Single Candle Patterns

What is a bullish hammer？

A bullish hammer is a single candle found within a price chart indicating a bullish reversal. It differs from other candlestick patterns due to its single candle hinting at a turn during an established downtrend.

Pictured below the hammer is interpreted by understanding a candle's particular open, low high, and close levels. To create a hammer, the price must first significantly sell off to create a new low for a currency pair. However, after this decline, prices must significantly rally, causing prices to have a small body and close near their opening price.

Its important to remember that bullish hammers should have long wicks at least twice the length of the candle body. In addition, the candle itself can either be red or green depending on the strength of the reversal.

Often the bullish hammer is confused with a bearish hanging man candle. The misrepresentation is logical because both candles look identical. The difference between these two candles lies in their placement in a trending market. The hanging man has a small body and long wick but is found hanging at the end of an uptrend. Bullish hammers have small bodies and long wicks also but are only seen at the end of a downtrend.

How to spot a Bullish Hammer pattern:

Candle with a short body and long wick (at least 2x the size of the body)

Occurs at the bottom of a downward trend

Confirmation from other indicators as mentioned below

What does it indicate:

Trend reversal to the upside (bullish reversal)

Price rejection at a certain ‘key level’

Value to traders:

Indicates potential price reversals which could lead to entering a long position at the start of an upward swing – capitalize on the full upward movement

Easy to identify

Using a Bullish Hammer Candlestick Pattern in Trading

Bullish hammer candlestick in the forex market

Bullish hammer candles can be found on a variety of charts and time frames. Depicted above is an example of the hammer on the AUD/USD daily chart. From 20 April through to 31 May, the AUD/USD fell as much as 892 pips. This downtrend was concluded with a bullish hammer candle, and the price has subsequently rallied a total of 792 pips through todays price action.

AUD/USD Bullish Hammer candlestick:

As the strength of a hammer depends on its placement on the graph, normally traders use this candle in conjuncture with other indications of price support. This includes using tools such as Fibonacci retracements, pivot points and psychological whole numbers. In an ideal scenario, the wick of the hammer will penetrate a support level, but the body will close above support on renewed buying sentiment. With a new buying opportunity presented, traders may then choose to place stops under the created wick below support.

Bullish hammer candlestick in the equity market

The bullish hammer candle is interpreted the same way in all financial markets (indices, forex, commodities, and stocks) however, stock analysis requires further data as confirmation. It is important to note that brokers generally show internal volume figures for other financial markets, including forex, which is why the volume indicator is not reliable for an overall market volume estimate.

The chart below shows a bullish hammer candle on a Barclays PLC chart. In conjunction with the bullish hammer, there is a subsequent relative increase in volume traded as highlighted. This emphasizes institutional activity for this period. Due to the large volume, –the retail traders will not be able to affect such large volumes.

This ‘denial’ by bulls (traders taking long positions) after the recent swing low displays price rejection at that level. This level may be a key level whereby ‘buy’ orders are triggered. With the bullish hammer and the volume exhibiting this relationship, traders can have some form of validation to place a long trade. As always, the principles of risk management should apply to all trades.

Barclays PLC Bullish Hammer:

What is a shooting star candlestick pattern？

A shooting star formation is a bearish reversal pattern that consists of just one candle. It is formed when the price is pushed higher and immediately rejected lower so that it leaves behind a long wick to the upside. The long wick should take up at least half of the total length of the shooting star candle – see image below.

Additionally, the closing price should be near the low of the candle. As you can see, this creates an overall bearish structure because prices were unable to sustain their higher trade.

A similar structure is observed with the Inverted Hammer pattern . However, the Inverted Hammer relates to a bullish reversal signal as opposed to a bearish reversal signal. This candlestick pattern is often revealed at the bottom of a downtrend, support level, or pullback.

It is often questioned about the difference between a shooting star formation on a forex pair, stock or commodity. There is no variance between the different financial market types. A shooting star candlestick pattern will offer the same signal/s regardless of the instrument.

Advantages of using the shooting star in technical analysis

The shooting star pattern is a great tool for novice technical traders due to its simplicity. Spotting a potential shooting star candle is straightforward if traders adhere to the pattern description as explained above.

The candle pattern by itself will sometimes be flawed. However, if the pattern appears near a resistance level or trend line, then the shooting star can add confirmation to the new bearish bias. This is because a single candle is not extremely crucial in the overall trend or market movement.

Risk management is important to incorporate when using this candlestick pattern. This provides the trader with a ‘safety net’ should the market move negatively.

