Let me start by saying that if you are unfamiliar with candlestick charts and how they work, please read Introduction to Candlestick Charts before going too in depth with the individual patterns. It will make all that follows so much easier to understand.
The Hammer and the Hanging Man are both candle patterns that signal a reversal in trend, much like the Doji. The only major difference between them is the trend they appear within. If the pattern occurs within an upward trend, which indicates a bearish reversal, it's a Hanging Man. If it occurs within a downward trend, which would indicate a bullish reversal, it's a Hammer.
The patterns and their components are virtually identical, aside from the trends they are found within. Both the Hammer and Hanging Man consist of a single candle with a body near the top of the candle, a long lower wick that is at least twice as long as the body, and little to no upper wick. The color of the candle body in either scenario is irrelevant.
In technical analysis, the Hammer candle is considered to be a bullish pattern, indicating reversal to the upside. The candle looks somewhat similar to a hammer. This particular chart pattern only has one candle, forms within a downtrend, and is considered a bottom to the market, and/or a support.
The display above shows the Hammer candle pattern.
Hammer candles form when the stock price falls below the opening price as a result of selling pressure. Despite the sell pressure, the stock prices manages to recover most (if not all) of the loss within that particular trading period. Due to price recovery of most of the losses throughout the trading period, the Hammer indicates significant buying interest for fundamental, psychological, or technical reasons. When this occurs within a downtrend, it indicates a change in trend, change in sentiment, or a possible bottom.
The Hanging Man candle pattern mirrors the Hammer. When a Hammer pattern occurs within an uptrend, it’s a Hanging Man. It’s considered to be a resistance point, or a peak in the market.
The Hanging Man form when the stock price falls below the opening price as a result of selling pressure. Despite the sell pressure, the stock prices manages to recover most (if not all) of the loss within that particular trading period. The price action indicates sell pressure for fundamental or psychological reasons. When the Hanging Man occurs within an uptrend, it indicates a change in trend, change in sentiment, or a possible market top.
Both of these patterns are used to identify trends. The Hammer can be used as an entry point, while the Hanging Man can be used as a point of exit.
If you have any questions, please feel free to comment. If you learned something new when reading this, share it with others.
Remember to stay in your "Trader Mentality."
Labels: Charts 101, Technical Analysis
