Single candlestick patterns can reveal critical information about potential market reversals. Recognizing these patterns can provide valuable insight into shifts in market momentum and sentiment.
Let’s explore four essential single candlestick patterns: the Hammer, Hanging Man, Inverted Hammer, and Shooting Star.
Hammer and Hanging Man
The Hammer and Hanging Man look identical but carry entirely different meanings depending on the market's prior movement. Both patterns feature:
A small real body (filled or hollow).
A long lower shadow.
Little to no upper shadow
Hammer: Bullish Reversal Pattern
The Hammer typically forms at the end of a downtrend and suggests a possible bullish reversal. Its long lower shadow indicates that sellers attempted to push the price lower, but buyers stepped in to regain control, closing the price near the session’s open.
Key Features of a Hammer:
- The lower shadow is 2-3 times the length of the real body.
- Minimal or no upper shadow.
- The real body is positioned near the upper end of the trading range.
- The body color (green or red) is not critical, though a green body is slightly more bullish.
Confirmation: Wait for a subsequent bullish candlestick to close above the Hammer’s open before taking action.
Example:
Imagine monitoring website traffic for an e-commerce site during a sales slump. A Hammer-like trend might indicate a bottom, suggesting a potential recovery in traffic as customers start returning.
Hanging Man: Bearish Reversal Pattern
The Hanging Man typically appears at the end of an uptrend and signals a potential bearish reversal. Its long lower shadow suggests that sellers entered the market, pushing prices lower during the session. Even though buyers managed to recover some ground, the failure to close significantly higher hints at weakening momentum.
Key Features of a Hanging Man:
- A long lower shadow, 2-3 times the length of the real body.
- Little or no upper shadow.
- The real body is near the top of the trading range.
- A black (filled) body is more bearish than a white (hollow) body.
Confirmation: Look for a bearish candlestick closing below the Hanging Man to confirm a potential reversal.
Example:
In business sales data, a Hanging Man pattern might represent a peak in monthly revenue, signaling resistance as demand wanes.
Inverted Hammer and Shooting Star
The Inverted Hammer and Shooting Star also share the same structure but have different implications depending on the trend. Both patterns feature:
- A small real body (filled or hollow).
- A long upper shadow.
- Little to no lower shadow.
Inverted Hammer: Bullish Reversal Pattern
The Inverted Hammer forms during a downtrend, signaling the possibility of a bullish reversal. Its long upper shadow shows that buyers attempted to push the price higher, even as sellers resisted. The eventual close near the session’s open suggests that selling pressure is waning, and buyers may soon take control.
Key Features of an Inverted Hammer:
The upper shadow is significantly longer than the real body.
Little or no lower shadow.
The real body sits near the lower end of the trading range.
Confirmation: Wait for a bullish candlestick to close above the Inverted Hammer’s high for confirmation.
Example:
In employment metrics, an Inverted Hammer could represent a period when job losses begin to slow, hinting at a potential recovery in hiring.
Shooting Star: Bearish Reversal Pattern
The Shooting Star appears during an uptrend, signaling a potential bearish reversal. Its long upper shadow indicates that buyers tried to push prices higher, but sellers regained control, forcing a close near the session’s low.
Key Features of a Shooting Star:
A long upper shadow, much larger than the real body.
Minimal or no lower shadow.
The real body sits near the lower end of the trading range.
Confirmation: Look for a bearish candlestick closing below the Shooting Star’s low to validate the reversal.
Example:
In customer subscription data, a Shooting Star pattern might signify a peak in new signups, suggesting the momentum is fading as cancellations increase.
Final Thoughts
Single candlestick patterns like the Hammer, Hanging Man, Inverted Hammer, and Shooting Star offer valuable insights into potential market reversals. However, it’s crucial to confirm these patterns with subsequent price action before making trading decisions.
