Deciphering between the Hanging Man and the Hammer

The last single-stick patterns that rely on a specific market environment that I present in this chapter are the hanging man and the hammer. I paired them together in this section because they appear exactly the same. Don’t be fooled, though — the two patterns aren’t identical. The hanging man is considered bearish, and the hammer is considered bullish, and the difference between the two is where they appear on a chart.

Spotting and distinguishing the hanging man and the hammer

The first step in working with the hanging man and the hammer is understanding how to spot them on a chart. The pattern is fairly distinctive, so identifying it usually isn’t a problem.

The hammer or hanging man is recognized by a small candle that appears at the very top of the pattern. There’s usually a pretty long wick on the bottom. If you see this pattern at the bottom of a downtrend, you’re looking at a hammer. If it appears at the top of an uptrend, it’s considered a hanging man. (Both cases assume that the patterns are actually good signals, of course.) Also, in less than ideal cases, it’s possible for a small wick to be sticking out of the top of the candle.

For a classic example, look at Figure 6-25.

Figure 6-25: A hammer or hanging man (depending on the market context).

Figure 6-25: A hammer or hanging man (depending on the market context).

Although the hammer and the hanging man are individual ...

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