period to open higher than the close of the previous period to confirm that the buyers are actually in control.Further buying pressure, and preferably on expanding volume, is needed before acting. Such confirmation could come from a gap up or long white candlestick.

Two additional things that traders will look for to place more significance on the pattern are a long lower wick and an increase in volume for the time period that formed the hammer.Hammers are similar to selling climaxes, and heavy volume can serve to reinforce the validity of the reversal.

Hanging Man

A hanging man is a type of candlestick pattern, made up of just one candle. It has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hanging man most traders say the lower wick must be two times greater than the size of the body portion of the candle, and the body of the candle must be at the upper end of the trading range.

The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. The low of the long lower shadow confirms that sellers pushed prices lower during the session. Even though the bulls regained their footing and drove prices higher by the finish, the appearance of selling pressure raises the yellow flag. As with the Hammer, a Hanging Man requires bearish confirmation before action. Such confirmation can come as a gap down or long black candlestick on heavy volume.

CANDLESTICKS - Spinning Tops

Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning tops. One long shadow represents a reversal of sorts; spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand and the result was a standoff. After a long advance or long white candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.

CANDLESTICKS - Long Versus Short Shadows

The upper and lower shadows on candlesticks can provide valuable information about the trading session. Upper shadows represent the session high and lower shadows the session low. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlestick with long shadows show that traded extended well past the open and close.

Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session, and bid prices higher. However, sellers later forced prices down from their highs, and the weak close created a long upper shadow. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.

CANDLESTICKS - Marubozu

Even more potent long candlesticks are the Marubozu brothers, Black and White. Marubozu do not have upper or lower shadows and the high and low are represented by the open or close. A White Marubozu forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. Black Marubozu form when the open equals the high and the close equals the low. This indicates that sellers controlled the price action from the first trade to the last trade.

CANDLESTICKS - Long Versus Short Bodies

Generally speaking, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.

Long white candlesticks show strong buying pressure. The longer the white candlestick is, the further the close is above the open. This indicates that prices advanced significantly from open to close and buyers were aggressive. While long white candlesticks are generally bullish, much depends on their position within the broader technical picture. After extended declines, long white candlesticks can mark a potential turning point or support level. If buying gets too aggressive after a long advance, it can lead to excessive bullishness.

Long black candlesticks show strong selling pressure. The longer the black candlestick is, the further the close is below the open. This indicates that prices declined significantly from the open and sellers were aggressive. After a long advance, a long black candlestick can foreshadow a turning point or mark a future resistance level. After a long decline a long black candlestick can indicate panic or capitulation.

Elements of Candlestick

In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation.
Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at prices, they don't involve any calculations.Each candlestick represents one period (e.g., day) of data. The figure below displays the elements of a candlestick :

Candlestick charts are flexible, because candlestick charts can be used alone or in combination with other technical analysis techniques. A significant advantage attributed to candlestick charting techniques is that these techniques can be used in addition to, not instead of, other technical tools. In fact this system is superior to other technical tools. Candlestick charting techniques provide an extra dimension of analysis. As with all charting methods, candlestick chart patterns are subject to interpretation by the user. As you gain experience in candlestick techniques, you will discover which candlestick combinations work best in your market.