Japanese Candlestick Theory

Hammer and Hanging Man

Candlestick Reversal Patterns

Reversal signal indicates that prevailing trend may change. This means that market may become flat, or may move in the opposite direction. Any reversal signal should be treated only as a sign of the fact that the prevailing trend may change, not as a signal of a new trend or the reason to initiate a new position in the opposite direction. To consider the opening of a new position global tendency should be analyzed more carefully but in order to offset position reversal signals may be and should be used.

Let’s begin with the most strong reversal signals, which more often than not produce opposite to the main trend price behavior.

The Hammer and the Hanging Man

hammer-1

The Hammer is a candle with a short real body and a long lower shadow, which appears after a downtrend. The Hammer is a strong reversal signal that a bearish trend is weakening:

hammer-2

The Hanging man is a candle with a short real body and a long lower shadow, which appears during a rally indicating forthcoming reversal:

hammer-3


How to define the hammer and the hanging man:

  • Real body of any color is in the upper price range.
  • Lower shadow as the bottom more than twice longer than a real body.
  • Candle does not have an upper shadow or has a very short one.

The longer the lower shadow the shorter the upper one, and the smaller the real body the higher hammer’s or hanging man’s potential.

Real body of such a candle can be both white and black, but hanging man’s black body is more bearish signal and hammer’s white body is more bullish signal:

  • Hammer’s white body signifies that despite the fact that the prices at the opening were falling, at the end of the period bulls were able to drive the closing price to the maximum. Therefore we can assume that bulls have become more aggressive.
  • Hanging man’s black body signifies that closing price could not rebound to the opening level so it assumes bears’ potential gathers momentum.

Hanging man’s confirmation signals:

  • The next bar opens under hanging man’s real body. The more the price gap between the hanging man’s real body and the next bar open price, the more probability that hanging man will form the high.
  • Close price of the next bar’s black candle is under the hanging man’s close price.

Confirmation signals for the hammer are diametrically opposite.

Important: The hammer and/or the hanging man behaves in accordance with the theory, if before the formation of the pattern there has been downtrend or uptrend respectively. It is worth mentioning that the hanging man is formed close to the prior candle high, and the hammer is formed close to the prior candle bottom.

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