David Waring

In our last lesson we learned about the Bullish and Bearish Engulfing Candlestick Patterns which can represent reversal patterns when found in an uptrend or a downtrend. In Today’s lesson we are going to look at two more candlestick Patterns which are known as the Hammer and the Hanging man.

The Hammer


Like the Spinning Top and Doji which we have studied in previous lessons where we learn to trade chart patterns, the Hammer candlestick pattern is made up of one candle. The 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 a valid hammer most traders say the lower wick must be two times greater than the size of the body potion of the candle, and the body of the candle must be at the upper end of the trading range.

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.

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.

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.


The Hanging Man


The Hanging Man is basically the same thing as Hammer formation but instead of being found in a downtrend it is found in an uptrend. Like the Hammer pattern, the Hanging man has a small body near the top of the trading range, little or no upper wick, and a lower wick that is at least two times as big as the body of the candle.

Unlike the Hammer however the selling pressure that forms the lower wick in the Hanging Man is seen as a potential sign of more selling pressure to come, even though the candle closed in the upper end of its range. While the lower wick of the Hammer represents selling pressure as well, this is to be expected in a downtrend. When seen in an uptrend however selling pressure is a warning sign of potential more selling pressure to come and thus the categorization of the Hanging Man as a bearish reversal pattern.

As with the Hammer and as with most one candle chart patterns most traders will wait for confirmation that selling pressure has in fact taken hold by watching for a lower open on the next candle. Traders will also place additional significance on the pattern when there is an increase in volume during the period the Hanging Man forms as well as when there is a longer wick.


Links Around the Web to Help You Learn More About the Hanging Man Candlestick Pattern

Bearish Hanging Man Japanese Candlestick Chart
Investopedia Entry on the Hanging Man Candlestick Pattern
Hammers and Hanging Man Candlestick Patterns

That completes our lesson for today. In our next lesson we will look at two additional reversal patterns which are known as the Morning and Evening Star Candlestick Patterns so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

David Waring

I received the below question from a trader today:

Here is my answer:

If there are any other questions or if anyone else has input on this please post below.

Best Regards,
Dave

knn9413

Hi Dave,

Came across your website yesterday and loved it... quick question

hammer is a reversal pattern found in a downtrend correct? You seem to mention it as uptrend

David Waring

Hi Knn9413,

Good catch yes the image in the video and in the text says that its found in an uptrend but as the text says and my voiceover says and as you correctly point out the hammer is a reversal when found in a downtrend.

I am going to fix the image in the text now and will make a note to fix the image in the video on the next revision.

If you notice anything else like this please let me know.

Best Regards,
Dave

Unregistered

Hello David.

Thanks David. Great website!
I cant differentiate the hammer from the hanging man... both have longer lower wick???
Is there any other distinct features to differentiate the two?

Fro emiwong

David Waring

Hi Emiwong,

Thanks for the comment I am glad you like the site.

The Hammer and the Hanging Man look the same. The difference is that the Hammer is found in and is considered a potential reversal pattern in a downtrend where a Hanging Man is found in and considered a potential reversal pattern in an uptrend.

If there are any other questions or comments on the one please feel free to post in the comments section below.

Best Regards,
Dave

Jaco Strauss

I have a funny at the mo' A reversed hammer after a long downturn followed by another reversed hammer except for the fact that the second one's wick is not quite double the body. The first one was. Could this be see as a reversal or should I wait yet another day?

Thanks for the very informative site

Jaco

David Waring

Hi Jaco,

Glad to hear from you and welcome to the community.

Generally when the market makes two hammer candles or two candles in a row where the body is small this is seen by traders as a period of indecisiveness in the market.

When this occurs after a large runup or rundown on the market, it can sometimes indicate a change in trend or a correction of the dominant trend in the market. With this in mind traders will often view this as a potential reversal pattern, however generally they will wait for the market to confirm by moving in the direction of the reversal before placing the trade.

Hope that helps.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Unregistered

Hi David,

What does it mean when a hammer forms in an uptrend? I know it usually means a reversal in a downtrend but Ive seen them form a few times in uptrending stocks.

Thanks,
Lee

Tekmnd

Hi Lee

In general, what a hammer means in an uptrend is that a surplus of sellers came in and pushed the price down. This could be a sign that buying pressure has dropped off and the price will reverse. A trader would probably want to use other methods as well (in other words, don't enter a trade just because you see a hammer). An example of an 'other method' could be if you get a hammer right as price hits resistance.

Cheers
Tek