Candlestick patterns are visual representations of market psychology. Among the most popular patterns used by intraday traders are the Hammer and the Hanging Man. While they look visually identical, their significance changes completely based on the preceding price action trend.
1. The Hammer Pattern: Formed at the bottom of a downtrend, it signals that buyers are stepping in to reject lower prices. The long lower shadow must be at least twice the height of the real body.
2. The Hanging Man Pattern: Formed at the peak of an uptrend, it signals potential buyer fatigue and exhaustion. It indicates that sellers successfully pushed prices lower during the session, even if buyers managed to close it near the top.