Editorial Reviews. From the Back Cover. The classic Japanese candlestick reference, updated In this revised and expanded third edition, candlestick expert Greg Morris updates his influential guidebook with valuable new material and. philosophy. Greg Morris has more that ably turned his attention to this fascinating charting style with this book. It occurs to me that. Japanese Candlesticks are. to Help You Master. Candlestick Charting. GREGORY L. MORRIS .. companion book to my. Candlestick. Charting. Explained a “boot camp.” It.
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CANDLESTICK. CHARTING. EXPLAINED. Timeless Techniques for Trading Stocks and Futures. Third Edition. Gregory L. Morris with Ryan Litchfield. McGraw -. Compre Candlestick Charting Explained:Timeless Techniques for Trading Stocks In this revised and expanded third edition, candlestick expert Greg Morris. CANDLESTICK CHARTING EXPLAINED This page intentionally left blank CANDLESTICK CHARTING EXPLAINED DOWNLOAD PDF . Greg Morris has more that ably turned his attention to this fascinating charting style with this book.
Business Nonfiction A practical, hands-on guide to building your mastery of candlestick charting and analysis Candlestick charting has become one of today's most popular technical analysis tools for both individual and professional investors. And it's much easier than you probably think. In fact, creating a candlestick chart demands no more information than traditional charting requires. With candle pattern analysis, the payoff is a deeper look into the minds of investors and a clearer view of supply and demand dynamics. Morris delivers hands-on knowledge you need to make candlestick charting and analysis a key element of your portfolio-building strategy. With this book you will be able to: Identify candle patterns and quickly see what traders and investors are thinking Use reversal patterns to enter or reverse your positions Identify continuation patterns to establish additional positions Utilize charting software to recognize patterns automatically Packed with study questions, data tables, diagnostic tools, terminology, sample charts, and market analyses, Candlestick Charting Explained Workbook helps you speed up the learning process and ramp up the profits.
Throughout the day the market moved higher and then sharply lower, or vice versa. It then closed at or very near the opening price.
It develops when the Doji is at, or very near, the low of the day. The Gravestone Doji, like many of the Japanese terms, is based on various analogies. In this case, the Gravestone Doji represents the graves of those who have died in battle.
If the upper shadow is quite long, it means that the Gravestone Doji is much more bearish. Prices open and trade higher all day only to close where they opened, which is also the low price for the day.
This cannot possibly be interpreted as anything but a failure to rally. The only difference is the that the Shooting Star has a small body and the Gravestone Doji, being a Doji, has no body. Some Japanese sources claim that the Gravestone Doji can occur only on the ground, not in the air. This means it can be a bull- Figure 18 Chapter Two ish indication on the ground or at a market low, not as good as a bearish one.
It certainly portrays a sense of indecision and a possible change in trend. Dragonfly Doji tonbo The Dragonfly Doji, or Tonbo pronounced Tombo , occurs when the open and close are at the high of the day Figure Like other Doji days, this one normally appears at market turning points. You will see in later chapters that this Doji is a special case of the Hanging Man and Hammer lines. A Tonbo line with a very long lower shadow tail shitahigi is also called a Takuri line.
A Takuri line at the end of a down trend is extremely bullish. Four Price Doji This rare Doji line occurs when all four price components are equal. That is, the open, high, low, and close are the same Figure This line could occur when a stock is very illiquid or the data source did not have any prices other than the close. Futures traders should not confuse this with a limit move.
It is so rare that one should suspect data errors. However, it does represent complete and total uncertainty by traders in market direction. Ideally, the gap should encompass the shadows, but this is not always necessary. And it's much easier than you probably think.
In fact, creating a candlestick chart demands no more information than traditional charting requires. With candle pattern analysis, the payoff is a deeper look into the minds of investors and a clearer view of supply and demand dynamics. Morris delivers hands-on knowledge you need to make candlestick charting and analysis a key element of your portfolio-building strategy. With this book you will be able to: Identify candle patterns and quickly see what traders and investors are thinking Use reversal patterns to enter or reverse your positions Identify continuation patterns to establish additional positions Utilize charting software to recognize patterns automatically Packed with study questions, data tables, diagnostic tools, terminology, sample charts, and market analyses, Candlestick Charting Explained Workbook helps you speed up the learning process and ramp up the profits.
