Candle Stick Charting – Reversal Patterns (Hammer, Hanging Man)
Recently I have started to read books related finance and trading. As a result, I have decided to publish blog posts related to my reading as a form of summary to what I have read. And this shall be the first of its kind.
Candlestick is a charting technique invented by japanese and introduced to the world by Steve Nison in the book “Japanese Candlestick Charting Techniques”. In the very first chapter of part I, 2 patterns namely Hammer and Hanging Man were introduced.
Hammer is a bottom reversal signal, while a Hanging Man is a top reversal signal.
Three criteria used to identify these 2 patterns:
- The real body is at the upper end of the trading range. The colour of the real body is not important.
- It has a long lower shadow that should be at least twice the height of the real body.
- It should have no, or a very short, upper shadow.
In order to differentiate the hammer from the hanging man, one has to look at the trend, extend of the move before the candle line, and confirmation.
- Trend: A hammer must appear after a decline, while a hanging man must appear after a rally.
- Extend of the move before the candle line: A hammer is valid even if it is preceded by a short-term decline, but a handing man should be preceded by an extended rally, which an all-time high is preferred.
- Confirmation: A hanging man should be confirmed, while a hammer need not be.
As these patterns are completed only after the closing, one should try to avoid buying near the completion to minimize the risk. When a hammer appeared, one should buy at a price that falls within the range of the shadow of the hammer on the next trading day. It was noted in the book that the lower end of the long lower shadow of the hammer forms a potential support area.
On the other hand, a confirmation is required for the hanging man. In order to get a confirmation, one should look at the closing price of the next trading day. The reversal is confirmed if the closing price is lower than the real body of the hanging man.
Disclaimer: this article is not meant to be used as financial advices. It is merely a note for my personal learning. So please use these information at your own risk.