The
Japanese Candlestick chart is currently the most popular price chart. It is
interesting to know that the Japanese Candlestick chart had been used in Japan
since the 18th century. It was developed by a Japanese rice trader
named Munehisa Homma. Munehisa Homma, considered one of the most successful
traders in history, claimed that the psychological aspect of the market was
extremely critical to trading success. The emotions of traders were reflected
in the prices and showed in the candles.
A
candlestick consists of the candle body and the shadow; the body denotes the
opening and closing price whereas the shadow denotes the intra-period high and
intra-period low. The period can range from one hour, one day, one week to even
one month depending on the time period. The color of the body depends if the
bulls or bears have won the period. If the bull has won and the closing price
is higher than the opening price, then the body is white in color. If the bear
has won, which means that the closing price is lower than the opening price,
then the body is black in color. Therefore, with just a glance, a person can
easily see if the bull or bear has won within a period.
A
candle pattern can be a single candlestick or multiple candlestick lines. Most
candle patterns are inversely related. For each bullish pattern, there is a
similar bearish pattern. The primary difference is their position relative to
the prior trend of the market.
In
this article, we will study two single candlestick reversal patterns: The
Hammer and the Hangman.
The Hammer
Hammers
are found at the bottom of a downtrend. For the past few days, the bear was
very strong and was victorious in the battle, thus, a number of black candles
appeared and the price trended down. One fine day, when the bear was expected
to win the day again, the bull appeared out of nowhere and ambushed the bear!
This shows that the market has a very bullish feel about it, hence chances of
stock price changing to a short term uptrend is higher.
Figure
1: Hammer candle
There are several criteria that must be met:
- Hammers are usually seen at the bottom of the trend
- The shadow must be at least twice the size of the body
- Can exist in both white or black
- Very little or no upper shadow
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Figure
2: Hammer with white candle confirmation
As seen in Figure 2, there was a preceding downtrend before we observed that a Hammer had formed, which was then followed by a white confirmation candle.
Figure
3: Double Hammer with white candle confirmation
Figure 3 is another example of a Hammer. Instead of having a single Hammer, another Hammer appeared the next day, which signaled that the bull was fighting very hard to win the battle, thus signifying a bullish trend.
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The Hanging man
As
the name implies, the Hanging man has a bearish connotation. The story is very
similar to the hammer but with opposite roles. This time, the bear ambushed the
bull and the market has a bearish feel to it.
Figure 4: Hanging man candles
There are several criteria that must be met:
- Hanging men are usually seen at the top of the trend
- The shadow must be at least twice the size of the body
- Can exist in both white or black candle
- Very little or no upper shadow
Figure
5: Hanging man candles foretell a bearish feeling
Figure
6: The Hanging man foretells a major retracement
Both
Hammer and Hanging man candles look the same but appear in different trends.
Look for the Hammer when stocks have been coming down and look for the Hanging
man when the stock has been continuously going up. When the Hammer or Hanging
man appears, it signifies a possible strong trend reversal.
The
examples above are screened using ChartNexus software with XPertTrader (www.chartnexus.com). The Hammer and
Hangman are two of the patterns that are taught in the ChartNexus Candlesticks
Analysis (CCA) course. Apart from learning about various types of candlesticks
patterns, ChartNexus trainers also educate participants on how to combine
candlesticks analysis with various indicators to achieve the all-important
upper hand in trading.
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This article first appeared in Smart Investor in 2009.
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.
