The Difficulty Differentiating Between Hammer and Hanging Man Candlestick Patterns
Looking beyond the bullshit of candlestick patterns, using a combination of modern stock screening tools, statistics, and a bit of subjectivity to find trends in the markets
Why would you even care about this?
Hammer & hanging man candlestick patterns are commonly known as “reversal” indicators, which indicate the potential for the current bullish (or bearish) trend to reverse.
One of the benefits of incorporating candlestick patterns throughout your trading is that you are given an indication of the state of the market on that particular day, that’s not dependent on a rolling average.
Some sources would imply that there’s really no reason, on average, to pay attention to these indicators, which I believe is totally wrong. It’s easy to find candlestick charts where these patterns clearly mark support or resistance tests.
Even if you wanted to use these candlestick indicators in your trading, I have had a hard time finding stock screeners of high enough quality for my standards, so I’ve been resorting to my own analyses for now. However, that’s the thing, what normal person has the time for this!
Why do I even care?
Quite frequently I observe hammer and hanging man candlestick patterns marking a reversal, like indicating a successful test of a support level in the case of a hammer or indicating resistance in the continued upward rise in stock price in the case of a hanging man.
Notice I say “frequently” here…
My efforts at statistically quantifying this have actually been more difficult because there are a bunch of subjective cases that I would normally intuitively ignore while checking out a company’s stock chart, but seem to sway statistical analyses to say “nothing to see here, folks…”
The basics of identifying hammer vs hanging man patterns
If you are familiar with these candlestick patterns, feel free to skip to the next section :)
These candlestick patterns appear literally like a little hammer on a stock chart:
In Steve Nison’s book “Japanese Candlestick Charting Techniques,” he describes hammer & hanging man candlestick patterns with the following characteristics:
Hammer & hanging man candlestick pattern characteristics:
Small candle body with longer lower shadow, resembling a hammer, with minimal (to zero) upper shadow
Lower shadow more than twice the length of the body
The difference between hammer & hanging man candlestick patterns on a stock chart is that hammer candlestick patterns occur after the stock price has rallied, while hanging man patterns occur after the stock has declined in price.
For example, in late May you can see MSFT stock rebounding after a hammer candlestick pattern marks the end of the stock’s correction:
Another example of a hanging man pattern here occurs with UBER stock — while the stock closed at a high for the year on February 8th, that candle marked the beginning of almost a 3-month long decline in price.
In the examples that I cherry-picked above, while the stock price for UBER was at a yearly high, the stock price for MSFT was extremely early in its “correction,” basically on candle #2 of declining price movements.
Nison does not specifically quantify how long the rally (or price decline) should last prior to the occurrence of these candles, or to what magnitude it should extend for. This is the point where an individual’s own personal trading experience and subjectivity will come into play.
How profitable or statistically significant are these patterns anyways?
Even Nison says in his book that these patterns are used as an indication for the market to potentially reverse. There is a chance that a reversal may not even occur, or it will take some time to occur. So, seeing these patterns on a candlestick chart is not an absolute indication that you should jump on the bandwagon and trade it.
Nison’s book does not use statistical methods to quantify the profitability of a reversal based on these patterns & such, so you’ll have to look elsewhere or even make your own analysis to find more information.
I’m sure a lot of people who have been interested in candlestick chart patterns have attempted to statistically quantify the advantages that they could potentially see in trading them.
Even just from some quick Google searches you can find some “authorities” online that attempt to statistically analyze these patterns. A lot of the time, these articles ultimately conclude that there is little to no edge to the majority of these patterns, so these articles (to me personally) are normally enough to discourage me from trading off of just one pattern.
Thomas Bulkowski is one of the most commonly cited sources for candlestick profitability statistics and rankings. The analysis he has posted on his website shows that, 60% of the time, hammer candlestick patterns act as reversal indicators, while 59% of the time, hanging man patterns act as bullish continuation patterns.
There is more to his analysis than just these statistics, but for simplicity’s sake I’m going to stop there.
Notice a few things — these probabilities are slightly more than random (50%), and the hanging man pattern, which should be acting as a bearish reversal indicator, actually acts as a bullish continuation pattern most of the time. Not exactly the direction we would have thought.
If and when I come across other “authorities” with relevant research I will add them to this list.
Sources:
Bulkowski on the Hammer Candle Pattern
Bulkowski on the Hanging Man Candle Pattern
Using modern stock screeners to find these patterns & the issues that come with it
There are a number of stock screeners that you can use to help you find these patterns. One that I particularly like to use is finviz.com, not necessarily for candlestick patterns but for stock market movements in general.
Some of the common issues that I have found with these stock screeners is that they don’t deal with a number of key fundamental problems:
- distinguishing between hammers and hanging men
The difference between a hammer and a hanging man is a fundamental one, because they imply different things. A hammer implies that the market is preparing for a potential move up, while a hanging man implies that the market is preparing for a potential move down.
However, I can see how a screener would group these into the same category (for example, Finviz groups these patterns into the “hammer” category), because on paper, the candles are alike. It’s just the trend leading up to the candle that’s (supposedly) the differentiating factor.
On Finviz and a few other platforms, simply by sorting your list by 1-week or 1-month (etc.) price changes could be enough of a starting point to help you characterize the differences between these patterns. Personally, I have found that this is not enough for me!
2. defining what exactly are the “uptrends” and “downtrends” leading up to the candle to bucket them into hammer vs hanging man patterns
In Nison’s definition, for a candle to be a “hammer,” the candle needs to occur after a downtrend, and for a candle to be a “hanging man,” the candle needs to occur after an uptrend.
But how exactly do you quantify a “downtrend” or an “uptrend”? You can use technical indicators like RSI, for example, to determine this. You could also just subjectively look at the candlestick chart and flip a coin :)
3. distinguishing between hammers and dojis
Depending on the size of the candle, a candle can appear to be both a doji and a hammer / hanging man due to the relative size of the shadow compared to the size of the body.
How do you trade this? Maybe it’s simply just a nothing-burger…
4. distinguishing between hammers and spinning tops
Quite frequently, I have found a number of “hammer / hanging man” candles to be too small (relatively speaking, compared to the rest of the candlestick chart) to serve as reliable indicators.
Sorting through these gets really annoying, because I literally have to look at each individual candlestick chart to (subjectively) “see” for myself.
5. how much flexibility is there in the “definition” of these patterns?
My last point here is about the tolerance of these patterns…
For example, if the shadow is supposed to be at least twice the length of the body, what if the shadow is only 1.9 times the length of the body? Seems close enough to me. Subjectively, I think you’d be able to notice this on a candlestick chart, and probably even consider it to be a hammer or hanging man pattern. Your candlestick screener wouldn’t pick this up.
Another example, what about the upper shadow to the candle? Nison doesn’t specifically quantify how much of an upper shadow is too much here. Personally ,I’d think that if the upper shadow is only about 10% of the length of the candle itself, it should pass, but that’s just me making up a number.
The struggle of identifying when hammer & hanging man patterns may indicate a potential reversal
Due to the quality of stock screeners readily available, I’d say you’d need to start with your own lists & criteria in order to come up with decent metrics.
The four issues that I mentioned in the previous section are what makes this identification process a struggle:
- distinguishing between hammers and hanging men
- defining what exactly are the “uptrends” and “downtrends” leading up to the candle to bucket them into hammer vs hanging man patterns
- distinguishing between hammers and dojis
- distinguishing between hammers and spinning tops
If you made it this far you probably can see where I’m going with this, but my frustration with this leads me to wanting to build my own stock screener :)
Thanks for reading!
