Two closely related but often misconstrued candlestick patterns are the hanging man and hammer pattern. Lucky for you, this hanging man vs hammer candle comparison clears up the common pitfalls most traders fall into when learning about these for the first time.
Along the way, I will teach you how to spot both formations in practice and incorporate other technical analysis tools into your trading arsenal. By the end, you should be fully equipped to trade these candlestick patterns with confidence and drastically improve your win rate.
What is a Hanging Man Candlestick Pattern?
A hanging man candlestick pattern is a single candlestick that appears towards the top of an uptrend and signals a potential bearish reversal in prices.
However, as with all candlestick patterns, it is not enough to predict a trend reversal with any confidence on its own. To increase its accuracy, you should always apply further technical analysis to confirm whether a reversal is in fact likely. I will show you how to do this below.
Optically, a hanging man has a long lower shadow/wick and a small upper body. The small upper body means that the opening and closing prices are similar to one another and appear towards the top of the candlestick. For the body to classify as “small”, the lower wick should be at least 2 times the length of the body.
What is a Hammer Candlestick Pattern?
In comparison, a hammer candlestick pattern forms towards the bottom of a downtrend and represents a potential bullish reversal pattern.
Visually, it has a long lower shadow and a small upper body, meaning that the opening and closing prices are similar to one another and skewed toward the top of the candle.
As with the hanging man, the lower shadow should be a least 2 times the length of the body and you should incorporate other technical indicators to confirm the reversal.
Hammer vs Hanging Man Pattern
Now, you may be scratching your heads slightly.
Aren’t those definitions exactly the same?
Well, not exactly. But you’d be forgiven for thinking so.
Let’s clear up the key similarities and differences between the hammer and hanging man. Note, these are not to be confused with the shooting star vs inverted hammer patterns.
Similarities
As you may have noticed, the visual description of a hammer and hanging man candlestick pattern are identical.
That is, they both have small bodies that appear towards the top of the candlestick, with a long lower shadow beneath it.
In terms of price action throughout the session, this means that sellers were able to drive prices far below the open. This selling pressure resembles the lower wick.
However, at some point, buyers fought back and drove prices back up towards (and in many cases) above the open of the day, before closing near the highs of the candle.
Differences
The main difference that distinguishes a hanging man from a hammer candle is the direction of the previous trend.
In particular, while a hammer pattern appears after a downtrend, the hanging man appears after an uptrend.
As such, the hammer is a bullish reversal pattern, whereas the hanging man is a bearish reversal pattern.
This pin bar vs hammer article clears up another mistaken pair of candlesticks.
Hanging Man vs Hammer Summary
| Properties | Hanging Man | Hammer |
|---|---|---|
| Bullish/Bearish | Bearish | Bullish |
| Location | Uptrend | Downtrend |
| Body | Small Upper Body | Small Upper Body |
| Shadow | Long Lower Shadow | Long Lower Shadow |
How to Trade the Hanging Man Candle
Ok, onto the all important issue of trading a hanging man candlestick pattern.
As mentioned earlier, the trick to trading any candlestick pattern is to incorporate other technical indicators into your analysis.
Firstly, since the hanging man is a bearish reversal pattern, you ideally want to see it appear after a short-term uptrend. It needs a trend to reverse, after all!
In addition, it helps if it occurs at a point of resistance like a trendline or moving average. Finally, you generally want to see other bearish indicators at play, like a bearish MACD crossdown or an overbought RSI.
The chart from TradingView below shows what this looks like in action.
In particular, you will notice that the hanging man candle appears at a horizontal resistance level following a short-term rally.
A good start for taking a bearish stance.
Moreover, the bottom panel shows that the RSI is in overbought territory (above 70), which suggests that prices have become extended to the upside.
As you can see, the combination of these indicators foreshadowed a subsequent price decline. Therefore, you could have profited by taking a short position at the next candle and covering your position as prices declined.
Note, it is always a good idea to set a stop-loss in case your trade doesn’t work out. For a hanging man, you should set your stop-loss at, or slightly above, the high of the hanging man candle.
How to Trade the Hammer Pattern
Let’s do the same thing for a hammer candlestick formation. Hint, it is a mirror image of the hanging man.
For starters, it’s preferable to see hammer candlestick patterns form after a downtrend. This increases the likelihood of a bullish reversal.
Not only that, but it should ideally occur at a point of support like a trendline or moving average and display other bullish technical signals like an oversold RSI or bullish MACD crossover. These all contribute to a bullish setup.
The following price chart shows what this looks like in practice.
Firstly, notice how the bullish hammer appears at a support level following a downtrend. Our first green flag.
Also, the RSI had just dipped into oversold territory (below 30) at the same time. A sign of bearish exhaustion.
Turns out that this was a good entry point for a long position, which you usually initiate during the next session/candle.
Then all you had to do was take profits as prices rose, which usually occurs at points of resistance that you identify beforehand.
Again, a stop-loss should be set at, or just below, the low of the hammer candle to limit losses in case of a “false signal”.
FAQs
What’s the Difference Between the Hammer vs Hanging Man Candle?
While both the hammer and hanging man patterns look identical, their difference lies in the direction of the prevailing trend.
It is a hammer candle if it appears after a short-term downtrend, foreshadowing a potential bullish reversal.
However, it is a hanging man pattern if it appears following a short-term uptrend. In this case, it acts as a potential bearish reversal pattern.
Is the Hammer Candle Bullish or Bearish?
A hammer candle tends to be a bullish reversal pattern, however only if a bearish trend precedes it. In addition, you should always confirm this signal with other bullish technical indicators.
For example, a hammer candle holds more weight if it occurs at a support level with elevated volume. It also helps if prices are oversold and other bullish indicators are in place, like a moving average or MACD cross up.
Is the Hanging Man Candle Bullish or Bearish?
A hanging man candlestick pattern is typically seen as a bearish reversal pattern, however only if a bullish trend precedes it. To increase its accuracy as a bearish reversal indicator, you should first confirm whether other bearish signals exist.
For example, the likelihood of a sell off increases if the hanging man occurs at a resistance level and/or when prices are overbought with diminishing momentum. Indicators like the MACD, stochastic oscillator, and moving averages are popular tools to gauge underlying momentum.
Is the Hanging Man Candle Accurate?
According to Bulkowski’s encyclopedia of candlestick charts – where he backtests the performance of different candlestick patterns – the hanging man candle turns out to be a continuation pattern 59% of the time instead of a reversal pattern.
This is within the realm of randomness, for sure. But as discussed in this article, there are ways to improve its accuracy with further technical analysis. Unfortunately, technical analysis is subjective and therefore impossible to capture in backtests.
What’s the Difference Between the Hanging Man and Inverted Hammer?
The key differences between the hanging man and inverted hammer patterns is the orientation of the wick/body and their location in a trend.
Firstly, while the hanging man has a long lower wick and small upper body, the inverted hammer has a long upper wick with a small lower body.
Also, a hanging man is usually a bearish reversal pattern found at the top of an uptrend, whereas an inverted hammer is usually a bullish reversal pattern found at the bottom of a downtrend.
What’s the Difference Between the Hanging Man and Shooting Star?
The main difference between the hanging man and shooting star comes down to orientation of the wick/body.
While both typically appear after an uptrend and signal a potential bearish reversal, the hanging man has a long lower shadow and small upper body, while the shooting star has a long upper wick and small lower body.