Chart Lesson 8: Single Candlestick Patterns

Every lesson that I learn and write about should build on the last.  Hopefully these all get shown in the correct order that they should be learned.  This lesson will be about single candle patterns.  As prices approach certain levels such as support, resistance or yearly highs or lows, it is important to look for clues as to how the market will treat that level.  When these candles are spotted, both traders and investors are given a clue how the market feels about the price level, and what might happen next.

The Hammer and Hanging man

These Hammer and Hanging Man look identical but mean different things depending on where we spot them.  They can be identified by small bodies, short or missing upper shadows, and long lower shadows (2 to 3 times the size of the body).  The color of the body is not important, so long as it is at the top of the trading range (top of the candle).

The Hammer (left) is a Bullish Reversal pattern that forms in a downtrend and may be an indication of a bottom.  The color of the Hammer is not important, but a white candle may be considered more bullish.  A white candle on the next trading day can be confirmation of the reversal.  A buy order can be placed with a stop below the body of the Hammer.  The Hanging Man (right) is the opposite, bearish.  It is found after an uptrend and may indicate the top.  Again, the candle can be black or white, but black may be considered more bearish.  After getting confirmation of a black candle on the next day, a sell order can be placed with a stop above the body of the Hanging Man.  These are also good places to close existing positions if riding a trend.  You may want to consider moving a trailing stop or completely closing a position after spotting these candles.

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star are the exact same as the Hammer and Hanging Man except for their appearance.  Instead of small bodies with short upper shadows and long lower shadows, they have short lower shadows and long upper shadows.  When spotted in an up or down trend, they both signal a possible reversal.

Understanding these patterns can allow us to see a potential reversal, which will allow us to develop a plan and execute it.  Whether it gives up our entry or exit point, learning indicators is an excellent way to avoid making bad trades.  They can also help us minimize the damage of bad trades, and maximize the good ones.