One-candle patterns

Candles with names

In the last level you learned the story inside each candle. Some candle shapes show up so often that traders gave them names. Here are the ones worth knowing.

The hammer

A hammer has a small body near the top and a long lower wick, at least about twice as long as the body. It shows up after price has been falling.

The story: sellers pushed price way down during the period. But buyers fought back and pushed it almost all the way up again before the close. The sellers had control, and they lost it. That's why a hammer can be an early clue that a fall is ending. It looks like a hammer "hammering out a bottom."

The shooting star

A shooting star is the hammer flipped upside down: a small body near the bottom and a long upper wick. It shows up after price has been rising.

The story: buyers pushed price way up, but sellers slammed it back down before the close. The buyers' push failed. It can be an early clue that a climb is ending.

Same shape, different name

Here's a funny thing. The name depends on where the candle shows up.

• Hammer shape after a fall: hammer.
• Hammer shape after a rise: hanging man. It's a warning that sellers were able to push price down hard during the period.
• Shooting star shape after a fall: inverted hammer. Buyers tried to push up, which can be an early hint of a turn.

The color of the body matters less than the shape and the place.

The doji

You met the doji in the last level: almost no body, because price closed about where it opened. It means a tie. After a long run up or down, a doji can mean the winning team is getting tired. In the middle of a sideways market, a doji means very little, because ties happen there all the time.

Big bodies

A candle that is almost all body, with tiny wicks, is called a marubozu (a Japanese word meaning "bald," because it has almost no wicks). One team was in charge from the open to the close.

• A big green body: buyers ran the whole period.
• A big red body: sellers ran the whole period.

A big body breaking out of a range says a lot more than a big body in the middle of nowhere.

Wait for confirmation

A single candle is a clue, not an answer. Many traders wait for confirmation: the next candle agreeing. After a hammer, they'd like to see the next candle close higher. After a shooting star, they'd like to see the next candle close lower. If the next candle disagrees, the clue failed.

Remember

• Hammer: long lower wick after a fall. Shooting star: long upper wick after a rise.
• The same shape gets a different name (hanging man, inverted hammer) depending on where it shows up.
• Big bodies show one team in charge. Dojis show a tie.
• One candle is a clue. Many traders wait for the next candle to confirm it.