For those wanting to understand reverse candlestick patterns on a deeper level, you’ve come to the right place. In our last article, we discussed Doji patterns — why they occur, how a trader can spot them, and what market trends they precede. But, to understand reverse candle stick patterns, it is also important to understand candlestick charts in general:
Candlestick charts offer detailed information about price movements within a particular time frame, including the opening, closing, high, and low prices. Each "candlestick" consists of a body (the range between the open and close) and wicks (shadows) that extend to high and low prices. Green (or white) candles indicate prices closed higher than they opened, while red (or black) candles show prices closed lower than they opened.
In this article, we will be introducing additional members of reverse candlestick patterns – the inverted hammer & the shooting star.
As we already mentioned, reverse candlestick patterns signify a potential shift in market trends. Similarly, the only difference between the inverted hammer and the shooting star pattern is the place where the trader spots them. If the candlestick occurs in a bull trend, it signifies that the market will shift to a bear trend. In this case, we call it the shooting star. If the candlestick occurs in a bear trend, it signifies that the market will shift to a bull trend. In this case, we call it the inverted hammer.
These two patterns consist of a candlestick with a body, a longer upper shadow that is typically twice the length of the candlestick of the body, and a minimal-to-non-existent lower shadow. As you might have noticed, the Inverted Hammer & Shooting Star patterns are essentially mirrored versions of Hammer & Hanging Man.
In both scenarios, the length of the upper shadow has a significant meaning, as it indicates the demand for the given asset in the set time period. In the case of the inverted hammer, it is very important to wait for a subsequent candlestick that would confirm the bullish trend.
To summarize – ‘The Shooting Star’ occurs when a bullish trend is ending and a bearish trend is beginning. Its long upper shadow indicates that the buyers have attempted to ramp the price up, but the sellers pushed the price back up.
‘The Inverted Hammer,’ on the other hand, occurs when a bearish trend is ending and a bullish trend is beginning. If you spot it near a support line, it is always wise to wait for a trend confirmation from the subsequent candle.
Hopefully, this article will help out with recognizing and working with the inverted hammer & shooting star reverse candlestick patterns. Keep your eyes peeled for our next article, where we will discuss more useful candlestick patterns you’re likely to encounter.
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