Candlestick Rules- Hammer and Hanging Man

A candle pattern can be a single candlestick line or multiple candlestick lines, seldom more than five or six. There are listed the almost typically occurring reversal patterns. Nearly of the candle patterns are inversely related. That is, for each bullish pattern, there is a similar bearish pattern. The primary difference is their position relative to the short-term trend of the market. 

There are more than 30 named reversal patterns and about 10 prolongation patterns but here we will focus on the reversals to assist the identification of tendency changes. 

NOTE: In the diagrams three small vertical lines precede the ‘pattern' which represent the previous trend of the market and are not included in any reference to pattern relationships. 

Hammer

The market has been in a downtrend but the failure of the market to continue the selling reduces bearish sentiment, and most traders will be uneasy with any bearish positions they might have. If the close is above the open, causing a green body, the situation is even better for the bulls. Confirmation would be a higher open with yet a still higher close on the next trading period. 

Hanging Man

For the Hanging Man, market is considered bullish because of uptrend and the price action for the period must trade much lower than where it opened, then rally to close near the high in order for the Hanging Man to appear. This is what causes long lower shadow which shows how the market just might begin a sell-off. If the market opens lower the next period, there would be many participants with long positions looking for an opportunity to sell. 

Rules of Recognition

• The small body is at the upper end of the trading range

• The colour of the body is not significant

• The long lower shadow should be much longer than the length of the real body, usually two to three times

• There should be no upper shadow, or if there is, it should be very small.