Hanging Man - Hammer

Reversal Patterns

In this discussion we are examining the widely-used Japanese candlestick reversal formations of the "Hanging Man" and the "Hammer'.

The hangman and the hammer are visually similar as they both have small bodies, long lower shadows and no upper shadow (or very small upper shadows). Both are also considered reversal patterns:

• the hangman candlestick pattern forms at the end of an uptrend, whilst

• the hammer forms at the end of a downtrend.

That is, when the hangman appears in an uptrend, it could signal the beginning of a downtrend. It follows that the appearance of hammer in a downtrend suggests a potential change in direction upwards.

The trading theory behind the hangman in an uptrend argues that there has been considerable bearish pressure near the market open, but then the bulls are able to push the price back near the opening price by the days end.

When a hammer appears during a downtrend, the hammer candle theory contends that after the market opens there is strong selling pressure, but by the days end the price recovers at, just below, or above the open.

Please note that the hangman or hammer can be white or black. As always, it is strongly recommended that with either candle, the short-term trader should wait for the next day for a confirmation candlestick that the share price is reversing direction, as in the practical example below.

Practical Example: Hammer

On the ASX200 index in early September 2011 a classic short-term hammer reversal pattern was accomonaued by the Macd pulling back from its nadir in conjunction with the RSI breaking back above the "30" oversold mark.