Business Nonfiction Publication Details Publisher: McGraw-Hill Education Imprint: Candle Patterns need to be defined within parameters that people can understand and use in their everyday analysis. This can still involve flexibility as long as the limits of that flexibility are defined, or at least explained. An attempt to take the subjectivity out of Japanese candlesticks analysis will be primary thrust of this book. Most sources that deal with candlesticks admit that patterns should be taken into the context of the market.
This is true, but is often an excuse to avoid the complicated methodology of pattern recognition. Chapters on statistical testing and evaluation will reveal, totally, all assumptions used and all details of the testing results.
Rigorous testing has been done on stocks, futures, and indices. Some of the results were surprising and some were predictable. All results are shown for your use and perusal. The seemingly endless verbiage about how you would have done if you had only recognized this or that when this or that occurred is totally worthless.
Charting examples will be shown in this book only as learning examples of the candle patterns being discussed. It definitely helps to see the actual candle patterns using real data. I could not have allowed myself even to start a project as involved as this if I had even the slightest doubt as to the viability and credibility of using Japanese candlesticks as an additional tool for market analysis and timing.
Over the last 15 years, I have read almost every book on technical analysis, used every type of indicator, followed numerous analysts, and developed technical and economical analysis software in association with N-Squared Computing.
Believe me, if candlesticks were just a passing fancy, this book would not have been considered—certainly not by me. I felt that a straightforward approach in writing the book would be the most accepted, and certainly the most believable.
When I download a book to learn about new techniques, a textbook-like approach is appreciated. Hence, this style has played a vital part in the structure and organization of this book. This book will not only introduce and explain all of the inner workings of Japanese candlesticks, but will also serve as a reference manual for later use.
Each candle pattern has been defined and explained in a standard format so that quick and easy referral is possible. You will see it gain in popularity because it can provide such a sound basis for future analysis and research.
Even if you use candlesticks solely as a method of displaying data, you will find them indispensable. Candlestick charting, candle pattern analysis, and candlestick filtering will give you an edge, a tool if you will, that will enhance your understanding of the markets and trading performance.
Learn candlestick charting and analysis, use it, and enjoy its rewards. Greg Morris Dallas, Texas Preface for the Third Edition The preface for the second edition still says most of the facts that need to be here, with only a few changes and additions given below. A number of new candle patterns have been developed since the first edition came out in Many of these were created to fill the holes in the original Japanese versions of the patterns.
A large number of original Japanese patterns did not have a complement or counterpart; there was either a bullish version or a bearish version, but not both. Those holes have been filled, along with a handful of new patterns. When you study these patterns for all these years, one easily can start to see how new things can develop. Steve North of North Systems was the originator of many of these complementary and new patterns.
So after 14 years, what has changed? Almost all data services offer stock data that has the open price available. In that was definitely not the case, as I addressed it in Chapter 6. The internet has offered charting services such as StockCharts.
Intraday data is certainly more readily available. I still have a problem in using candle pattern analysis on anything other than daily data. The Japanese believed strongly that the time between the close of one day and the open of the next day was important to investor psychology. Not a lot of time to develop a psychological outlook on the market, is it?
So what has not changed? I still witness folks using candle pattern analysis that seem to forget its one primary and most basic premise; you must first identify the trend of the market before you can even begin to find candle patterns. How can you have a bullish reversal candle pattern if you not in a downtrend?
Remember, these short-term views of investor psychology are based upon the trend of the market. I still hear and witness analysts making much more out of candle pattern analysis than they should. It is not magical; it is not the key to instant profit; it is just simply another good short-term tool for market analysis and trading.
Candle pattern analysis should always be supplemented with other analysis techniques. In this edition, I added considerably more information on the measures of success for candle patterns relative to many other technical indicators.
