The Hanging Man and Hammer patterns are trend reversal patterns that consist of the same type of candlestick. In other words, both the Hanging Man and the Hammer pattern have the same shape, though the one is bearish while the other is relatively bullish. These candlesticks are called umbrella lines because of their shape, which represents and umbrella with a short real body, a long lower shadow and no upper shadow.
What distinguishes the two is the nature of the trend that they appear in. If the umbrella line appears in an uptrend then it is known as the Hanging Man pattern, and if it appears in a downtrend, then it is known as the Hammer pattern. Both are single candlestick patterns in which the candlestick consists of a real body that is located at the top of the candlestick with little or no upper shadow and a relatively long lower shadow, which should be at least twice the length of the real body. The length of the lower shadow is important as the pattern becomes much more significant when the lower shadow is much longer. The color of the Hanging Man or Hammer candlestick, however, is not important, only its shape and the length of its lower shadow.
The Hanging Man
The Hanging Man is a bearish signal that appears in an uptrend and warns of a potential trend reversal. The candlestick pattern is called the Hanging Man because the candlestick resembles a Hanging Man with dangling legs. The long lower shadow of the Hanging Man is generally a bullish signal, indicating that demand for the underlying security forced the price into the upper third of the price range for that period. For this reason, confirmation of a trend reversal is should be sought. At the very least, the candlestick following the Hanging Man should close below the real body of the Hanging Man. Confirmation may also take the form of another trend reversal pattern such as an Engulfing pattern or a Piercing pattern. The color of the Hanging Man on its own is not important though the nature of the confirmation pattern may assign significant to the color of the Hanging Man candlestick.
The Hanging Man has a counterpart called the Shooting Star that also appears in an uptrend but has a long upper shadow rather than a long lower shadow.
The Japanese name for the Hammer pattern is takuri, which means testing the water for its depth. The Hammer pattern is quite similar in appearance to the Hanging Man pattern but it occurs in a downtrend and is a bullish signal that warns of a possible trend reversal. The candlestick is called a Hammer because it is said to hammer out a base at the bottom of the downtrend that would support a subsequent uptrend. The long lower shadow of the Hammer is a bullish signal regardless of the color of the candlestick's real body. It indicates that the underlying sold off sharply but demand returned, forcing the price back up to close at or near the high for that period.
Like the Hanging Man, the Hammer has a counterpart called the Inverted Hammer that also appears in a down trend but has a long upper shadow rather than a long lower shadow.