Benefits of the Shooting Star candlestick pattern:

Easy to identify

Reasonably reliable if all criteria are met

Suitable for but not limited to novice traders

Limitations of the Shooting Star candlestick pattern:

Shooting Star candle does not dependably define a short trade

Confirmation is needed – further technical/fundamental justification

Trading the shooting star pattern

EUR/USD Shooting Star Candlestick Pattern:

Trading this reversal pattern is fairly easy. First, the implication is for lower prices therefore we want to look for entries to short. Since the prices were previously rejected at the high of the shooting star, we will look to establish the stop loss at the recent swing high (red horizontal line on the chart).

A trader could simply enter on the opening of the next candle or, if the trader was more conservative and wanted to capture a better risk-to-reward ratio, trade the retest of the wick (black dashed line). Retests of the wick tend to occur when the wick is longer than normal.

Often prices will come back and retrace upward a portion of the long wick. A trader recognizing this might wait to enter around the middle of the wick rather than enter immediately after the shooting star candle forms. This means the trader is entering a short trade at a higher price and with a tighter stop loss reducing risk. Regardless of the entry mechanism, the stop loss will remain the same.

Regarding profit targets (blue line), DailyFX communicates taking profit at least twice the distance of the stop loss. So, if the stop loss is 90 pips away from the opening level, then look for at least 180 pips of profit potential. This commonly refers to a 1:2 risk-to-reward ratio which falls in line with the Traits of Successful Traders research.

What is an Inverted Hammer Candlestick？

The inverted hammer candle has a small real body, an extended upper wick, and little or no lower wick. It appears at the bottom of a downtrend and signals a potential bullish reversal. The extended upper wick suggests that the bulls are looking to drive the price upwards. Validation of this move will be confirmed or rejected through subsequent price action.

The inverted hammer should not be confused with the shooting star. Both candles have similar appearances but have very different meanings. The shooting star is a bearish signal and appears at the top of an uptrend, while the inverted hammer is a bullish signal at the bottom of a downtrend.

How to spot an Inverted Hammer candlestick pattern:

Candle with a small real body, a long upper wick and little to no lower wick

Appears at the bottom of a downtrend

Stronger signals are produced when the candle appears near key levels of support

What does it indicate:

Trend reversal to the upside (bullish reversal)

Rejection of lower prices (sometimes at a key level)

Advantages and Limitations of the Inverted Hammer Candlestick

Like all candlestick patterns, there are pros and cons to using the inverted hammer in a trading strategy:

Advantages

Favorable entry points: If the inverted hammer candle immediately triggers the new uptrend, traders are able to enter the market at the beginning of the trend and capitalize on the full upward movement.

Easy to Identify: The Inverted Hammer Candlestick is easy to identify on a chart.

Limitations

Over-reliance on a single candlestick: The Inverted Hammer is a single candle, representing price action. Relying entirely on a single candle to overturn market momentum, without considering additional supporting evidence/indicators, can result in sub-optimal outcomes.

Short-lived retracement: The Inverted Hammer Candle may signal a momentary surge in bullish price action that fails to develop into a longer-term trend reversal. This can happen if buyers arent able to sustain buying pressure amidst a dominant downward trend.

Using the Inverted Hammer Candlestick Pattern in Trading

Trading the inverted hammer candle involves a lot more than simply identifying the candle. Price action and the location of the hammer candle, when viewed within the existing trend, are both crucial validating factors for this candlestick.

Trading the Inverted Hammer Candlestick near a Line of Support

Below, is a GBP/USD chart exhibiting a downtrend that consolidates at support. The appearance of the inverted hammer candle near support provides the basis for the bullish reversal. Traders can place stops below the support line to limit downside risk in the event the market moves in the opposite direction.

Targets can be placed at previous levels of resistance that result in a positive risk-to-reward ratio. Since the inverted hammer candle often signals a reversal in trend, and trends can persist for a long time, traders often identify multiple target levels or simply utilize a trailing stop.

Inverted Hammer Technical Analysis: Fibonacci Retracement

The inverted hammer can also be used to identify retracements in the market. The EUR/USD chart below highlights the inverted hammer (in blue) which signals renewed bullish momentum. The Fibonacci retracement level of 38.2% presents a possible level of support before the price regains its upward momentum.

Top traders will look for complementary signals on the chart in order to increase the probability of a successful trade. These will either support or invalidate the trade idea before it is placed. In this example, the appearance of the inverted hammer at the 38.2% level provides a stronger case for the bullish bias as the price seems to resist a move lower at this level.