I also enhanced the statistics that support the candle pattern filtering concept I introduced in the first edition. I have also shortened my view on the viability of using candle patterns. In the first edition I mentioned that they were fairly reliable up to about nine market days. Today, I strongly believe that anything over five days is coincidental and random.
If a candle pattern calls the beginning of the biggest up move in history, it is not the candle pattern that causes it; the candle pattern only helps identify its beginning. Finally, Ryan Litchfield contributed a much-needed section on candlesticks for traders. If you are a trader you will love Chapter If you are not a trader you will love Chapter Gregory L.
Where do I start? Who do I mention first? This, quite possibly, is more difficult than the book itself. There is no doubt in my mind that my parents, Dwight and Mary Morris, are mostly responsible for all the good that I have ever accomplished.
Any of the bad surely had to come from being a jet fighter pilot in the U. Navy for six years. I am blessed with a wonderful wife, Laura. Her support during this effort was unwavering and fully appreciated. Norman North Mr. N-Squared Computing has gone from a business associate to a valued friend. His insight and opinions are always sought and usually relied upon.
The bottom line is this: I am forever grateful to Takehiro Hikita for his gracious offer to visit Japan, stay in his home, and help with the many Japanese interpretations. My trip to Japan in January to study Japanese candlestick analysis was invaluable. His knowledge of candle pattern analysis is filtered throughout this book.
Ron Salter, of Salter Asset Management, has always offered an unusual but insightful opinion on the economy and the markets, one that usually seems to be more right than wrong. I am grateful for his permission to quote some of his comments from his client letter.
Nison coined many of the English names for the various patterns used in the West today. This book does not try to change that. This book provided as immense wealth of information about all of the popular candle patterns along with their many interpretations. It was translated by Greg Nicholson.
Another valuable source of information on candlesticks was published by Nippon Technical Analysis Association, called Analysis of Stock Price in Japan, My thanks also go to Chip Anderson and all the folks at StockCharts. Special recognition goes to Kellie Erlandson for converting them into a usable format and never complaining when I wanted to change something. Also thanks to Edgar Isidro for typing the original book into Microsoft Word. I think I must have been using a DOS-based word processor, or something long since gone when I did the first edition in Thanks to Jason Holcombe for reviewing all of my Japanese language books in search of any new patterns and providing a few of the translations for the new patterns.
Ryan has a unique way of viewing markets and trading, and our collaboration on this edition has enhanced this book significantly. You are going to enjoy Chapter As is the accepted standard, and certainly in this case the fact, whatever factual errors and omissions are sadly, but most certainly, my own.
Promoters of instant wealth will always misdirect and abuse their rights, but in the end, they are not around long enough to cause any substantial damage.
One should always look into any new technique with a healthy amount of skepticism. Hopefully, this book will keep that skepticism under control and unnecessary. Many facts that we learn are not actually true; and what seems to be the obvious, sometimes is not.
George Washington neither cut down a cherry tree, nor threw a silver dollar across the Potomac. A good detective will tell you that some of the least reliable information comes from eye witnesses. When people observe an event, it seems their background, education, and other influences color their perception of what occurred.
A most important thing that detectives try to do at a crime scene is to prevent the observers from talking to each other, because most would be influenced but what others say they saw.
Another curious human failing becomes a factor when we observe facts. The human mind does not handle large numbers or macro ideas well. That thousands of people die each year from automobile accidents raises scarcely an eyebrow, but one airplane crash, killing only a few people, grabs the nation.
We are only modestly concerned that tens of thousands of people are infected with AIDS, but we are touched deeply when presented with an innocent child that has been indirectly infected. If a situation is personalized, we can focus on it.
We can become deluded by our emotions, and these emotions can affect our perceptions. When our portfolios are plunging, all of the fears that we can imagine are dragged out: Something is needed to keep us from falling victim to everyday emotion and delusion; that something is technical analysis. The investor is made painfully aware that technical competence does not ensure competent trading.
