What Is A Stop Limit Order In The Stock Market Japanese Candlestick Charting Techniques: Fundamental Differences Between Hammer and Hanging Man

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Japanese Candlestick Charting Techniques: Fundamental Differences Between Hammer and Hanging Man

Japanese candlestick charts or candlesticks used internationally by investors, financial institutions, traders (day traders, swing traders) in the technical analysis instantly determining the direction and momentum for maximum profits. The use and popularity of candlesticks has grown around the globe in the recent years because of their simple visual representation in determining the psychology behind the market behavior compared to the other technical charting methods like bar charts, line chars etc.

As a trader, we always thrive on improving the profits or ROI (rate of return on investment) and constantly looking for ideas or methods to learn and implement them in trading for better entry and exit points using the technical analysis.

As I constantly interact with the traders, I found that traders are constantly overlooked or misinterpreted the most important single candle types as they resemble the similar structure and they happen often. The good news is I will help you distinguish the differences between the hanging man and hammer and use them to our advantage in the trading.

Hanging man and hammer resemble the same candle structure but the psychology behind the formation of these candles is completely different.

Hanging man:

  • Occurs in an uptrend
  • Indicates a reversal signal but confirmation required
  • Small real body (white or black) close at or near the high of the session and have long lower shadows

The confirmation required for the reversal pattern as the hanging man appears in the uptrend and long lower shadows indicates bulls bounced back during the session. The pattern is confirmed in next session if price closes below the body of the hanging man (not the shadow itself).

Hammer:

Hammer occurs in a downtrend and is a bearish reversal signal.

  • Occurs in downtrend
  • Indicates Reversal signal
  • Small real body (white or black) close at or near the high of the session and have long lower shadows

Market sold off initially with bears in control and by the end of the day market bounced back with bulls in control.

The long lower shadow indicates the bulls gained control during the session and can be used as confirmation.

How to trade:

Place the buy stop-limit order just above the hammer and let the trade trigger during the session and manage the trade with the stop-loss and adjust it daily.

For trading the hanging man, place the sell stop-limit order and let the trade trigger during the session. This order is really important as we need to wait for the confirmation with the hanging man reversal patterns.

By implementing these simple steps in my trading, I ended up having the most winning trades than expense trades in trading the reversal patterns using the hanging man and hammer.

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