Candlesticks are a commonly used chart type, and many traders know some candlestick formations, such as engulfing patterns. What doesn’t get as much attention is the tails or wicks of a candle. They mark the highs and lows in price which occurred over the price period, and show where the price closed (that bar) in relation to the high and low. The tails won’t mean much unless there is a context for their movement. Two candlestick patterns in particular, when combined with support and resistance, give us a good indication the price is turning.
The hammer is a candle that has a long lower tail and a small body near the top of the candle. It shows that during that period (whether 1 minute, 5 minute or daily candlesticks) the price opened then fell quite a distance, but rallied back to close near (above or below) the open. This is sign that buyers stepped in and are “hammering out a bottom.”
Long lower tails are seen all over the place, and aren’t significant on their own. But they are significant when a long lower tail–hammer–is seen near support. It indicates the sellers tried to push the price through support but failed, and now the buyers are likely to take price higher again.
Figure 1 shows an example of a hammer candle on the USDJPY Daily Chart.
Three candles, all with long tails occurred in the same price area and had very similar price lows. That three long tailed candles all respected the same area showed there was strong support at 100.800. When the hammer occurred (third candle in the series with the red area below it) it showed the price was likely to continue higher, since sellers had tried to push the price lower, but couldn’t. That continued to be an important support area after that for some time.
The gravestone is a candle that has a long upper tail and a small body near the bottom of the candle. It shows that during that period (whether 1 minute, 5 minute or daily candlesticks) the price opened then rallied quite a distance, but fell to close near (above or below) the open. This is sign that sellers stepped in and created a graveyard for the buyers.
Long upper tails are seen all over the place, and aren’t significant on their own. But they are significant when a long upper tail–gravestone–is seen near resistance. It indicates the buyers tried to push the price through resistance but failed, and now the sellers are likely to take price lower again.
Figure 2 shows an example of a gravestone candle on the EURUSD hourly chart.
The price tested this resistance area multiple times, finally it broke above it, but within the same bar (one hour) the price collapsed back. This indicated the buyers didn’t have control and that the breakout would likely fail. The price did proceed lower from there.
The Final Word
Look for tails on candle. Multiple long tails in one area, like in figure 1, show there is a support or resistance there. If a hammer or gravestone candle occurs near support or resistance, expect a reversal since the support/resistance has held. A hammer opens and closes near the top of the candle, and has a long lower tail. A gravestone opens and closes near the bottom of the candle, and has a long upper tail. These are not so much trade signals as analytical tools that can be combined with trade signals to find higher probability trades.