The hammer and the shooting star candles

The hammer candle, and on the right is the shooting star. The hammer candle appears after the market has been in a downtrend, so called as it is ‘hammering out’ a bottom. It is the first possible signal of a market reversal from this price level. The candle should have a narrow body and a deep lower wick, and this is what gives the candle its power. In the session of this candle, the market has opened, then fallen sharply only to reverse at some point to close back near or at the opening price.

The selling pressure that was evident for part of the session has been completely absorbed as buyers have come into the market, overwhelmed the sellers, and ‘bought the market’. You can think of this price action as an old fashioned tug of war. Two teams are pulling on the rope, and initially one team is stronger pulling the rope further and further to one side. Then gradually they start to tire, and the opposing team finds the strength to pull them all the way back to the centerline again, recovering all the lost ground.

This is what is happening here in terms of the price action. It is the first sign of a potential reversal in trend from bearish to bullish, and therefore sending a clear signal to ‘pay attention’.The shooting star is the hammer in reverse, with the same principles applying, only in this case it is the buyers who are overwhelmed, as they struggle to take the market higher. The sellers come in at this price level and take the market back to the open.

Again, the shooting star is sending a strong signal of a potential reversal, this time from bullish to bearish. With both these candles we then apply volume price analysis in order to validate these signals. The insiders love playing tricks trapping traders into weak positions, and using these price moves is a classic one. If the insiders are buying on a hammer candle we can see it in the associated volume, and should consider buying with them.

Equally, if the insiders are selling on a shooting star candle, again we will see it and we should be thinking about selling too.What we are constantly looking for when applying volume price analysis, is either to confirm that volume and price are in agreement, or they are in disagreement. From there we are able to interpret what the insiders are doing and to follow them accordingly. Here are a couple of examples to demonstrate this.