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).

Although the hammer and the hanging man are individual patterns, there's one extra step to them: the confirmation of the pattern. The confirmation comes on the following day's opening price. If the opening price on the very next day is in the direction of the signal, you're working with a true hammer or hanging man. If you think you have a hanging man appearing in an uptrend, you wouldn't trade on it unless it's confirmed the next day with an opening price lower than the previous close. By the same token, if a hammer appears during a downtrend, you need to confirm it with an opening price on the next day that's higher than the hammer's close.

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