Candlesticks identifying a hanging man and a hammer

The hangman and the hammer are visually similar as they both have small bodies, long lower shadows and no upper shadow (or very small upper shadows). Both are also considered reversal patterns:

• the hangman candlestick pattern forms at the end of an uptrend, whilst

• the hammer forms at the end of a downtrend.

That is, when the hangman appears in an uptrend, it could signal the beginning of a downtrend. It follows that the appearance of hammer in a downtrend suggests a potential change in direction upwards.

The trading theory behind the hangman in an uptrend argues that there has been considerable bearish pressure near the market open, but then the bulls are able to push the price back near the opening price by the days end.

When a hammer appears during a downtrend, the hammer candle theory contends that after the market opens there is strong selling pressure, but by the days end the price recovers at, just below, or above the open.

Please note that the hangman or hammer can be white or black. As always, it is strongly recommended that with either candle, the short-term trader should wait for the next day for a confirmation candlestick that the share price is reversing direction, as in the practical example below..

Practical Example

The chart below is of Bank of Queensland from March to May 2007.

Notice in the highlighted yellow area that a hangman first appears on 23rd April. The next day another larger handman appeared followed by a "hangman like" formation. The hangman candlesticks gave a bearish signal to the market however, you would have to move quick to get into this trade due to the large ranges in a short amount of time.