Speculators who lose money do so not only because of bad analysis, but because of their inability to transform their analysis into sound practice. Bridging the vital gap between analysis and action requires overcoming the threats of fear, greed, and hope. It means having the discipline to believe what you see and to follow the indications from sound methods, even though they contradict what everyone else is saying or what seems to be the correct course of action.
What does candlestick charting offer that typical Western highlow bar charts do not? As far as actual data displayed—nothing. However, when it comes to visual appeal and the ability to see data relationships easier, candlesticks are exceptional.
A quick insight to the recent trading psychology is there before you. After a minimal amount of practice and familiarization, candlesticks will become part of your analysis arsenal. You may never return to a standard bar chart. Japanese candlesticks offer a quick picture into the psychology of short-term trading, studying the effect, not the cause.
This places candlesticks squarely in the category of technical analysis. The overall psychology of the marketplace cannot be measured by statistics; some form of technical analysis must be used to analyze the changes in these psychological factors.
More than just a method of pattern recognition, candlesticks show the interactions between downloaders and sellers. Japanese candlestick charting provides insight into the financial markets that is not readily available with other charting methods. It works well with either stocks or commodities.
Related analysis techniques, such as candlestick filtering and CandlePower candle volume charting, will add to your analysis and timing capabilities.
This book not only will serve as a complete guide to Japanese candlestick charting and candle pattern analysis, but will also provide conclusive evidence of the usefulness of candlestick patterns as an analysis tool.
All methods of analysis and all assumptions will be opened and unobstructed. You will, after reading this book, either begin to use candlesticks to assist in your market analysis and timing or be confident enough in them to further your own research into candlestick analysis. Without candlesticks, you will feel that you are not seeing the complete picture—that something is missing.
Besides providing the quick and easy pattern recognition, candlesticks have great visual appeal. The data relationships almost jump off the page or computer screen , hardly the case with bar charts.
It should be understood that a bar or candle line can represent any trading period, not always just a day.
Additionally, the mention of inventors, speculators, and traders will be used throughout with no attempt to classify or define them. Standard Bar Charts The data required to produce a standard bar chart consists of the open high, low, and close prices for the time period under study.
A bar chart consists of vertical lines representing the high to low range in prices for that day. The high price refers to the highest price that the issue traded during that day. Likewise, the low price refers to the lowest price traded that day.
For years, the only other price element used in bar charting was the close price. The close was represented on the high-low bar as a small tick mark extending from the bar out to the right. Recently, bar charting has incorporated the open price by another small tick on the left side of the high-low bar. This stands true for almost all stock charts and stock data vendors. Most futures and commodity charts have always used the open price because it was more readily available.
Most bar charts are displayed with a volume histogram at the bottom. Charting services also offer a number of popular indicators along with the bar chart. The standard bar chart could be displayed with indicators, volume, open interest, and a large assortment of other technical tools appropriate for that software.
Candlestick Charts Japanese candlestick charts do not require anything new or different as far as data are concerned. Open, high, low, and close are all that is needed to do candlestick charting. This, however, presents a somewhat controversial situation and is thoroughly discussed in Chapter 6. When this body is black, it means that the closing price was lower than the opening price. When the closing price is higher than the opening, the body is white. These lines are called shadows and represent the high and low prices reached during the trading day.
The upper shadow uwakage represents the high price and the lower shadow shitakage represents the lower price. It is these shadows that give the appearance of a candle and its wick s. When drawing candlestick charts by hand, the Japanese use red instead of white to represent the up days close higher than open. With the use of a computer, this is not feasible because red would be printed as black on most printers and you could not tell the up days from the down days.
This also applies to photocopying. If you compare Figures and , you can see that the Japanese candlestick chart really does not display anything different from the standard bar chart. This matter of interpretation is also what this book is about. Japanese candlestick charting and analysis will continue to grow and gain in popularity. For as long as it is used as intended, only a profit of doom would suggest its demise. This page intentionally left blank CHAPTER TWO Candlestick Lines A day of trading in any stock or futures market is represented in traditional charts by a single line or price bar; Japanese candlestick charting is no different, except that the information is so much more easily interpreted.
