Hammer, Inverted Hammer, and Hanging Man Patterns

Do you know how road signs caution you about upcoming turns or detours? In trading too, certain road signs help you on this treacherous path, called candlesticks. Candlestick patterns can signal important turning points in the market. Some of the most useful patterns traders look for are the Hammer, Inverted Hammer, and Hanging Man. These candlesticks indicate potential reversals in price trends, helping traders spot when a downtrend might be ending, or an uptrend might be losing steam.

In this chapter, we’ll break down these three candlestick patterns, explain what they signal, and show how traders use them to make smart trading decisions. Before diving into each, let's start with the Hammer pattern, the most commonly recognised bullish reversal signal

1. Hammer Pattern: Signaling a Bullish Reversal

The Hammer is a well-known bullish reversal pattern that forms after a downtrend. It tells traders that even though sellers drove the price down during the session, buyers stepped in and pushed the price back up by the end of the day. The long lower wick of the Hammer shows that sellers tried to take control but couldn’t hold it, as buyers came in strong at the end of the session.

What Does a Hammer Look Like?

• A small body at the top with little or no upper wick.
• A long lower wick is at least twice the size of the body.
• It forms after a downtrend and suggests that the price may be about to reverse and move higher.

Reference of the Hammer Pattern

While the Hammer is often a strong signal for a trend reversal, the Inverted Hammer offers a different but equally important bullish pattern after a downtrend.

2. Inverted Hammer Pattern: A Potential Reversal in a Downtrend

The Inverted Hammer is another bullish reversal pattern, but it looks a bit different from the standard Hammer. The Inverted Hammer forms after a downtrend, with a small body at the bottom and a long upper wick. It signals that although buyers tried to push the price higher during the session, they couldn’t maintain the momentum. However, the pattern still suggests that the selling pressure may be weakening, and a reversal might be on the way.

What Does an Inverted Hammer Look Like?

• A small body at the bottom with little or no lower wick.
• A long upper wick, at least twice the length of the body.
• It forms after a downtrend, signalling a potential bullish reversal.

Reference of the Inverted Hammer Pattern

Now that we’ve covered two bullish reversal patterns, let’s switch gears and talk about the Hanging Man, a bearish pattern that signals the end of an uptrend.

3. Hanging Man Pattern: A Bearish Reversal Signal

The Hanging Man pattern is the bearish counterpart of the Hammer. It looks exactly like a Hammer but forms at the top of an uptrend instead of the bottom. The Hanging Man signals that sellers are starting to gain control, even though buyers were able to push the price back up during the session. This pattern suggests that the uptrend may be losing steam, and a bearish reversal could be on the horizon.

What Does a Hanging Man Look Like?

• A small body near the top of the candlestick with little or no upper wick.
• A long lower wick, at least twice the size of the body.
• It forms after an uptrend and suggests that the market may soon reverse and head lower.

Reference of the Hanging Man Pattern

Now that we’ve explored these key patterns, let’s look at how you can use them effectively in your trading strategy.

How to Use These Patterns Effectively?

Candlestick patterns like the Hammer, Inverted Hammer, and Hanging Man are all about spotting potential reversals. But no pattern works perfectly on its own. Traders often use these candlestick signals in combination with other tools like support and resistance levels, trendlines, and volume analysis to confirm their trades.

For example:

• A Hammer at a strong support level, combined with a rise in volume, provides a stronger signal to buy.
• An Inverted Hammer might indicate a reversal, but traders should wait for confirmation from other indicators, such as a higher close in the following session.
• A Hanging Man near a key resistance level is more reliable when followed by a day of declining prices and volume.

By combining these patterns with other technical indicators, traders increase their chances of making successful trades.

After understanding how these patterns fit into your trading, let’s wrap up with some key takeaways about how and when to use them.

Conclusion

Understanding and recognising candlestick patterns like the Hammer, Inverted Hammer, and Hanging Man can give traders an edge in spotting market reversals. These patterns act as signals for potential changes in market direction, helping traders decide when to enter or exit a trade. Whether you’re looking to catch a reversal after a downtrend or spot the end of an uptrend, these candlestick patterns provide valuable insights into market sentiment.

Now that you know how these patterns work, you can start incorporating them into your trading strategy. Keep an eye out for Hammers signalling a bounce, Inverted Hammers hinting at a reversal, or Hanging Men suggesting a trend could be about to turn.