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Shapes, Sizes and PatternsThe advanced features of the candlesticks allow traders to understand to more extent what has been happening in the market, for example: A long Red body can indicate selling pressure, while a long Green body can indicate positive sentiment among traders.
Over the years the different shapes of the candlesticks have received names. Traders tend to search for these types of candlesticks as the patterns formed by the candles will often point to reversals in the current price movement.
One must note that this tutorial explains the basic reversal patterns and their criteria: Hammer The Hammer consists of a long tail with a short body. An ideal Hammer, hinting to a possible reversal, will occur towards the end of a down trend. Criteria: - The tail should be approximately 2/3 of the body
- There should not be an upper shadow
- The body is located towards the upper part of the candlestick
- Even though the color of the candle is less significant, a Green Hammer will indicate to more bullish sentiment in the security.
*courtesy of netdania.com
Hammers are one of the most popular candles that technical traders use to identify a change in market trend. Technical traders try to identify the hammers by the length of the tail and normally wait to receive confirmation from the next candlestick.
The following chart is a daily chart of the Diamonds Trust Series, an ETF (Exchange Trust Fund) that tracks the Dow Jones Index. Taking a look at the chart one can see, that the trust fund formed a magnificent hammer candlestick, which was followed by a change in trend. From a low of approximately 125, in August, the Diamond ETF rallied to 141.
The following weekly chart of the USD/CAD shows how a weekly hammer was formed leading to a massive rally that lasted for approximately 2 months.
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