There is much information provided in a single candle line. This will help in understanding the psychology behind the many candle patterns described in later chapters. There are a few candle patterns that consist of only a single candlestick and also qualify as reversal patterns. They will be covered thoroughly in the chapter on reversal patterns. Each type of candle line has a unique name and represents a possible trading scenario for that day. Some candle lines have Japanese names and some have English names.
Whenever possible, if the name is in English, the Japanese name will also be given. The Japanese name will be written in a format called Romanji.
This is a method of writing Japanese so that it can be pronounced properly by nonJapanese-speaking people. Single candle lines are often referred to as yin and yang lines. There are 9 basic yin and yang lines in candlestick analysis.
These can be expanded to 15 different candle lines for a clearer explanation of the various possibilities. It will be shown in later chapters how most candle patterns can be reduced to single candle lines and maintain the same bullish or bearish connotations. Long describes the length of the candlestick body, the difference between the open price and the close price, as shown in Figure A long day represents a large price movement for the day. In other words, the open price and the close price were considerably different.
How much must the open and close price differ to qualify as a long day? Like most forms of analysis, context must be considered. Long compared to what? It is best to consider only the most recent price action to determine what is long and what is not. Japanese candlestick analysis is based solely upon the short-term price movement, so the determination of long days should be also. Other acceptable methods of determining long days may also be used.
These will be thoroughly discussed in the chapter on pattern identification and the recognition. There are also numerous days that do not fall into any of these two categories. Other interpretations refer to it as Bald or Shaven Head.
In either case, the meaning reflects the fact that there is no shadow extending from the body at either the open or the close, or at both. This is considered an extremely weak line. It often becomes part of a bearish continuation or bullish reversal candle pattern, especially if it occurs during a downtrend.
This line, being black, shows the weakness of the continuing downtrend. A long black line could be a final sell off; this is why it is often the first day of many bullish reversal patterns. It is also called a Major Yin or Marubozu of Yin. This is an extremely strong line when considered on its own merits. Opposite of the Black Marubozu, it often is the first part of a bullish continuation or bearish reversal candle pattern.
It is sometimes called a Major Yang or Marubozu of Yang. Closing Marubozu A Closing Marubozu has no shadow extending from the close end of the body, whether the body is white or black Figure If the body is white, there is no upper shadow because the close is at the top of the body.
Likewise, if the body is black, there is no lower shadow because the close is a the bottom of the body. Opening Marubozu The Opening Marubozu has no shadow extending from the open price end of the body Figure If the body is white, there would be no lower shadow, making it a strong bullish line.
The Black Opening Marubozu yoritsuki takane , with no upper shadow, is a weak and therefore bearish line. The Opening Marubozu is not as strong as the Closing Marubozu. This represents indecision between the bulls and the bears. The color of the body of a spinning top, along with the actual size of the shadows, is not important. The small body relative to the shadows is what makes the spinning top. Figure DOJI When the body of a candle line is so small that the open and the closing prices are equal, they are called Doji simultaneous or concurrent lines.
A Doji occurs when the open and close for that day are the same, or certainly very close to being the same. The lengths of the shadows can vary. Requiring that the open and close be exactly equal would put too much of a constraint on the data and there would not be many Doji.
If the difference between the open and close prices is within a few ticks minimum trading increments , it is more than satisfactory. Determining a Doji day is similar to the method used for identification of a long day; there are no rigid rules, only guidelines. Just like the long day, it depends upon previous prices. If the previous days were mostly Doji, then the Doji day is not important. In almost all cases, a Doji by itself would not be significant enough to forecast a change in the trend of prices, only a warning of impending trend change.
A Doji preceeded by a long white day in an uptrend would be meaningful. This particular combination of days is referred to as a bearish Doji Star Chapter 3. An uptrend that, all of a sudden, ceases to continue, would be caused for concern. A Doji means that there is uncertainty and indecision. According to Nison, Doji tend to be better at indicating a change of trend when they occur at tops instead of at bottoms. This is related to the fact that for an uptrend to continue, new downloading must be present.
