A unique feature of patterns Hammer and Hanging Man is that they have the same form. However, the pattern can be both Bullish and Bearish signal, depending on where it occurs.
The appearance of these candlesticks on the downtrend is the signal that its domination of the market comes to an end. In this scenario, the candlestick is called the Hammer. In Japanese, such candlestick is called Takuri; this word translates as “the attempt to find the bottom”. If such a pattern appears after the rising prices, this indicates a possible ending of the uptrend. In this case, the candlestick is called the Hanging man.
There is an analogy of the Hammer and the Hanging man in the Western technical analysis – the Island Top and Bottom. These patterns also have an identical form and their values change depending on the trend direction.
The Hammer and the Hanging man can be identified by three key features:
- The body is on the top of the price range. Body color does not value
- The lower shadow is twice longer than the body
- The candlestick has no upper shadow, or it is very short
The longer the lower shadow, the shorter the upper shadow and the smaller the body – the higher influence has the potential bullish hammer or bearish hanging man.
Hammer during a downtrend
Hanging Man during an uptrend
The small body of the Hanging man pattern is interpreted as follows: the players were not confident in the direction of the uptrend, and the price began to unfold. After reaching a certain level, prices become more attractive to buy, and traders tried to continue the trend, but prices failed to reach past levels or exceeded them too low. The length of the lower shadow indicates the doubts of traders in the current direction of prices. The occurrence of these patterns requires confirmation of candlestick reversal.
The long shadow of the Hammer signals about the attempts of traders to drive down the price, but prices were too attractive for purchase, and players on the increase have raised prices to the opening price. This signal also requires confirmation of the next bar.