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Financial market analysis falls under two categories. First comes, Fundamental analysis, which uses information such as macroeconomic conditions, quarterly earnings, and prevailing interest rates, among other factors, to predict future price moves. On the other hand technical analysis functions on the principle that all publicly available information is reflected in prices.
Use of candlestick price charts falls under technical analysis, which uses earlier price moves as input to predict future moves. Hanging Man and Hammer are candlestick patterns that give a clue to the traders about these moves.
Let us see in detail what these candlestick patterns mean and what are their key points of difference.
Key Takeaways
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The hammer indicates a bullish reversal in a downtrend, whereas the hanging man suggests a bearish reversal in an upward trend.
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Both patterns have the same candlestick structure but convey different signals based on the trend direction.
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These candlestick patterns are simple to recognise, but they may generate incorrect signals without confirmation.
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Their accuracy improves when combined with trend strength, volume, and subsequent candles.
What Is Hammer And Hanging Man?
The hammer and hanging man are single-candle pattern reversals used in technical analysis to highlight trend turning points. A hammer occurs in a falling trend, indicating a possible bullish reversal, whereas a hanging man appears in a rising trend, indicating a potential negative reversal.
Both patterns are based on candlestick charts, which show the open, high, low, and close of a specific period of time. In these patterns, the small body and extended lower shadow indicate rejection of lower pricing. Traders use them to gauge market mood at important levels.
Hammer Candlestick
Bullish hammer candlestick occurs at the bottom of the trend. The hammer is made up of a small real 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; the longer the lower shadow, the greater the bullishness of the pattern. The trend of the hammer prior to this should be a downtrend.
When the hammer pattern forms, the prices are expected to fall to a new low. But increased buying interest at those levels pushes the security’s price higher, and it finally peaks at the session’s high. The movement suggests that the buyers stopped the prices from falling 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 higher . This may not be an ideal spot to buy.
Besides, Hammers don't provide a price target. Therefore, figuring out the reward potential of a hammer trade can be tough. Traders need to be cautious, and exits should ideally be based on other candlestick patterns too.
Hanging Man Candlestick
Hanging Man is a top reversal pattern. It indicates a market high. A candlestick pattern is classified as a hanging man only if it follows (or appears at the top of) an uptrend. A bearish hanging man pattern means selling pressure on high levels.
Bulls are in control during an uptrend, and highs can be seen during that time, but the hanging man pattern suggests 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 moves. Therefore, traders may want to look for longer lower shadows and increased volumes. Besides, traders can also utilise a stop loss above the hanging man high.
Also, read What are Candlestick Patterns in detail here.
Difference Between Hanging Man and Hammer
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Parameter |
Hammer |
Hanging Man |
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Trend in which it appears |
Forms during a downtrend |
Appears during an uptrend |
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Market indication |
Signals a potential bullish reversal |
Signals a possible bearish reversal |
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Price behaviour |
Sellers push the price down, but buyers regain control and close near the high |
Sellers push the price down during the session (creating fear), but buyers manage to push it back up to close near the open. |
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Trader interpretation |
Indicates buying support at lower levels |
Indicates selling pressure emerging at higher levels |
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Structure |
Small body at the top with a long lower shadow |
Identical structure with a small body and long lower shadow |
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Meaning of the long lower shadow |
Suggests rejection of lower prices by buyers |
The long lower tail shows that selling interest has suddenly appeared |
Also, learn Reversal Candlestick Patterns here.
Benefits and Limitations of the Candlesticks
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Pattern |
Hammer |
Hanging Man |
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Benefits |
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Limitations |
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Conclusion
Both the hanging man and hammer candlestick patterns assist traders in identifying potential trend reversals, but the key difference between hanging man and hammer lies in the trend in which they show up. A hammer appears in a falling trend, indicating a possible bullish reversal, whereas a hanging man emerges in a rising trend, indicating a potential bearish reversal. This distinction is critical since the same candlestick form delivers opposing messages depending on market direction.
While such patterns are commonly used, their advantages and disadvantages must be thoroughly understood by traders. They are simple to recognise and can detect early movements in market mood. Yet, if utilised alone, they can create misleading signals. Their value is dependent on confirmation from following candles, general trend strength, and other technical parameters. Understanding these characteristics allows for a more accurate interpretation of candlestick patterns within larger market conditions.