A downtrend can continue unabated.
Throughout the day the market moved higher and then sharply lower, or vice versa. It then closed at or very near the opening price. It develops when the Doji is at, or very near, the low of the day.
The Gravestone Doji, like many of the Japanese terms, is based on various analogies. In this case, the Gravestone Doji represents the graves of those who have died in battle. If the upper shadow is quite long, it means that the Gravestone Doji is much more bearish. Prices open and trade higher all day only to close where they opened, which is also the low price for the day. This cannot possibly be interpreted as anything but a failure to rally. The only difference is the that the Shooting Star has a small body and the Gravestone Doji, being a Doji, has no body.
Some Japanese sources claim that the Gravestone Doji can occur only on the ground, not in the air. It certainly portrays a sense of indecision and a possible change in trend. Dragonfly Doji tonbo The Dragonfly Doji, or Tonbo pronounced Tombo , occurs when the open and close are at the high of the day Figure Like other Doji days, this one normally appears at market turning points.
You will see in later chapters that this Doji is a special case of the Hanging Man and Hammer lines. A Tonbo line with a very long lower shadow tail shitahigi is also called a Takuri line. A Takuri line at the end of a down trend is extremely bullish. Four Price Doji This rare Doji line occurs when all four price components are equal.
That is, the open, high, low, and close are the same Figure This line could occur when a stock is very illiquid or the data source did not have any prices other than the close. Futures traders should not confuse this with a limit move. It is so rare that one should suspect data errors. However, it does represent complete and total uncertainty by traders in market direction. Ideally, the gap should encompass the shadows, but this is not always necessary.
A Star indicates some uncertainty in the marketplace. Stars are part of many candle patterns, primarily reversal patterns. Like the previously mentioned candle lines, the Umbrella lines have strong reversal implications.
There is strong similarity between the Dragonfly Doji and this candle line. Two of the Umbrella lines are called the Hammer and Hanging Man, depending upon their location in the trend of the market. When they are used by themselves, and then in combinations with other candle lines, a complete psyche of the market unfolds. However, this book will go beyond the Sakata Method with additional patterns and methods.
Some of these patterns are new; some are variations of the originals. In Japanese literature, there is occasional reference to patterns that use even more candlesticks, but they will be included in the chapter on candle formations. The order in which the candle patterns are discussed does not reflect their importance or predictive ability.
They are listed based upon the number of days or periods required for each pattern, with the one-day patterns first. Generally, within each category the patterns are then arranged based upon their frequency of occurrence. Most of the candle patterns are inversely related.
That is, for each bullish pattern, there is a similar bearish pattern. The primary difference is their position relative to the short-term trend of the market. The names of the bullish and bearish patterns may or may not be different. So that this chapter can serve as a reference, each pattern set will be covered using the same basic format.
Some patterns retain their Japanese name while others have been given English interpretations. A few are identical in construction, but have different names.
Any differences will be dealt with in the individual discussions. Three small vertical lines will precede the pattern drawing. This chapter covers the reversal patterns and Chapter 4 covers the continuation patterns. This separation was done to add convenience and simplify future reference.
This is mentioned here because the determination of bullish or bearish implications has to do only with continued price action and not with previous action. Previous price movement helps to determine only the pattern, not its ability to foresee or anticipate future price movement.
Whether a reversal pattern or a continuation pattern, investment and trading decisions still need to be made, even if it is the fact that you decide to do nothing.
Chapter 6 deals with this concept at length. There is a normal expectancy to have a bullish pattern or situation prior to a bearish counterpart. That tendency will continue here, except when one counterpart tends to exhibit greater prevalence; then it will be covered first.
A number of new patterns are introduced with this edition of this book. Many were created to serve as a complementary pattern to those that only had a bullish or bearish version, but not both. In those cases, the original is always presented first. Some candle patterns will not be covered as thoroughly as others because of their simplicity or similarity to other patterns.
Because many patterns have a counterpart reflecting the other side of the market, some of the scenarios will contain only one example. Additionally, some repetition may seem to occur.
