Hammer and Hanging Man Patterns: What are they?

by | Aug 6, 2021 | Blog

During a downward trend in the cryptocurrency markets, traders are always looking for a way to determine the bottom to enter a long position. Similarly, in an upward trend, it’s useful to be able to predict when the market has reached its top to close any open trades. There are two indicators which can help in these scenarios. To understand this article, we’re going to assume that you already know how to read a candlestick chart.

 

Hammer Pattern

A hammer pattern can signal the market bottom during a period of downward movement. It is easily recognisable by its form but also because it follows a series of red candles. The pattern itself is formed by a short candle relative to its shadow (or downward wick). Whether the “hammer” candle is green or red isn’t so important, more the psychology behind the shape of the candle. The long wick suggests that there has been heavy selling, possibly capitulation, during the period represented by the candle but buyers have stepped in before its close to create this form. A strong hammer candle should have a downward wick at least twice the length of the candle body.

A good way to validate a hammer signal is to wait until the subsequent candle is fully formed. If this candle is green, it’s likely that we’ll see some upward momentum, at least for the time being. It’s important that the low of the hammer candle is not broken as this would invalidate the pattern.

How to trade a hammer in Bitcoin

Hanging Man Pattern

During a period of upward momentum, it’s possible to notice a hammer candle. A relatively short candle body with a long downward wick. In this instance, the pattern is called a “hanging man”. A hanging man pattern is arguably the lesser of these two signals with regards to reliability but as their form and result are noticeably similar, we’ve included both within the same article.

Similarly to a hammer candle, it’s important to wait until the close of the candle which follows a hanging man in order to validate it. If this next candle is red, it would certainly suggest that the upward momentum preceding the pattern is running out of steam. If the next candle is green, it may still be an idea to avoid entering long positions for now.

How to trade a hammer or hanging man pattern

Assuming the pattern is validated by its subsequent candle, the lowest risk way of trading a hammer signal would be to place a long while adding a stop loss just below the lowest point of the hammer’s wick. This way, any potential loss due to unpredictable movement is minimised. A hanging man is often less reliable than a hammer so if low risk trading is your thing, it may be worth using this pattern to evade unsuccessful longs rather than entering shorts.

 

 

In Summary

A hammer or a hanging man doesn’t indicate any target levels but it can be a good way to spot the end of a strong market trend. As always, it’s recommended to use trading tools and strategies in conjunction with one another to further strengthen the signal you are trading on.

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