Hammer and Hanging Man
The
hammer and hanging man look exactly alike but have totally different meanings
depending on past price action. Both have cute little bodies (black or white),
long lower shadows, and short or absent upper shadows.
The hammer is a
bullish reversal pattern that forms during a downtrend. It is named because the
market is hammering out a bottom.
When
price is falling, hammers signal that the bottom is near and price will start
rising again. The long lower shadow indicates that sellers pushed prices lower,
but buyers were able to overcome this selling pressure and closed near the
open.
Just
because you see a hammer form in a downtrend doesn't mean you automatically
place a buy order! More bullish confirmation is needed before it's safe to pull
the trigger.
A typical
example of confirmation would be to wait for a white candlestick to close above
the open to the right side of the hammer.
Recognition Criteria:
·
The long shadow is about two or three times of the real body.
·
Little or no upper shadow.
·
The real body is at the upper end of the trading range.
·
The color of the real body is not important.
The hanging man is a
bearish reversal pattern that can also mark a top or strong resistance level.
When price is rising, the formation of a hanging man indicates that sellers are
beginning to outnumber buyers.
The long
lower shadow shows that sellers pushed prices lower during the session. Buyers
were able to push the price back up some but only near the open.
This
should set off alarms since this tells us that there are no buyers left to
provide the necessary momentum to keep raising the price.
Recognition Criteria:
·
A long lower shadow which is about two or three times of the real
body.
·
Little or no upper shadow.
·
The real body is at the upper end of the trading range.
·
The color of the body is not important, though a black body is
more bearish than a white body.
Inverted Hammer and Shooting Star
The
inverted hammer and shooting star also look identical. The only difference
between them is whether you're in a downtrend or uptrend. Both candlesticks
have petite little bodies (filled or hollow), long upper shadows, and small or
absent lower shadows.
The inverted hammer occurs
when price has been falling suggests the possibility of a reversal. Its long
upper shadow shows that buyers tried to bid the price higher.
However,
sellers saw what the buyers were doing, said "Oh heck no" and
attempted to push the price back down.
Fortunately,
the buyers had eaten enough of their Wheaties for breakfast and still managed
to close the session near the open.
Since the
sellers weren't able to close the price any lower, this is a good indication
that everybody who wants to sell has already sold. And if there are no more
sellers, who is left? Buyers.
The shooting star is a
bearish reversal pattern that looks identical to the inverted hammer but occurs
when price has been rising. Its shape indicates that the price opened at its
low, rallied, but pulled back to the bottom.
This
means that buyers attempted to push the price up, but sellers came in and
overpowered them. This is a definite bearish sign since there are no more
buyers left because they've all been murdered.
