The hammer and the hanging man look exactly the same. Both have small bodies near the top of the candlesticks with a long lower shadow and little or no upper shadow.
It is more bullish and gives a bullish signal when it appears at the end of a downtrend. A hanging man is more bearish and it gives a bearish reversal on top of an uptrend.
Illustrations of The Hammer and The Hanging Man
More to that, a hammer forms at the end of a down trend and is a bullish reversal pattern while, a hanging man forms at the top of an uptrend and is a bearish reversal pattern.
The real body of the hammer and the hanging man is at the top of the candlestick, the colour of the body is not very important. But a blue hammer is more bullish compared to the red one and a red hanging man is more bearish compared to the blue one.
Hammer’s lower shadow should be twice the height of the real body. It can either have a small upper shadow or none.
The long lower shadow indicates that sellers pushed prices lower but the buyers came in and pushed prices back up and closed near the open.
Unlike the hammer, the appearance of the hanging man on an uptrend shows that sellers are getting stronger compared to the buyers and have started pushing prices lower. Buyers can only push prices back as high as near the open but as more sellers engage the market, they probably loose control and are out weighed.
Using it as a signal to trade, you should always wait for a confirmation candlestick atleast at the close of a blue candlestick above the open of right side of the hammer.
An Example showing a Hammer on a chart below
Let’s take a look at the chart below;
The above chart shows the significance of a hammer on a market chart . Looking at the above chart, you can clearly tell that the appearance of a hammer after a long fall of prices gives a signal for a probable reversal in the trend direction.
On the next chart below, we shall see a trend reversal induced by a hammer. Take a look
Our next interesting candlestick pattern that we going to learn is a shooting star
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