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Difference Between Hanging Man and Hammer

30 Nov 2023

Introduction:

Candlestick patterns play a crucial role in the technical analysis of stocks, allowing traders and investors to speculate trend reversals or continuations and make accurate trading decisions. They comprise one or more candles with varying bodies, wicks, and colours. Identifying and understanding the significance of various candlestick patterns is the key to maximising profits from the stock markets.

But sometimes, a few candlestick patterns seem similar, and distinguishing between them can become an arduous task. This article discusses two such patterns – hanging man and hammer. Both these patterns indicate a reversal of the prevailing trend and appear similar. However, the difference lies in the market context in which they appear and the trading strategies to follow.

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Continue reading to explore the differences between the hanging man and hammer candlestick patterns and learn appropriate trading strategies for them.

What is a hanging man candlestick pattern?

The hanging man candlestick pattern is a bearish reversal pattern that typically appears at the top of an uptrend. It comprises a single candle with a small real body, a long lower wick, and a negligible upper wick, resembling the shape of a hanging man. The formation of this pattern implies that the stock is trading at higher levels under immense selling pressure. 

Below are the key characteristics of the hanging man pattern:

  • Appearance

As mentioned, a hanging man appears at the top of an uptrend. It has a small body, often near the top of the candlestick, a long lower shadow with at least twice the length of the body, and a short upper shadow. In some cases, the upper shadow may be absent.

  • Significance

The formation of a hanging man during an uptrend indicates that buyers initially had control over the stock, driving higher prices. However, during the trading session, sellers managed to push down the prices significantly. As the session progressed, the buyers again got control of the stock, and it closed near the opening price, resulting in a small body and a long lower shadow.

  • Trading Strategy

Hence, the hanging man indicates a weakening of the prevailing uptrend and hints at a potential beginning of a downtrend. For traders, it’s an opportune moment to enter a short position or exit a long position.

What is a hammer candlestick pattern?

The hammer is a bullish reversal pattern that typically appears at the bottom of a bearish trend. Similar to a hanging man, it comprises a single candle with a small real body, a long lower wick, and a negligible upper wick, resembling the shape of a hammer. 

The key characteristics of the hammer pattern include:

  • Appearance

A hammer is very similar to a hanging man in appearance. It can be characterised by a small real body near the top of the candlestick, a long lower shadow with at least twice the length of the body, and an almost negligible upper shadow.

  • Significance

Although both the hanging man and hammer look similar, they signify different outcomes. While a hanging man indicates the weakening of an uptrend, a hammer suggests a potential strength in the prevailing downtrend. The latter's formation means that sellers tried to dominate the stock and push the prices down during a trading session. However, the buyers regained control at closing. 

  • Trading Strategy

A hammer suggests a potential reversal to the upside. Hence, it can be an opportunity to enter a long position or exit a short position. Conservative traders can wait for additional bullish signals before entering a trade.

Differences between hanging man and hammer patterns

Below are the points of difference between hanging man and hammer patterns:

  • Market context

The primary point of difference between the hammer and the hanging man is the market context in which they appear. A hammer occurs at the bottom of a downtrend, indicating a potential reversal to the upside. On the other hand, a hanging man occurs at the top of an uptrend, suggesting a potential reversal to the downside.

  • Trading Strategies

Another point of difference is the trading strategies for the two patterns. The appearance of a hanging man suggests an opportunity to enter a short position or exit a long position. On the other hand, a hammer suggests an opportunity to enter a long position or exit a short position.

To conclude

Understanding hanging man and hammer patterns and their differences is vital to traders seeking to speculate market sentiments and make informed trading decisions. However, it is essential to consider these patterns in the overall market context and wait for confirmation from other technical indicators.

 

Related Articles:  Difference Between Shooting Star And Inverted Hammer Candlestick Patterns | Hammer Candlestick Patterns: How Do You Interpret It

 

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