Single Candlestick Patterns Tell Us that Market Reversal Might Happen

May 8, 2021
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What are single candlestick patterns?

If we encounter single candlestick patterns on a chart, then we may expect market reversals. These candlesticks are significant signals. We can classify single candlestick patterns into four types: the hammer and hanging man, inverted hammer, and shooting star

The first two types: the hammer and hanging man

We placed these first two types together because they look the same, but they do not mean the same. Looking at the chart, we can describe them as patterns with tiny bodies, long lower shadows, and no upper shadow. They only differ with their body’s color. It may be black or white (hollow or filled).

The hammer

Let us start with the hammer. Since it forms during a downtrend, it is a pattern that signals a bullish reversal. As the price falls, the hammer gives out a signal that the bottom is getting near and the price increase is about to start. Here are major hammer recognition points:

  • Upper shadow. It usually has no upper shadow. If it has, it is tiny.
  • Lower shadow. It should be twice or thrice the size of the real body. Long lower shadows mean that the sellers made the prices lower, but buyers went past that selling pressure that they closed near the open.
  • Real body. It is on the trading range’s upper end.
  • Color. It is not too relevant.

You should note not to place a buy order instantly just because there is a hammer during a downtrend. Make sure to look for a bullish confirmation first. When we say wait for bullish confirmation, we mean at least waiting or a white candlestick closing above the open to the hammer’s right side.

The hanging man

 

In contrast, the hanging man is a pattern that gives out bearish reversal signals. It also marks a solid or top resistance level. As the price rises, the hanging man forms and suggests that there will be more sellers than buyers.

Its long shadow tells us that sellers placed lower prices in the trade, but the buyers went past this. They were able to increase the price at least near the open. When this happens, we can think that the buyers are not enough anymore to improve the price continuously.

As we mentioned a while ago, the hanging man has the same recognition points as the hammer. They look the same, but a black or filled body is more likely bearish than a white or hollow body.

The third and fourth type: the inverted hammer and shooting star

The inverted hammer and the shooting star also look the same, but you can tell them apart in a downtrend or an uptrend. They both have tiny bodies, little to no lower shadow, and long upper shadows. A bullish reversal is for an inverted hammer, and a bearish reversal is for the shooting star.

The inverted hammer

We see inverted hammers during downtrends, and they tell us that a reversal might happen. The long upper body means that buyers attempted to bid the price more, but the sellers tried to drive the price down instead. However, the buyers were still able to close near the open. The sellers failed to close at a lower price, so there were no sellers left, only buyers.

The shooting star

In contrast, the shooting star looks like the inverted hammer, but we see them during an uptrend and suggests a bearish reversal. It tells us that the price opened at its low. It rallied later on, but it went back at the bottom. Furthermore, the buyers tried to increase the price, but to no avail, sellers overpowered them.

 

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