Technicians throughout the world have adopted the Japanese
practice of candlestick charting. In fact, many have abandoned Western bars in favor of
this visual tool that generates detailed information from short-term price movement. Of
all candlestick patterns, single bar hammers and dojis provide
the most versatile immediate feedback. Western technical analysis rarely offers such
dependable single bar signals.
These formations print when a significant battle between
bulls and bears ends in a draw. Two characteristics generate their predictive power:
- 1. High to low range greater than average.
- 2. Closing tick equal to or near opening tick.
Dojis represent perfect opening-closing balance as price
finishes exactly where it started. Hammers need only close so that the central body of the
candlestick is less than one-third the length of the bars total range. But the body
must sit near one end of the bars action.
Dojis and hammers predict immediate reversals within the
time frames they are created. Their significance directly relates to their position within
the overall chart pattern. When appearing on high volume near significant highs or lows,
they may represent price extremes signifying an important change in trend. If printed
within an ongoing congestion pattern, they often reflect market makers or specialists
"cleaning out" stops in one direction so they can move the market in the
Retracement science assists traders in predicting events
subsequent to one of these important candles. Shifting down one time frame from the bar
reveals the length of the short-term trend being reversed by the long finger. Very often,
dojis and hammers represent first rise/first failure setups within the
smaller time frame. This further predicts where the reversal momentum will fade for a test
of the candle.
Following a doji or hammer reversal, a test of the candle
high or low often takes place within 3 to 5 bars. When the test fails, expect price to
thrust sharply forward, especially when overbought/oversold indicators show no divergence.
When the test succeeds, shift down one time frame again and trade the setup according to
double bottom/double top strategy. Specifically look for price to surge on the breakout
past the high/low of the initial reversal generated by the candle.