Understanding The Difference Between Hanging Man And Hammer: While trading in the stock market, you must have come across various candlestick patterns that can help you find good trades whether it is a trend reversal or a trend continuation.
In this article, we will discuss two such candlestick patterns which are hammer and hanging man, their benefits and limitations, and the Difference Between Hanging Man And Hammer.
What Is A Hammer Candlestick?
A hammer is a price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies within the period to close near the opening price.
This pattern forms a hammer-shaped candlestick, in which the lower shadow is at least twice the size of the real body.
The candlestick’s body represents the difference between the opening and closing prices, while the shadow shows the high and low prices for the period.
The hammer candlestick occurs when sellers enter the market during a price decline. By the time of market close, buyers absorb selling pressure and push the market price near the opening price.
Image is taken from tradingview.com (Chart: ICICI Bank, Timeframe: 1 Day)
Benefits Of A Hammer Candlestick Pattern
In any financial market, the hammer candlestick pattern can be utilized to spot trend reversals, especially if it is being formed at the bottom of a downtrend.
Hammer candlestick patterns work well on smaller timeframes as well as larger timeframes. A hammer candlestick pattern can be used for different timeframes making them suitable for both intraday and swing trading.
Limitations Of A Hammer Candlestick Pattern
At times spotting a hammer candlestick pattern can be quite tough and confusing as these patterns can be formed in the middle of a downtrend as well and you might think that the market is ready for a reversal but the market continues to fall.
It is very important to be sure that the market has bottomed out when the hammer candlestick pattern is formed. A hammer candlestick pattern by itself isn’t very reliable.
To maximize the chances of success when trading the hammer candlestick pattern, it is advisable to use other technical indicators for confirmation.
What Is A Hanging Man Candlestick?
A hanging man candlestick occurs during an uptrend and warns that prices may start falling. The candle is composed of a small real body, a long lower shadow, and little or no upper shadow.
The hanging man shows that selling interest is starting to increase. In order for the pattern to be valid, the candle following the hanging man must see the price of the asset decline.
The hanging man pattern occurs after the price has been moving higher for at least a few candlesticks. This does not need to be a major advance.
It may be, but the pattern can also occur within a short-term rise amidst a larger downtrend. The hanging man looks like a “T”, although the appearance of the candle is only a warning and not necessarily a reason to act.
The hanging man pattern is not confirmed unless the price falls in the next period or shortly after.
After the hanging man, the price should not close above the high price of the hanging man candle, as that signals another price advance potentially.
If the price falls following the hanging man, that confirms the pattern and candlestick traders use it as a signal to exit long positions or enter short positions.
Image is taken from tradingview.com ( Chart: Wipro, Timeframe: 1Day)
Benefits of a hanging man candlestick pattern
The accuracy of a hanging man candlestick pattern is quite high and if you are able to enter a trade at the right point, it can give you big targets and your stop loss will be very small.
This makes the risk-to-reward ratio very favourable when trading the hanging man candlestick pattern. A hanging man candlestick pattern is quite easy to spot. You just have to make sure that it is formed at the top of an uptrend.
Limitations of a hanging man candlestick pattern
A hanging man candlestick pattern is not necessarily indicative of a trend reversal. As a result, it is advisable to combine this pattern with other technical indicators for a higher success rate.
A hanging man candlestick pattern is quite uncommon compared to other candlestick formations.
Difference Between Hanging Man And Hammer
| Hammer Candlestick Hanging Man Candlestick |
| A hammer candlestick pattern is usually A hanging man candlestick pattern formed at the bottom of a downtrend. usually formed at the top of an uptrend. |
| A hammer candlestick pattern is a bullish A hanging man candlestick pattern is a reversal pattern. bearish reversal pattern. |
| A hammer candlestick pattern acts as an A hanging man candlestick pattern acts as an important support area. an important resistance area. |
If a hammer candlestick pattern is formed and the next candle crosses the top of the hammer, it would be advisable to exit any short positions or enter new long positions.
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In Closing
If a hanging man candlestick pattern is formed and the next candle crosses the low of the hanging man, it would be advisable to exit any long positions or enter new short positions.
In this article, we understood what hammer and hanging man candlestick patterns are, their benefits and limitations, and the Difference Between Hanging Man And Hammer.
If you are able to identify these patterns at the right points you can make very high returns with a very good risk-to-reward ratio.
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