What are Hammer and Hanging Man Candlesticks?

There are several variations of candlestick patterns. Two of them are called hammer and hanging man. Both of them have small bodies and long lower wicks.

Hammer Candlestick

The hammer candlestick has a small real body and much longer (at least twice the length of the real body) lower wick/shadow. There is no (or very little) upper wick. The color of the hammer is of no importance. What matters is that this formation must occur after an established downtrend to be considered a hammer.

The hammer candlestick is a bullish indicator signaling a reversal after a down-trend. If the hammer formation appears continuously after several days with decreasing prices, a close by a hammer confirms the reversal of the trend. The longer the wick and the smaller the body, the more significant the hammer is as a bullish signal.

If a hammer appears, traders may react to it in one of the following ways:

1. Buy the currency pair immediately. This is done since the possibility of the market not pulling back exists. As a result the reversal may occur at once.
2. Buy the currency after it has retested the hammer level. If a break through is not observed, then the hammer area is believed to provide a stable level of support. This will mean that a confirmation of the trend reversal is received.

Hanging Man Candlestick

The hanging man candlestick is identical in appearance to the hammer but occurs after an established uptrend. This pattern is a bearish indicator signaling a reversal of the uptrend and the possibility of a starting bear market.

The hanging man candlestick implies the beginning of a bear market since the currency has not been able to close on a positive note. This can be interpreted as a signal of a weakened market interest toward the currency pair.

In order to confirm the trend reversal, the close of the next period should be waited for. The candle of the next period should close under the body of the hanging man.

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