Financial market analysis falls under two categories. Fundamental analysis uses information like the macroeconomic conditions, quarterly earnings, and the prevalent interest rates among other factors to predict future price moves while technical analysts believe that all the information in the public domain reflects on the prices.
Use of candlestick price charts fall under technical analysis which uses earlier price moves as input to predict the future moves. Hanging Man and Hammer are patterns that give a clue to the traders.
Let us see in detail what they mean and what are the key points of difference.
What is a candlestick?
Candlestick is a type of price chart. It is used in technical analysis that displays the opening, closing, high and low of a stock during a particular period. Usage of a candlestick is believed to have been started by Japanese rice merchants and traders to track the rice market. It later became popular in the US and across the world.
The wide part of a candlestick is called the real body. It tells traders if the closing price was higher or lower than the opening price. Colours visible on the chart are used for the same reason. Black or Red is used if the stock closed lower and white or green is used if the security closed higher.
Hanging Man and Hammer candles appear to be similar. Both have long lower shadows and small bodies but the hanging man pattern is bearish and the hammer pattern is bullish in nature. The key difference between the two patterns is the short term trend.
Bullish hammer candlestick occurs at the bottom of the trend. The hammer is made up of a small read body at the upper end of the trading range with a long lower shadow. Traders can know the bullishness of the pattern by the size of the lower shadow, longer the lower shadow, the greater the bullishness of the pattern. The trend of the hammer prior to this should be a down trend.
When the hammer pattern forms, the prices are expected to fall to a new low. Buying at those levels pushes the price of the security up and it finally ends at the high point of the session. The movement suggests that the buyers stopped the prices to fall further and ultimately drove it to the high point of the trading session.
It must be noted that prices may continue to move to the upside even after a confirmation candle. A long-shadowed hammer and a confirmation candle may pump the price high . This may not be an ideal spot to buy.
Besides, Hammers don’t provide a price target. Therefore figuring what the reward potential for a hammer trade is can be tough. Traders need to be cautious and exit should ideally be based on other candlestick patterns too.
Hanging Man is a top reversal pattern. It indicates a market high. A candlestick pattern is classified as a hanging man only if it precedes an uptrend. A bearish hanging man pattern means selling pressure on high levels.
Bulls are in control during an uptrend and we see highs during that time but the hanging man pattern means that the bears or sellers have managed to come back. They are trying to control the trend now, which leads to the price falling to the lowest level.
The Hanging Man pattern is a very frequent occurrence. If traders highlight them on charts, it could prove to be a poor predictor of price move. Therefore, traders may want to look for increased volume, longer lower shadows and increased volumes. Besides, traders can also utilize a stop loss above the hanging man high.
Both the hanging man and hammer patterns are candlestick patterns which indicate trend reversal. The difference between them lies in the nature of the trend in which they appear. Pattern with a rising trend suggesting a bearish reversal is called a hanging man and if the pattern appears in a falling trend indicating a bullish reversal, it is called a hammer.Other than that the patterns and their components are identical.