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In the last post, we summarised the anatomy of Japanese candlestick patterns. We also provided a review of the basic candlestick patterns which you can use to predict when the market will continue either in its direction or reverse from it. Indeed, Japanese candlestick patterns are a very important guide in Forex trading.
Here, we will continue with our review of them. We will break down the most important, specific details you need to know about the single types. Because of the essential nature of these details, it is important you commit them to memory so that you will be able to easily take trading decisions with them.
Single Japanese Candlestick Patterns
– Single Japanese candlestick patterns are those patterns that are made up of just one candlestick. Usually, they are used to signal potential market reversals.
– There are four of them, occurring in pairs (meaning there are two pairs). They are the hammer and the hanging man and the inverted hammer and shooting star.
– The hammer has a small real body. It does not have an upper shadow. When the upper shadow is present, it is small. It, however, has a long lower shadow. Also, whether black or red, the colour of its real body does not matter.
– The hammer is formed during a downtrend. It indicates that the downtrend is already “hammering out” and will soon reverse. The long lower shadow of this pattern indicates that despite their attempts, sellers could not close the market below the lowest price of the day.
– The Hammer is a bullish reversal pattern. Its formation usually signifies the beginning of an uptrend.
The Hanging Man and the Hammer.
©Babypips.com.
– The Hanging Man has a small real body the colour of which does not also matter. The upper shadow is either small or absent. The lower shadow, on the other hand, like in the hammer too, is long. However, although the colour of the small real body does not matter, a black or red one, is considered a very strong signal of reversal.
– The Hanging Man is formed at the end of an uptrend. It indicates that the trend is already “hanging” at a resistance level and so can possibly reverse from it. The long lower shadow shows that there is little buying pressure to sustain the market in its upward direction.
– The Hanging Man is, therefore, a bearish reversal pattern. Its formation indicates the initiation of a downtrend, a possibly good time sell.
Summary: The Hammer is formed at the end of a downtrend. It indicates that the prevailing downward-moving trend will reverse and an uptrend will take over. So, after confirmation this could be a good place to consider buying. On the other hand, the Hanging Man is formed at the end of an uptrend. It signals that a downward-moving trend will soon be initiated. So, you should be ready to consider selling after the confirmation.
©Babypips.com
– The Inverted Hammer has a long upper shadow but a small or nonexistent lower shadow. Although the real body can be either hollow or filled, it is better either white or green and suggests a potential bullish reversal. This is because the long upper shadow of the Inverted Hammer indicates that despite sellers’ attempts to push the price lower during the time frame, the market eventually closed at a price higher than the open price for the time frame under consideration.
– The Inverted Hammer, therefore, is found at the end of a downtrend and at the beginning of an uptrend.
The Shooting Star and the Inverted Hammer
©Babypips.com.
– The Shooting Star also has a long upper shadow but a small or nonexistent lower shadow. Although the real body is either hollow or filled, it is better either black or red and suggests a potential bearish reversal. Why? It is because its shape indicates that despite buyers’ efforts to push the price up, sellers came in and successfully made the market close lower during the considered frame of time.
– As a result, the Shooting Star is formed at the end of an uptrend and at the beginning of a downtrend.
The Inverted Hammer and the Shooting Star. The Inverted Hammer signifies the end of a downtrend. So, after confirmation of the trend reversal this is a good place to consider buying. Conversely, the Shooting Star indicates the end of an uptrend. So, after confirmation of the trend reversal this is a good place to consider selling.
Summary: Trading With Single Candlestick Chart Patterns
The most important use of single Japanese candlestick patterns is in the identification of market reversals. That is why:
– When a hammer emerges, at the end of a downtrend, the trend may reverse and give way to an uptrend.
– When a hanging man emerges, at the end of an uptrend, the trend may reverse and give way to a downtrend.
– When an inverted hammer emerges, at the end of a downtrend, the trend may reverse and give way to an uptrend.
– When a shooting star emerges, at the end of an uptrend, the trend may reverse and give way to a downtrend.
However, it is important you confirm first because the appearance of any of those candlesticks does not necessarily imply sure reversals. Sometimes, the market maintains its course. This is why you should first ensure that reversals have played out first before you place your trades.
So, here, you have become further intimated with the Single Japanese Candlestick Patterns – from the Hammer and Hanging Man to the Inverted Hammer and the Shooting Star. If you want to succeed at Forex trading, it is important you know those important details as summarised here. They will help you to make smart, sound trading decisions.
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