Price action traders consider the hammer and shooting star patterns as the most profitable price action patterns. For that reason, in this post, we’ll discuss how to identify those patterns and trade them profitably without messing up your chart with indicators.
The hammer pattern
The hammer pattern, also known as the bullish pin bar, is a single candlestick pattern that forms when the open, high, and close are around the same level. So, it has a long lower shadow, which shows price rejection at lower levels and buyers’ intent at pushing the price up.
Features of the hammer pattern
The hammer pattern is characterized by the following:
- A small body at the upper end
- A little or no upper shadow
- A long lower shadow that is more than 2x the size of the body
The illustration below shows how it looks like:
The significance of the hammer pattern
It is important you understand the psychology behind the formation of the hammer pattern, as that will enable you to predict the market direction with better accuracy. The hammer candlestick forms when sellers push the market lower during the early stages of the trading session but buyers forced the market back up later in the session, closing around the opening price. The long lower shadow represents the high buying pressure that is emerging.
When this pattern forms at the end of a downtrend, a downswing in an uptrend, or the downswing in a range-bound market, it signifies a potential bullish reversal. Look at the illustration below:
You can see that the pattern formed at the end of a downward price swing and marked the beginning of an upward move. The sellers tried to push the price lower, in line with the preceding downward move, but buyers stepped in and forced the price back up, leading to a reversal.
How to trade the hammer pattern
Whether the market is trending or moving sideways, the best way to trade the hammer pattern is when it forms at a support level, which can be identified from previous reversal levels or with the help of certain tools, such as trend lines and the Fibonacci retracement levels.
Take a look at the GBP/CHF daily chart below:
You can see that the market made a double bottom, which shows that the level is a strong support level. The hammer forming at that level, with part of the lower shadow piercing through the support level, showed that the buyers rejected the down move and forced the price up, which is a sign of a potential upward reversal.
Let’s see another example using the Fibonacci retracement tool. See the USD JPY H1 chart below:
You can see that the market is starting a new uptrend. Then, a nice hammer pattern forms after a short retracement. Apparently, there’s no important level there, and it’s not advisable to trade the hammer pattern alone. However, when we attached a Fibonacci retracement tool, we could see that the tail of the hammer pierced through the 61.8% level, which could be considered a potential support level. The price being rejected at that level, coupled with the formation of a hammer pattern, signals the beginning of a new impulse wave.
What we’ve shown are some basic ways of trading the hammer pattern. You will learn what really works and the right way to trade it in my trading course.
The shooting star (bearish pin bar)
Also known as the bearish pin bar, the shooting star pattern is just the opposite of the hammer pattern. So, it is a single candlestick pattern that forms when the open, low, and close prices are around the same level. Its long upper shadow shows price rejection at higher levels and the sellers’ intent at pushing the price down.
Features of the shooting star pattern
The shooting star pattern is characterized by the following:
- A small body at the lower end
- Little or no lower shadow
- A long upper shadow that is more than 2x the size of the body
The illustration below shows how it looks like:
The significance of the shooting star pattern
The shooting star candlestick forms when buyers push the market up during the early stages of the trading session but sellers later came in and forced the market down, causing it to close around the opening price. So, the psychology behind the shooting star candlestick pattern is that the sellers have regained control of the market. The long upper shadow represents the high selling pressure in the later stages of the trading session.
If this pattern forms at the end of an uptrend, the upswing in a range-bound market, or an upswing in a downtrend, it signifies a potential bearish reversal. Look at the illustration below:
You can see that the pattern formed at the end of an upward price swing and marked the beginning of a downward move. Buyers tried to push the price higher, in line with the preceding upswing, but sellers stepped in and forced the price back down, leading to the emergence of a new downswing.
How to trade the shooting star pattern
The shooting star pattern can be traded in a trending or range-bound market. But there should be a confluence of other technical factors, such as a resistance level, a bearish reversal chart pattern, a downtrend line, etc.
Take a look at the USD/CAD daily chart below:
Notice that the market is in a range, formed by a triple top chart pattern, which is a bearish reversal pattern on its own. That the market earlier reversed twice from the same level shows that the level is resisting strongly. So, when the market tested that level for the third time and formed a shooting star pattern, it showed that sellers were ever ready to push the price down, which eventually happened, with the price even breaking the lower boundary of the range which served as the neckline of the triple top pattern.
Take note of the hammer pattern at the lower boundary of the range. The shooting star and hammer patterns can be used as trade triggers, especially for advanced market maker strategies, like the supply and demand strategy or the smart money breakout trap.
Learning what you need to succeed may seem like a lot of work to do. But you don’t have to worry since I’m always here to assist you all through your trading journey if you are willing to do the right thing and put in the hard work. In this trading course, I will teach you everything you need to succeed in trading, but I cannot force you to do what is required to deserve success in your trading. While you may think you deserve to succeed in trading, your trading account will tell you whether you’re getting it or not. It is up to you to do what can make you deserve that success you desire.