Hammer & Hanging Man
The Hammer & Hanging man Can be recognized by three criteria-
- The real body is at the upper end of the trading range. The color of the real body is not important.
- Hammer has a long lower shadow that should be at least twice the height of the real body.
- Hammer should have no, or a very short upper shadow.
Difference between Hammer & Hanging Man-
- Trend:- A Hammer must come after a decline while a hanging man must come after a rally.
- Extent of the move before the Candle Stick:- A Hammer is valid even if it comes after a short term decline, but a hanging man should emerge after an extended rally, preferably at an all time high.
- Confirmation:- A Hanging man should be confirmed while a hammer need not be.
About Hammer?
The real body of the hammer can be Green or Red. This is because even if the real body of the hammer is red, we can see in the image that it still closed near the session high. We can say it is slightly more bullish if the real body of the hammer is green (because it closed at the high). The success of the hammer is not dependent on the color of its real body.
The hammers long lower shadow and close at, or near, the high of the session graphically relays that the market sold off sharply during the session and than bounced back to close at, or near, the session's high.
This could have bullish signal.
Since the hammer is a bottom reversal signal, we need a falling trend to reverse as shown in image.
In the image we see a hammer in the circle. Its classic because of its extended lower shadow and small real body at the top end of the trading range. It also followed a decline. This is a necessary condition for a hammer. A lower shadow is necessary because it would display that the market had been pushed down sharply lower during the session, but by the end of the session the bears lost control as adduced by the fact that the market closed at, or near, its session high.
When the hammer was completed (Remember that we have to wait for the close). Thus, if anyone bought at the completion of a hammer, the risk wold be under the hammer's low. There is nothing wrong with that if your target is much greater than the risk that is under the hammer's low.
As such to help lower the potential risk of the trade, you could wait for a correction to within the hammer's lower shadow (Of-course, there will be many times when the market will not correct after the hammer).
See the chart, stock has formed a hammer near its bottom. If you would buy on that day the risk would be under the hammer's low but you can see on next session stock has pulled back near hammer's low. If you buy here, you can reduce your risk.
When the hammer was completed (Remember that we have to wait for the close). Thus, if anyone bought at the completion of a hammer, the risk wold be under the hammer's low. There is nothing wrong with that if your target is much greater than the risk that is under the hammer's low.
As such to help lower the potential risk of the trade, you could wait for a correction to within the hammer's lower shadow (Of-course, there will be many times when the market will not correct after the hammer).
See the chart, stock has formed a hammer near its bottom. If you would buy on that day the risk would be under the hammer's low but you can see on next session stock has pulled back near hammer's low. If you buy here, you can reduce your risk.
About Hanging Man:
The hanging man has the same shape as the hammer, the only difference is that a hanging man comes after an advance while a hammer comes after decline & also body color is not important. Because a long lower shadow is viewed as a plus, and since the hanging man has such a shadow, it is specially important that wait for bearish confirmation with the hanging man. At a minimum this would be a lower opening under the real body of the hanging man. The reason for waiting for a close under the hanging man's real body is that if the market closes lower the next day, those who bought on the open or close of the hanging man day (Lots of trading occurs at these two times) are now left "Hanging" with a losing position. That's why i would like to suggest to see the hanging man at an all time high, or at least at a high for a significant move.
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