For those wanting to understand reverse candlestick patterns on a deeper level, you’ve come to the right place. In our last article, we discussed Doji patterns — why they occur, how a trader can spot them, and what market trends they precede. But, to understand reverse candle stick patterns, it is also important to understand candlestick charts in general:
Candlestick charts offer detailed information about price movements within a particular time frame, including the opening, closing, high, and low prices. Each "candlestick" consists of a body (the range between the open and close) and wicks (shadows) that extend to high and low prices. Green (or white) candles indicate prices closed higher than they opened, while red (or black) candles show prices closed lower than they opened.
In this article, we will be introducing additional members of reverse candlestick patterns – the hammer & the hanging man.
As we already mentioned, reverse candlestick patterns signify a potential shift in market trends. Similarly, the only difference between the hammer pattern and the hanging man pattern is the place where the trader spots them. If the candlestick occurs in a bull trend, it signifies that the market will shift to a bear trend. In this case, we call it the hanging man. If the candlestick occurs in a bear trend, it signifies that the market will shift to a bull trend. In this case, we call it the hammer.
This is virtually the only difference between these two patterns, as they are identical in form. Both of them consist of one candlestick with a body, a longer lower shadow (which typically spans twice the length of the body), and lastly, this pattern has little-to-no upper shadow.
When it comes to the hammer, the length of the lower shadow is very significant, as it indicates the strength of the demand for the given asset over a given time span. This is typically considered a bullish signal.
On the other hand, when the Hanging Man occurs, the trader has to wait for confirmation from the subsequent candlestick. In an ideal scenario, the confirmation comes in the form of a candlestick whose closing price is lower than the body of the hanging man.
To summarize, the hammer pattern occurs at the end of a bear trend. Its long lower shadow indicates that the sellers attempted to push the price downwards, but the buyers prevailed and managed to pull it back up. On the contrary, the hanging man occurs at the end of a bullish trend. In this case, its long lower shadow signifies an opposite effect. However, it is important to wait for confirmation from the consequent candlestick.
Hopefully, this article will help out with recognizing and working with the hammer & hanging man reverse candlestick patterns. Keep your eyes peeled for our next article, where we will go over the reverse versions of the hammer and the hanging man.
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