They’re the end of the trend – and the beginning of reversal, perhaps… The hammer and hanging man look very similar, with long lower shadows, short upper shadows and small bodies (open or filled). They look similar, but:-

A Hammer occurs in a downtrend = bullish reversal, the market’s going up again
A Hanging Man occurs in a uptrend = bearish reversal, the market’s going down…

In practice, of course, these candlesticks don’t necessarily guarantee a solid reversal – price may edge back again, or drift in a level market, with support/resistance. They’re a sign that the end of the trend is near – if the next time-period confirms the reversal, time to consider your position…

And then the inverse – the Inverted Hammer and the Shooting Star.

Again, short bodies, but this time short lower shadows, long upper shadows.

Here’s an example from a real chart, a hammer in a downtrend, that led to steady reversal.

Note also the small up candlestick 2 time periods earlier, that might have caused you to think “buy”, and have pressed the trigger a bit too early….

And one other thing – falls are often steeper than rises. In forex, with a currency pair meaning that while one currency falls, the other rises, there’s no logic to this, unlike the market in stocks. But it still seems to happen – and it does mean that catching a downtrend makes you the money faster.

One Response to “Hammers, Shooting Stars and the Hanging Man”

1. Forex » Hammers, Shooting Stars and the Hanging Man says:

   October 30, 2008 at 7:40 am

   The hammer and hanging man look very similar, with long lower shadows, short upper shadows and small bodies (open or filled).

   Reply