This too is so that later reference will be both easy and thorough. The usual format will be: Japanese Name: Trend Required: Frequency MDaysBP: This box contains: Required, Suggested, or No Note on confirmation: This was an attempt to identify candle patterns that universally fell into two categories, one that seemed to never work well, and one that seemed to always work well.
Those that never seemed to work well need confirmation Required. It is boldly stated later in this book that all candle patterns should be confirmed with other technical methods. A few good ones are mentioned herein. This is the number of mean average days between patterns with a classification of Quite Frequent, Frequent, Average, Rare, and Extremely Rare.
Statistics over 7 different days of performance: The components of the Pattern Detail Information are further explained in later chapters. They have long lower shadows and small real bodies that are at or very near the top of their daily trading range.
These were first introduced as paper umbrellas in Chapter 2. The Hammer occurs in a downtrend and is so named because it is hammering out a bottom. The Japanese word for Hammer tonkachi also means the ground or soil. A Hanging Man occurs at the top of a trend or during an uptrend.
The name Hanging Man kubitsuri comes from the fact that this candle line looks somewhat like a man hanging. Another candle line similar to the Hammer is the Takuri pronounced taguri line.
This Japanese word equates with climbing a rope or hauling up. The motion is not smooth and could be related to pulling up an anchor with your hands: A Takuri line has a lower shadow at least three times the length of the body, whereas the lower shadow of a Hammer is a minimum of only twice the length of the body. Rules of Recognition 1. The small real body is at the upper end of the trading range. The color of the body is not important.
The long lower shadow should be much longer than the length of the real body, usually two or three times. There should be no upper shadow, or if there is, it should be very small. Scenarios and Psychology behind the Pattern Hammer The market has been in a downtrend, so there is an air of bearishness. The market opens and then sells off sharply. However, the sell-off is abated and the market returns to, or near, its high for the day. The failure of the market to continue the selling reduces the bearish sentiment, and most traders will be uneasy with any bearish positions they might have.
If the close is above the open, causing a white body, the situation is even better for the bulls. Confirmation would be a higher open with yet a still higher close on the next trading day. Hanging Man For the Hanging Man, the market is considered bullish because of the uptrend. In order for the Hanging Man to appear, the price action for the day must trade much lower than where it opened, then rally to close near the high. This is what causes the long lower shadow, which shows how the market just might begin a sell-off.
If the market opens lower the next day, there would be many participants with long positions that would want to look for an opportunity to sell. Steve Nison claims that a confirmation that the Hanging Man is bearish might be that the body is black and the next day opens lower.
This trait, when used on the Hammer, will change its name to a Takuri line. Takuri lines are generally more bullish than Hammers. A Hanging Man with a black body is more bearish than one with a white body. Likewise, a Hammer with a white body would be more bullish than one with a black body.
As with most single candlestick patterns like the Hammer and the Hanging Man, it is important to wait for confirmation. This confirmation may merely be the action on the open of the next day. Many times, though, it is best to wait for a confirming close on the following day.
That is, if a Hammer is shown, the following day should close even higher before bullish positions are taken. The lower shadow should be, at a minimum, twice as long as the body, but not more than three times. The upper shadow should be no more than 5 to 10 percent of the high-low range. The low of the body should be below the trend for a Hammer and above the trend for a Hanging Man. Pattern Breakdown The Hammer and the Hanging Man patterns, being single candle lines, cannot be reduced further.
See Paper Umbrella in Chapter 2. In most instances, the Dragonfly Doji would be more bearish than the Hanging Man. Figure 1 48 2. Remember that the opening marubozu does not have a shadow extending from the open end of the body.
The bullish Belt Hold Figure is a white opening marubozu that occurs in a downtrend. It opens on the low of the day, rallies significantly against the previous trend, and then closes near its high but not necessarily at its high.
The bearish Belt Hold Figure is a black opening marubozu that occurs in an uptrend. Similarly, it opens on its high, trades against the trend of the market, and then closes near its low.