A type of bullish pattern on a bearish background.
An Inverted Hammer indicates the earlier downtrend is about to end and may reverse to an uptrend or a move sideways. This forms when the Upper Shadow is longer than the Real Body and the Lower Shadow is small or non-existent. The Inverted Hammer is the same as a Shooting Star, only it appears at the end of a downtrend, whereas the Shooting Star appears at the end of an uptrend.
An inverted pattern can be found on all forms of time frame charts, i.e. on intraday, daily, weekly, etc. The longer the time frame, the higher the fall one can expect in prices from the prevailing levels.
The lower shadow is small or nonexistent.
TRADING STRATEGY
On identifying an inverted hammer, one should always wait for the next candle to break the high of the inverted hammer candle.
Once that happens, one can exit from his/her short positions or even go long by putting a stop-loss of the low of the shooting star candle.
SHOOTING STAR
A Shooting Star indicates that the prior uptrend is about to end and may reverse to a downtrend or move sideways.
The Shooting Star looks exactly the same as the Inverted hammer. But instead of being found in a downtrend, it is found in an uptrend and thus, has different implications. Like the Inverted Hammer it is made up of a candle with a small lower body, little or no lower wick, and a long upper wick that is, at least two times the size of the lower body.
The long upper wick of the chart pattern indicates that the buyers drove prices up at some point. During the same time, a candle was formed which encountered selling pressure driving prices back down for the period to close near to where they opened. As this occurred in an uptrend, the selling pressure is seen as a potential reversal sign. When encountering this pattern traders will look for a lower open on the next period before considering the pattern valid and potentially including it in their trading strategy.
Since it occurs in an uprend, the Shooting Star formation is indicative of a bearish change of momentum. Shooting Stars show that traders have tested the highs and settle the day near the open and low price. This suggests the rally is unsustainable and sellers are retaking the market.
The long upper shadow and small real body at the bottom of the trading range are cause for concern by the bulls. They wonder if this is the end of the uptrend and take measures to protect their gains.
HOW TO IDENTIFY
Price gap open to the upside.
Small real body formed near the bottom of the price range.
The upper shadow at least three times as long as the body.
The lower shadow is small or nonexistent.
TRADING STRATEGY On identifying shooting star, one should wait for the next session to break the low of shooting star candle.
Once that happens one can exit from his/her long positions or even go short by putting a stop-loss of high of the shooting star candle.
The writer is director and head of research, Anagram Capital
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