Hammer and hanging man – reversal patterns

«Hammer» (in Japanese «takuri» — this word means something like «an attempt to determine the bottom by foot») —is a candle with a small body and a long lower shadow that occurs after a downtrend. If a «hammer» appears it is a strong signal that bears are loosing control over the market (Figure 2).

«Hanging man» — is a candle with a small body and a long lower shadow that occurs after an uptrend. A «hanging man» signals the end of the uptrend. (Figure 3).

• Three main features of a «hammer» and a «hanging man» (рис. 1):
• The body is in the upper part of the price range. The color of the body is of no importance.
• The lower shadow is at least twice as long as the body.
• The candlestick doesn’t have the upper shadow or it is very short.

• Factors that strengthen patterns «hammer» and «hanging man»:
• The longer the lower shadow is, the shorter the upper shadow is and the smaller the body is the higher the potential of a «hammer» or a «hanging man» is.
• Though bodies of these candles can be both white and black, but the bullish nature of a «hammer» with a white body and the bearish nature of a «hanging man» with a black body are more pronounced. The white body of a «hammer» means that in spite оf the fact that at the beginning of the bar prices were declining by the end of the period bulls managed to increase the closing price up to the highest price of the bar. It indicates that the bulls are strengthening. The black body of a hanging man means that price failed to return to the opening level which is a sign that the bears are strengthening.

• Confirming signals for a «hanging man»:
• The following bar opens lower than the body of the «hanging man».The more downward the price gap between the body of the «hanging man» and the opening price of the following bar is the higher probability that the «hanging man» will form a high is.
• The following bar is a black candlestick with the closing price lower than the closing price on the day when the «hanging man» appeared.

Confirming signals for a «hammer» are similar (с точностью до наоборот).

One serious consideration that must be used to identify a «hammer» or a «hanging man» is the trend of the market preceding the pattern (downward or upward correspondingly). Also it should be taken into consideration that a «hanging man» forms near the high of the preceding candle and a «hammer» forms near the low of the preceding candle.