The hammer and hanging man candlestick chart patterns are made up of similar candlesticks, which are known as umbrella lines.
Hammer and Hanging Man Candlestick Chart PatternsAlthough the hammer is a bullish pattern and the hanging man is bearish, they both take the same shape. The main difference between these two patterns is that they appear on two different trends—one on the uptrend and the other on the downward trend. The hanging man pattern is formed when the candlesticks or umbrella lines form in an uptrend; the hammer pattern appears in a downward trend.
The Hammer pattern
The hammer pattern is a bullish version of the Hanging man pattern. This formation takes place at the tail end of a downward trend when the price of the close, high and open are generally similar. The candlesticks are characterized by an elongated shadow that is two times longer than the main body.
A bullish hammer candlestick pattern forms when the close and high price are similar. This usually happens when the bulls eliminate the bears and thus the bulls pushed the price of the underlying beyond the opening price. The hammer pattern is not strongly bullish when the open and high prices are the same. In this situation, although the bull managed to eliminate the bears, they were unable to retrace the price back to the open price.
The long shadow that is characteristic of the hammer formation signifies that the market has identified a support and demand point. The area of support is indicative of the low price points of the day where the bulls push prices further towards the opening market. As a result, the bulls kept the bears from going on with their downward trend.
Hanging man candlestick chart patternThe Hanging man is a bearish formation. It forms in the highest part of an uptrend and is an indication of a prospective downward reversal. This pattern is also a strong indication of a probable change in prices and is not essentially a signal for a trader to go short.
Just like the Hammer pattern, the Hanging man formation occurs when the close, open and high are generally at the same price level. This pattern also features a long shadow that is usually two times the length of the actual pattern.
A strong bearish pattern is formed when the high and the open price are the same. This is considered a strong bearish signal compared to when the high or close price are at the same level. Following a lengthy uptrend, the bearish Hanging Man formation occurs because the prices declined massively during the day trading session. Although buyers purchased the underlying stock and caused prices to push up closer to the open prices, these prices still fell significantly. In effect, a hanging man pattern indicates whether prices will decline or spike up.
In summary, several features are characteristic of the hammer and hanging man patterns:1. The shadow is at least two times longer than the real body
2. The real body, irrespective of the color is typically in the range of higher prices
3. The candles have either a very short upper shadow or none at all
4. When the lower shadow is longer, the upper one is usually shorter; when the real body is smaller, the greater the potential for either of these two candles
5. The real body of the candles can comprise of white and black colors; however when the hanging man has a black body, it signals bearishness while the hammer’s white body signals bullishness.