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Thursday, October 25, 2007

HAMMER vs. HANGING MAN

Both Hammer and Hanging Man have the same shape, i.e. candlesticks with long lower shadows and small real bodies.
The lower shadow should be at least 2 times longer than the body.
There should be no upper shadow, or a very small upper shadow.
The color of the body is not important, although a white body has slightly more bullish implications and a red / black body has slightly more bearish implications.

Hammer and Hanging Man are reversal patterns which comprised of one candle only.
Whether a pattern is bearish or bullish reversal, it depends on whether it is formed at the end of a downtrend (Hammer) or an uptrend (Hanging Man).



Note:
The grey candle means the color of the candle’s body can be white or black (red).

HAMMER (BULLISH)
Hammer
is a bottom reversal pattern / bullish reversal pattern.
It can be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

When the price is still in the midst of a decreasing trend, the market opens and then sells off sharply. However, at the end of the session, the price turns and managed to close near its high. This shows some evidence that the bulls have begun to step in.
The following day needs to confirm the Hammer’s bullish reversal signal with a strong bullish day (e.g. a gap up or a long white candle on a high volume).

HANGING MAN (BEARISH)
Hanging Man
is a top reversal pattern / bearish reversal pattern.
It may be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

For a hanging man to form, the price must first trade much lower than where it opened, and then it rallies to close near its high at the end of the day. The long lower shadow formed shows some indications that the selling pressures might just begin. Although the bulls managed to regain control and drive the price higher at the close, the appearance of selling pressure raises some concerns.
The next trading day needs to confirm the Hanging Man’s bearish signal with a strong bearish candle (e.g. a gap down or a long red / black candle on a high volume).

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Posts:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Learning Charts Patterns
* Getting Started Trading
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)

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