CANDLESTICKS - Hammer & Hanging Man

Hammer

This candle looks like a hammer, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be valid hammer most traders say the lower wick must be two times greater than the size of the body portion of the candle, and the body of the candle must be at the upper end of the trading range.

The Hammer is a bullish reversal pattern that forms after a decline.

In addition to a potential trend reversal, hammers can mark bottoms or support levels.After a decline, hammers signal a bullish revival.

When you see the hammer form in a downtrend this is a sign of a potential reversal in the market as the long lower wick represents a period of trading where the sellers were initially in control but the buyers were able to reverse that control and drive prices back up to close near the high for the day, thus the short body at the top of the candle.

While this may seem enough to act on, hammers require further bullish confirmation.The low of the hammer shows that plenty of sellers remain.

After seeing this chart pattern form in the market most traders will wait for the next period to open higher than the close of the previous period to confirm that the buyers are actually in control.Further buying pressure, and preferably on expanding volume, is needed before acting. Such confirmation could come from a gap up or long white candlestick.

Two additional things that traders will look for to place more significance on the pattern are a long lower wick and an increase in volume for the time period that formed the hammer.Hammers are similar to selling climaxes, and heavy volume can serve to reinforce the validity of the reversal.

Hanging Man

A hanging man is a type of candlestick pattern, made up of just one candle. It has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hanging man most traders say the lower wick must be two times greater than the size of the body portion of the candle, and the body of the candle must be at the upper end of the trading range.

The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. The low of the long lower shadow confirms that sellers pushed prices lower during the session. Even though the bulls regained their footing and drove prices higher by the finish, the appearance of selling pressure raises the yellow flag. As with the Hammer, a Hanging Man requires bearish confirmation before action. Such confirmation can come as a gap down or long black candlestick on heavy volume.