Hammers and Hanging Man
The Hammer Signal
A very important signal is the Hammer signal. It is extremely easy to spot since it really does look like a hammer. Okay, perhaps an old wooden hammer or mallet. Basically, the body is fairly square, there is little or no wick on top, and the lower shadow is generally at least twice the length of the body.
The Hammer is a single candle. At the bottom of a downtrend, the trade opens near or slightly below the previous days trade, drops down during the day to some value, and closes slightly above or below the open. This is an indication that the buyers are stepping in and may be the beginning of the reversal. If the close is higher than the open, this is a slightly stronger indication of a reversal than if the close is lower than the open. To be sure, it is wise to wait another day to make sure the trend has really reversed.
Rules:
- The lower shadow should be at least two times the length of the body..
- The real body is at the top end of the trading range. While a white body is slightly stronger, it is not required to signal the reversal.
- There should be little or no upper wick.
- Watch the next day to ensure the reversal is not a “fake”.
Signal Strengtheners:
- The longer the lower shadow, the higher probability of a reversal.
- A gap below the previous day’s close indicates a stronger reversal if the following day after the Hammer opens higher.
- Large volume trading on the Hammer day indicates that the reversal is occurring.
General Analysis:
The market trend was on its way down. The price opens and starts moving down as investor sentiment is still in sell. The buyers step in and start pushing the price back up, thinking they have hit the low end and its time to buy. The price moves back up to the top of the trade range, closing either slightly below or slightly above the opening. This shows the sellers could not maintain control and the downtrend is slowing down. The upward rally of the price starts the sellers thinking that the decline is over. If the next day opens higher, this indicates the sellers have given control back to the buyers, and the reversal is likely to be continued.
The Hanging Man Signal
Another very strong indicator is the Hanging Man. It is very similar to the Hammer, at the top end of an uptrend. If you see the correct indication of the Hanging Man signal, your probability of being on the right side of a trade increases dramatically.
The Hanging Man is a single candle. It is identified because it looks like the Hammer at the top of an upward trend. It has a small body at the top of the trading range, with the lower shadow being at least two times greater than the body length.
Rules:
- The lower shadow should be at least two times the length of the body..
- The real body is at the top end of the trading range. While a black body is slightly stronger, it is not required to signal the reversal.
- There should be little or no upper wick.
- Watch the next day to ensure the reversal is not a “fake”
Signal Strengtheners:
- The longer the lower shadow, the higher probability of a reversal.
- A gap above the previous day’s close indicates a stronger reversal if the following day after the Hanging Man opens lower.
- Large volume trading on the Hammer day indicates that the reversal is occurring.
General Analysis:
The market trend was on its way up. The price opens higher than the previous time period but starts to move lower. This indicates that the buyers have topped out of the market. The sellers move the price lower, but the buyers step in and the price moves back up to close in the higher end of the trading range. This creates a small body and a long tail. Even though the buyers have pushed the price back up, this indicates strong activity from the sellers which indicates that investor sentiment is changing. If the next day shows a lower open, or a black candle by close, reinforces that sellers are taking control and a reversal is very likely or has begun.
This is an especially good indicator if the market is overbought, at the top of an uptrend, and provides the information necessary for interpreting the reversal.
