The hammer is a single candle with a long lower shadow and a small real body. The longer the shadow the more significant the pattern. A hammer is an Umbrella candle found after a decline or at a low price.
Rules of recognitions
- A downtrend must be in progress
- The open and close has a very tight range (small real body)
- The lower shadow must be at least twice the length of the real body (three times or more is better)
- It should have no or a very short upper shadow
- Colour of the real body is not important (black or white)
- Th sharper the prior decline, the higher will be the probability of a market bottom.
How to sell on Hanging Man Pattern?
Sell if confirmation candle closes below the lowest low of the candle before hammer.
In case of resumption of an up trend, place buy stop or stop loss above the highest high of hammer candlestick.
How to buy on inverted hammer?
Buy if confirmation candle closes above the previous candle before inverted hammer
In case of resumption of downtrend, you can place a sell order below that inverted hammer.