| Updated: October 30, 2024Patterns including one candlestick. Doji candlesticks
This lesson will cover the following
- What are these patterns?
- What information do they carry?
- What is a doji and what can it tell us?
Patterns consisting of only one candlestick have three variations, as each one can be bearish and bullish. They can be presented as follows:
1. Hammer (bullish version) and Hanging Man (bearish version),
2. Inverted Hammer (bullish version) and Shooting Star (bearish version),
3. Yo Sen (bullish version) and In Sen (bearish version).
Hammer and Hanging Man formations
These formations appear almost identical on the price chart, but they have a different role to play. They both have very long lower wicks, small bodies and short or absent upper wicks.
The Hammer represents a bullish reversal formation – it is formed after prices have previously been in a decreasing trend. It can usually appear at support levels. What it signals is, that price action may have probably reached a low limit, while prices may begin to change their direction and rise. The appearance of the Hammer provides traders with the opportunity to enter into a long position, but this does not mean they should purchase at once. As with any other technical analysis tool, this should not be taken into consideration as a sole indicator. In addition, traders need to look for confirmation, that price action is reversing up. Usually this may be a green candle, which has a close price above the open price (or high price) of the candle, preceding the Hammer candle.
The Hammer formation can be recognized, when the following features are present:
1. It has a long lower wick, at least three times longer than the body
2. It has a short or absent upper wick
3. The body appears to be at the upper end of the candle
4. The color of the candlesticks body is not that relevant, but a green Hammer is preferred by traders.
The Hanging Man represents a bearish reversal formation – it is formed after prices have previously been in an uptrend. It can usually appear at resistance levels. What it signals is, that price action may have probably reached a high (peak) limit, while prices may begin to change their direction and fall. The appearance of the Hanging Man provides traders with the opportunity to enter into a short position. Again confirmation is needed, that price action is reversing down. Usually this may be a red candle, which has a close price below the open price (or low price) of the candle, preceding the Hanging Man candle.
The Hanging Man formation can be recognized, when the following features are present:
1. It has a long lower wick, at least three times longer than the body
2. It has a short or absent upper wick
3. The body appears to be at the upper end of the candle
4. The color of the candlesticks body is not that relevant, but a red Hanging Man is preferred by traders.
Inverted Hammer and Shooting Star formations
These formations again appear in an almost identical way on the price chart, but are used in a different context. They both have very long upper wicks, small bodies and short or absent lower wicks.
The Inverted Hammer corresponds to the Hanging Man pattern, but it forms after prices have previously been in a decreasing trend. It can usually appear at support levels. What it signals is, that price action may have probably reached a low limit, while prices may begin to change their direction and rise. The appearance of the Inverted Hammer provides traders with the opportunity to enter into a long position. However, traders should not buy immediately. They need to look for confirmation, that price action is indeed reversing up. Usually this may be a green candle, which has a close price above the open price (or high price) of the candle, preceding the Inverted Hammer candle.
Sometimes an Inverted Hammer may form close to an ordinary Hammer, with this serving as a confirmation that a given support level is indeed strong.
The Inverted Hammer formation can be recognized, when the following features are present:
1. It has a long upper wick, at least three times longer than the body
2. It has a short or absent lower wick
3. The body appears to be at the lower end of the candle
4. The color of the candlesticks body is not that relevant, but a green Inverted Hammer is preferred by traders.
The Shooting Star formation corresponds to the Hammer pattern, but it forms after prices have previously been in an uptrend. It can usually appear at resistance levels. What it signals is, that price action may have probably reached a high (peak) limit, while prices may begin to change their direction and fall. The appearance of the Shooting Star provides traders with the opportunity to enter into a short position. However, they should not sell immediately. They need to look for confirmation, that price action is indeed reversing down. Usually this may be a red candle, which has a close price below the open price (or low price) of the candle, preceding the Shooting Star candle.
The Shooting Star formation can be recognized, when the following features are present:
1. It has a long upper wick, at least three times longer than the body
2. It has a short or absent lower wick
3. The body appears to be at the lower end of the candle
4. The color of the candlesticks body is not that relevant, but a red Shooting Star is preferred by traders.
Yo Sen and In Sen formations
These candlestick formations can be recognized by their large bodies and short or none shadows.
The Yo Sen candlestick (bullish) represents a single up candle with a large (full) body and short or none shadows (wicks). When it appears on the price chart, this signals that it is appropriate for a trader to enter into a long position.
The In Sen candlestick (bearish) represents a single down candle with a large (full) body and short or none shadows (wicks). When it appears on the price chart, this signals that it is appropriate for a trader to enter into a short position.
Doji candlesticks
These candlesticks are usually formed, if a given tradable instrument has virtually equal opening and closing prices. This causes the doji to have a much shorter body in comparison with the ordinary candlesticks.
What a doji candlestick usually provides as information is, that a relative balance exists between long-positioned and short-positioned players in the market, which does not allow price action to take a certain direction distinctly.
Doji candlesticks are useful for traders, as they make it possible to identify whether a particular trend is losing strength and when prices may turn their direction. This enables traders to catch and ride a particular trend just when it begins, or exit a trend before it reaches its end. Patterns based on doji candlesticks provide reliable signals within trending markets. In trading ranges, however, signals are not reliable, because market sentiment has no distinct direction and movement is limited, which makes it significantly harder to understand whether these signals should be taken into account.
Doji types
Four different types of doji candlesticks may appear on a price chart. These are: star doji, long-legged doji, dragonfly doji and gravestone doji. The major difference between them all lies in the length and the position of their wicks.
The star doji, also known as a standard doji, has short upper and lower wicks, which have almost identical length. This doji is formed, if the candle opens and closes at one and the same price, while the latter has moved in a tight range. What it signals is, that traders remained indecisive during the respective period (in dependence on the time frame used).
The long-legged doji can be recognized by the longer upper and lower shadows, while the price has traveled in a considerably wider range. What it signals is, that again long-positioned and short-positioned traders are battling each other, but this time both sides are demonstrating higher activity. When this doji appears on the chart, a volatile move by prices is usually expected to occur shortly.
The dragonfly doji can be recognized by the long lower shadow, while the candle has opened and closed at one and the same level, the high end of the trading range. This doji indicates that short-positioned traders have managed to drag prices in their favor, until they lost control due to an increase in long positions. Buyers have become more active and pressure the price back up, where it opened. No upper wicks can be seen, which implies that short-positioned traders stand firm and long-positioned traders do not cause enough pressure, so that the price level can be breached. The dragonfly doji is considered as a bullish signal (a decreasing trend may be losing its strength and prices may reverse up).
The gravestone doji has a long upper shadow, while the candle has opened and closed at one and the same level, the low end of the trading range. This doji indicates that long-positioned traders have managed to drag prices in their favor, until they lost control due to an increase in short positions. Sellers have become more active and pressure the price back down, where it opened. No lower wicks can be seen, which implies that long-positioned traders still provide support to prices and short-positioned traders do not cause enough pressure, so that the price level can be breached. The gravestone doji is considered as a bearish signal (a rising trend may be losing its strength and prices may reverse down).