A candle pattern can be a single candlestick line or multiple candlestick lines, seldom more than five or six. Here are listed the most frequently occurring reversal patterns. Most of the candle patterns are inversely related. That is, for each bullish pattern, there is a similar bearish pattern. The primary difference is their position relative to the short-term trend of the market.
There are more than 30 named reversal patterns and approximately 10 continuation patterns but here we will focus on the reversals to assist the identification of trend changes.
NOTE: In the diagrams three small vertical lines precede the ‘pattern' which represent the previous trend of the market and are not included in any reference to pattern relationships.
Hammer
The market has been in a downswing but the failure of the market to preserve the selling reduces bearish view, and most traders will be restless with any bearish positions they might have. If the close is above the open, causing a green body, the situation is even better for the bulls. Confirmation would be a higher open with yet a still higher close on the next trading period.
Hanging Man
For the Hanging Man, market is considered bullish because of uptrend and the charge action for the interval must trade much lower than where it opened, then rally to close near the high in order for the Hanging Man to seem. This is what causes long lower shadow which shows how the market just might begin a sell-off. If the market opens lower the next period, there would be many participants with long positions looking for an opportunity to sell.
Rules of Recognition
• The small body is at the upper end of the trading range
• The colour of the body is not main
• The long lower shadow should be much longer than the length of the real body, usually two to three times
• There should be no upper shadow, or if there is, it should be very small.
The body colour of the Hanging Man and the Hammer can add to the significance of the pattern's predictive ability. A Hanging Man with a red body is more bearish than one with a green body. Likewise, a Hammer with a green body would be more bullish than one with a red body. As with about single candlestick patterns like the Hammer and the Hanging Man, it is significant to wait for confirmation. This maybe simply the next trading period opening action.
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