Traders watching price charts. Image source: Rafael Matsunaga, flickr.com
This article is the first entry in a series of materials we intend to publish examining the significance of various candles and price patterns and how they can be used in trading.
By far, the most popular approach to trading involves the careful examination of past price action - technical analysis - in an attempt to forecast the likely future behaviour of a given asset's price. Chartists look for predictable patterns in the price action that appear regularly as a means of determining whether the market is driven by bullish or bearish pressures.
The significance of such patterns stems from the fact that the majority of traders believe what they are said to signify. In other words, the market only moves in a predictable manner if traders are convinced of the significance of the structures they perceive on the chart.
That is why it is vitally important to understand the difference between what a given candle or pattern is said to indicate and how traders structure their positions after they spot such formations.
Before we can move on to complex price structures, it is worthwhile to understand the functioning of simpler candlesticks. In today's article, we pay attention to the bearish 'Shooting Star' and bullish 'Hammer', which are each other's mirrored images.
When to expect a likely bearish reversal following a shooting star candle
Shooting stars are commonly found near the peaks of recent uptrends and upswings. Their emergence is usually taken to signify likely reversals from said peaks, potentially leading to the emergence of a new downtrend.
Shooting Star on BTCUSD. Image source: Trendsharks ©, created with TradingView.com
Shooting stars usually have small bodies and huge upper shadows. If it weren't for the latter, they would be indistinguishable from regular Doji candles. This structure is the result of the changing buying and selling pressures throughout the duration of the candle.
Initially, the price starts to rise in an attempt to continue driving the existing uptrend higher. A swift change in the market sentiment then ensues, with the price action changing directions. The candle proceeds to close below its opening price.
However, traders should not rush to place new selling orders every time they see a shooting star on the chart. This type of candle could emerge within an established trend without it having to signal an imminent reversal necessarily. That is why bears need to look for other indications that are congruent with the expectation of a reversal.
Shooting Star Trading Setup on BTCUSD. Image source: Trendsharks ©, created with TradingView.com
There are two shooting stars of interest on the 4H chart above. The first (minor) one emerged while the price action was still advancing within a classic ABCD pattern, comprised of two impulse legs and one retracement leg. It developed just below the psychologically significant resistance level at 40000.00.
The impact of mass-market psychology is such that traders should not rush to place orders around similar significant turning points on the first early signals of a potential reversal/rebound.
Once having established a fake breakout above the psychological resistance, the subsequent development of a shooting star represents a completely different story. The second shooting star indicates rapidly rising selling pressure in the short term, but this time this behaviour is congruent with the expectations for a reversal.
That is why traders can easily discern that other market participants are more likely to bet on such a turn of events as well. Hence, there is a pretty solid case to be made here that more and more traders are entering short around the psychological resistance, not just below it, which validates the underlying expectations.
When to expect a likely bullish rebound following a hammer candle
As was mentioned in the introduction, a hammer candlestick is essentially a mirrored shooting star. It has a massive lower tail and a small body. Hammers are typically found at the bottom of bearish trends and signify likely bullish rebounds.
Hammer Candle on BTCUSD. Image source: Trendsharks ©, created with TradingView.com
Similarly to what was said with regards to shooting stars, bulls should avoid buying into the market every time they spot a hammer on the chart. Additionally, traders should keep in mind that candlesticks do not stop being important right after their close. I other words, they can be traded even shortly after their completion.
As can be seen on the 4H chart below, not all hammers entail imminent bullish rebounds. However, when there is a confluence of bullish indicators, the likelihood of such a change in the direction of the market is bolstered.
The correction reached a dip just below the psychologically significant support level at 50000.00, signified by the Hammer. The subsequent rebound then managed to break out above the consolidation range, which represented a good opportunity to go long.
Hammer Candle Trading Setup on BTCUSD. Image source: Trendsharks ©, created with TradingView.com
Over the past few weeks, the USD has lost nearly 800 pips against the JPY, driven by Japan's shift away from decades of negative interest rates. With the Bank of Japan raising rates for the second time in a row, investors are adjusting their positions to [...]
Despite its volatility, Silver remains in an uptrend. While not as dynamic as Gold, XAG often mirrors XAU’s movements. A Multiple Top has formed around $32.50, and history shows that the more a level is tested, the weaker it becomes, increasing the likelihood of a [...]
