Since you’re familiar with important fundamental candlestick patterns like spinning tops, marubozus, and dojis, let’s cover some key single candlestick patterns. The following four single candlestick patterns often signal a potential market reversal.

The Hammer and the Hanging Man

Hanging Man and the Hammer look identical but derive their meaning from past price action. Their bodies are different (black/red or white/green), their lower shadows are long, and their upper shadows are either non-existent or very short.

In a downtrend, a Hammer often indicates that the market is finishing a reversal. In an uptrend, the Hanging Man indicates that the market may be finishing a reversal and the price may be preparing to start a move downward.

Hammer

The Hammer candlestick is a bullish reversal pattern that is established during downtrends. A bottom is being hammered out by the market, hence the name.

Hammers signal that the price action is falling, may have hit a bottom, and will start rising again once the bottom is reached.

The longer shadow signals that sellers pushed prices lower, but buyers overcame that selling pressure to push prices higher and closer to the open.

However, you shouldn’t submit a buy order simply because you see a hammer structure in a downtrend. Before you proceed, you should look for more bullish confirmation. For example, if the next candle — or even the next few candles — after the Hammer remains white/green, it might be confirmation that a new price trend is forming.

Here’s how you recognize a Hammer candlestick:

  • The long shadow is about two or three times the size of the real body
  • Little or no upper shadow
  • The real body is at the upper end of the trading range
  • The color of the real body is unimportant

Hanging Man

The Hanging Man often marks a bearish reversal of an uptrend to the downside. It may indicate that a top has been formed or the price has met strong resistance. Ultimately, a Hanging Man may signal that the sellers are starting to overtake the buyers in the market.

The long lower shadow indicates that sellers pushed the price lower, but the buyers were able to push the price back up somewhat — but only near the open price. What does that mean? The buyers may be losing steam and lack the momentum to keep pushing prices higher.

Here’s how you recognize a Hanging Man candlestick:

  • A long lower shadow that’s about two or three times the length of the real body
  • Little or no upper shadow
  • The real body is at the upper end of the trading range
  • The color of the body is unimportant, but a black/red body is more bearish than a white/green body

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star also look the same. The only real difference between them is whether the market is in a downtrend or an uptrend. Inverted Hammers are bullish reversal candlesticks, while Shooting Stars indicate a bearish reversal.

Both of these types of candlesticks have small bodies, a long upper shadow, and little to no lower shadow.

Inverted Hammer

If the price has been moving steadily downward and you see an Inverted Hammer, you might be looking at a potential reversal.

The long upper shadow indicates that buyers are trying to take control and bid the price higher. But the sellers took the reins back and forced the price lower. The buyers still managed to close the candlestick near the open.

The fact that sellers could not force prices lower is a good indication that all those who were looking to sell have probably already sold. And if no sellers remain, what’s left? That’s right, buyers.

Shooting Star

The Shooting Star is a bearish reversal pattern that looks the same as an Inverted Hammer — except Shooting Stars appear when the price has been in an uptrend.

The shape of the Shooting Star implies that the price opened at its low, rallied, but ended up in a pullback towards the bottom.

The buyers tried to push the price further up, but the sellers won the battle and overpowered them — a sure sign of a bearish reversal, as there aren’t any buyers left.

 

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