The "Hammer" and "Hangman" candlestick patterns
Figures of technical analysis and candlestick models are often used by traders both as an independent type and as a supplement to other forecasting techniques. This course of lectures can be useful for both novice traders and experienced masters. I would like to start this series with reversal candlestick patterns "Hammer" and "Hangman".
Description of the "Hammer" and "Hangman" candlestick patterns
The "Hammer" and "Hangman" candlestick patterns consist of a single candle. They have long lower shadows and small bodies that are at or very close to the top of the daily trading range.
Candlestick pattern "Hammer" arises on the downtrend and is so named because it forges the bottom, and the Japanese word "tonkachi" for this model translates as "earth.
Hangman candle model appears at the top of a trend or during upward trend. This name comes from the Japanese "kubitsuri" and arose from the fact that this candle resembles a hanging man.
Rules of formation of reversal candlestick patterns "Hammer" and "Hangman"
- The small body is near the upper edge of the trading range;
- The color of the candle body does not matter;
- Long bottom candle shadow should be much longer than the body, usually two or three times longer;
- The candle should not have an upper shadow, and if it does, it is very small.
Market behavior at the time of the "Hammer" and "Hangman" models
- Candle model "Hammer"
The market is in a downtrend, hence bearish sentiment. A trading session opens and the price falls sharply. However, it then rises and the market returns to or near the trading day's high.
The market's reluctance to further reduce the price is chilling sellers, and most traders feel uncomfortable with open bearish positions. If the closing price is higher than the opening price (which is indicated by the white body of the candle), the situation becomes even more attractive for buyers. This will be confirmed by a higher opening price with an even higher closing price on the next trading day.
- Hangman candle model
In this case, the market is considered bullish due to the presence of an uptrend. In order for a "Hangman" to appear, the price must fall well below the opening level of the trading session and then rise to close near the high. This leads to the formation of a long lower shadow, which shows how low prices can fall.
If the next candle after the "Hangman" opens lower, many traders may want to consider the possibility of selling. Thus, the confirmation of the bearish nature of the "Hangman" candlestick pattern can be a black candle and a lower opening price of the next candle.
Features of the "Hammer" and "Hangman" price models
Signs that reinforce the value of the signal given by the "Hammer" and "Hangman" candlestick patterns:
- an extremely long lower shadow;
- the absence of the upper shadow or its very small value;
- a very small body;
- strong previous trend and body color.
In general, the body color of "Hammer" and "Hangman" candlestick patterns can increase the significance of the model's prognostic capabilities. For example, "Hangman" with a black body has a more pronounced bearish character than the same model with a white body. Similarly, the "Hammer" with the white body would have a more pronounced bullish character than the one with the black body.
The lower shadow must be at least twice as long as the body, but not more than three times as long. The upper shadow should not exceed 5-10% of the range from maximum to minimum. The bottom of the body should be below the trend for the "Hammer" model and above the trend for the Hangman model.
Examples of pricing models in the market
In the drawings we can see that the trends, after the formation of the candlestick patterns "Hammer" and "Hangman", really drew the bottom and top respectively, and changed direction. The formation of the "Hangman" candlestick pattern has turned out to be perfect, without upper shadows and with optimal proportions of body/shadow. And the confirmation of the "Hangman" candlestick pattern was the closing of the next day with a bearish candlestick.
But I intentionally chose the non-optimal example of the "Hammer" candlestick pattern with a small upper shadow, so you can see that small shadows in these types of candlesticks can exist (about 10% of the total range of the candlestick). Just as in the previous example with the "Hangman", the reversal candlestick pattern "Hammer" worked itself out, and the trend, having formed it, reversed.