A combination of factors, including Trump-era tariffs, the emergence of DeepSeek, and a slowdown in GDP growth, has contributed to the recent pullback in the US30 from its record highs. From a technical standpoint, a Double Top pattern has formed around the [...]
Over the past month, Silver has experienced an impressive 13% surge, marking a strong bullish trend. Despite notable volatility and multiple pullbacks, the overall momentum remains firmly to the upside. This strength is further validated by the Golden Cross, a historically reliable [...]
The Swiss Stock Market has been on a remarkable rally, surging over 15% between December and January. At times, the price action resembled a near-vertical ascent. However, following the announcement of Trump’s tariffs over the weekend, Monday’s trading session opened with a [...]
Between October and January, GBPUSD experienced a significant decline, dropping by approximately 1300 pips. However, we now observe signs of a potential trend reversal. Over the past few weeks, the pair has rebounded by more than 400 pips, shifting momentum toward a [...]
For the past 1 month, the UK100 saw a fantastic 600 point rally! The occasional corrections only attracted more buyers, which is healthy for the current up trend and the RSI currently exhibits elevated demand. A 130 point correction started last week on Friday, dipped below the [...]
Over the past two weeks, Japan’s leading stock index surged 2,000 points, reflecting strong bullish momentum. However, this week saw a sharp sell-off, erasing nearly all gains since mid-January. Despite this drop, the decline stalled at the 61.8% Fibonacci retracement, a key [...]
There is a clear shift in the momentum in the Oil market, with the commodity dropping with nearly 10% for the past 2 weeks. The Death Cross, a classic sell signal, is indicating that sellers are indeed in control and we are lookin now at a strong [...]
The 350 pip rally for the past 2 weeks seems like a trend reversal for EURUSD, with buyers back in control. The strong bullish momentum is also confirmed by the Golden Cross, a historic buy signal. Corrections are healthy for the trend and we currently looking at [...]
For the past 2 weeks GBPUSD went up with 400 pips and this is why we believe we might be looking at a trend reversal. The strong bullish momentum is confirmed by the Golden Cross, a classic buy signal, which supports the hypothesis that [...]
The Death Cross formation in USDJPY signals a robust downward momentum, with the USD depreciating by 300 pips over recent weeks. Further declines exceeding 300 pips are anticipated, potentially reaching the 152.00 level. Despite several corrective pullbacks, the price has been unable to surpass the [...]
Following the formation of a Double Top pattern at the 21,930 level last Friday, the NASDAQ has experienced a significant decline, plummeting by nearly 800 points. This downturn has been primarily driven by unfavorable manufacturing data emerging from China, alongside the Bank of Japan's interest rate hike on Friday. The market reaction closely resembles the [...]
GOLD's uptrend has regained strength, with several factors supporting further gains. The RSI bounced from oversold levels and now stands at 65, signaling growing demand and increasing buying volume. Additionally, the appearance of a [...]
For the past few months, USDJPY gained 2100 pips! Then, about 10 days ago the USD started dropping and so far corrected with 300 pips, dropping down to 155.00. A local Double Bottom got formed and this level also aligns with the important [...]
For the past week, the US100 has surged by over 1,000 points, signaling strong bullish momentum. The RSI stands at 69, indicating high demand and buyer dominance. A bullish Golden Cross pattern has emerged, confirming the upward trend. Despite a brief correction yesterday, with the index dipping to [...]
The Descending Triangle on the 4-hour chart, typically a bearish signal, failed to materialize this time. Instead, the Triple Bottom support at 92,000 held strong, driving significant buying volume. A Golden Cross—a classic bullish indicator—confirms strong [...]
After a 300-point correction from its December highs, the SP500 appears to be rebounding as bulls regain control. This recovery is supported by positive economic data, including strong NFP numbers, low unemployment, and CPI readings meeting expectations—all favorable for stocks. Additionally, the earnings season began yesterday with [...]
For several months, the EUR has been trending downward, losing hundreds of pips. While occasional corrections to the upside occur, bears remain in control. The strong downward momentum is highlighted by the Death Cross pattern, a classic sell signal. Yesterday, we observed another [...]
The Dollar remains strong, with buyers firmly in control since the Fed's December comments hinting at fewer 2025 rate cuts. This drove a 400-pip rally in USDCAD, now facing resistance near 1.4450 as early buyers take profit. Corrections are part of healthy trends, and the pair is testing support at [...]
