Candlesticks - Hammer and The Hanging Man

Hammer

The hammer, with its long lower shadow and a close near or at the high, is easily understood to be a bullish signal. The term "hammer" derives from the fact that the market is "hammering out a base," or that a bottom is so solid that it does not break, even when a hammer knocks away at it.

An aspect of the hammer is that it must appear after a significant downturn or in an oversold market to have significance. The hammer is a reversal indicator, and as such, should have a downtrend to reverse.

Since the hammer is most useful after a significant downturn, it should be noted that there may be selling on a rally from the
hammer. As such, the first bounce from the hammer may fail and the market may return to test the hammer's support.

The Hanging Man

The hanging man has a very long lower shadow, a small real body (white or black) near the upper end of the trading range
and little or no upper shadow, appears during an uptrend, it is a sell signal.

With the hanging man's long lower shadow reflecting buying interest, it may seem that the hanging man is a bullish signal. However, the hangman's action shows that once the market has fallen, it has become very fragile. The small teal body of the hanging man also shows that the prior uptrend may be in the process of changing. Because of the bullish action of the hanging man session (during the session the market sells off and then rallies by the close), an important aspect of the hanging man lines is that there should be bearish confirmation. A common method of bearish confirmation of a hangman is to wait to see if the next session close is under the hanging man's real body.

The reason for the importance of this confirmation has to do with the fact that the hanging man's long lower shadow shows that there is still rising power left in the market. However, if prices fall under the hanging man's real body, it translates into the fact that everyone who bought at the open or close of the hanging man session is now losing money. In such a scenario, these longs may decide to liquidate, and by doing so, may engender a further weakening of prices.