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Monday, October 29, 2007

INVERTED HAMMER vs. SHOOTING STAR

Both Inverted Hammer and Shooting Star have the same shape, i.e. candlesticks with long upper shadows and small real bodies.
The upper shadow should be at least 2 times longer than the body.
There should be no lower shadow, or a very small lower shadow.
The color of the body is not important, although a white body has slightly more bullish implications and a red / black body has slightly more bearish implications.

Inverted Hammer and Shooting Star are reversal patterns which comprised of one candle only.
Whether a pattern is bearish or bullish reversal, it depends on whether it is formed at the end of a downtrend (Inverted Hammer) or an uptrend (Shooting Star).



Note:
The grey candle means the color of the candle’s body can be white or black (red).

INVERTED HAMMER (BULLISH)
Inverted Hammer
is a bottom reversal pattern / bullish reversal pattern.
It can be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

For an Inverted Hammer to form, the price must first trade much higher than where it opened, and then it drops to close near its low at the end of the day. The long upper shadow formed shows some indications that the buyers (bulls) might have started to step in. Although the sellers (bears) managed to regain control and drive the price lower at the close, the appearance of buying pressure gives some warnings.
The next trading day needs to confirm its bullish reversal signal with a strong bullish day (e.g. a gap up or a long white candle on a high volume).

SHOOTING STAR (BEARISH)
Shooting Star
is a top reversal pattern / bearish reversal pattern.
I could be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

When the price is in the midst of a strong rally, the price opens and then rises sharply. However, at the end of the session, the price turns and managed to close near its low. This shows some evidence that the sellers (bears) might have begun to take control.
The following day needs to confirm this with a strong bearish day (e.g. a gap down or a long black/red candle on a strong volume).

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Option Greeks

6 comments:

Brandon said...

Just wanted to say thanks for all the great posts on how to read candle stick charts. Also wanted to ask, what do you think the best book on candle stick charting is?
Thanks

Jonathan said...

This was an informative post. Thanks for sharing.

Question, have you found any other technical indicators help you filter what inverted hammer to trade?

OPTIONS TRADING BEGINNER said...

Hi Brandon,
Don't mention it! :)

With regards to the candlestick charting books, many people including myself like Japanese Candlestick Charting Techniques by Steve Nison.

I also like Profitable Candlestick Trading: Pinpointing Market Opportunities to Maximize Profits by Stephen Bigalow.
Some of the content of this book can be found in Bigalow's website for free.
The website URL is as follow:
http://www.candlestickforum.com/

OPTIONS TRADING BEGINNER said...

Thanks, Jonathan. :)

Actually, I don't rely too much on technical indicators for my trading. I normally only use the standard RSI, Stochastic & MACD.
I use technical indicators just to see if the stock is in oversold/overbought condition, and divergence.
I prefer to keep my trading as simple as possible.
When a certain candlestick patterns appear, I'll check where the previous supports / resistances are (Also use Fibonacci to help determine possible support/resistance).
If the pattern appears at the strong support/resistance, it'll normally provide a higher probability setup.

Best Regards,
Options Trading Beginner

Brandon said...

Thanks for the book recomendation. I have read the book written by Steve Nison, but I will check out Stephen Bigalow's book.

Tony Chai said...

Hi OTB :

Thanks for the candlestick pattern article again.

Yours Truly,

Tony Chai
My Options Trading Blog