Hammer and hanging man: one shape, two names, and the context that decides which
The hammer is probably the best known candlestick pattern, and the hanging man is the same candle with a different address. Both have a small body at the top of the range, a lower wick at least twice the height of the body, and little or no upper wick. What separates them is what came before. After a decline, the shape is a hammer and records a low that was tested and rejected. After an advance, the identical shape is a hanging man and records that sellers were able to drive price a long way down during the period, even though buyers recovered it, which is a first crack in a rising market. This module measures the shape exactly, explains what the long lower wick records, and sets out the confirmation and stop rules for each. The hammer is the stronger of the two by a clear margin, and the module says why.
The shape, measured
Three measurements define the shape. First, the lower wick must be at least twice the height of the body; the classic rule says two to three times, and longer is better. Second, the body must sit in the top third of the range, which follows from the first rule but is worth checking separately when the upper wick is not tiny. Third, the upper wick should be small, no more than about ten percent of the range; a noticeable upper wick means the high was also rejected and the candle is drifting toward a spinning top. The colour of the body does not decide the pattern. A bullish body, close above open, is slightly better for a hammer because the close is at the very top, but a bearish hammer with a long wick is still a hammer. Apply these numbers before using the name. A candle with a lower wick 1.3 times its body is not a hammer, whatever it looks like at a glance, and the discipline of measuring is what keeps you from seeing hammers in every pullback.
The hammer: a low tested and rejected
A hammer forms after a decline. During the period sellers continued the move, driving price well below the open, and then buyers absorbed that selling and pushed price back up to close near the high. The long lower wick is the ground sellers took and lost. That is what the candle records, and in context it is a strong statement: the selling that had been in control ran into demand and could not hold its gains. The context the hammer needs is a decline in front of it and a level under it. The decline gives the wick something to reverse; the level, a support, a previous day low, a higher-timeframe swing, gives a reason for demand to have been waiting there. A hammer with both is a bottoming candle worth planning around. A hammer after a decline but at no level is weaker, and a hammer with no decline before it is a different candle entirely, a dip bought inside a range or a pullback. The price action course covers how to mark those levels on gold.
The hanging man: the same candle after an advance
A hanging man is the hammer shape printed after an advance, typically at or near a resistance level. The same contest happened inside the candle: sellers drove price down a long way, buyers recovered it. But the context changes what that means. In a market that has been rising, the fact that sellers could push price so far below the open at all is the news; it shows supply arriving in size for the first time. The recovery to a close near the high shows buyers are still present, which is why the hanging man is a warning rather than a reversal. On its own it is one of the weaker patterns in the course, and a hanging man that is followed by a strong bullish candle has simply been a dip inside an uptrend. It becomes a short idea only when the next candle closes below the hanging man body, and better below its low, because that is the point at which the dip sellers made has been repeated and held. Treat it as a candle that lowers your confidence in longs, not as a reason to open shorts.
Sizing the wick against normal movement
The two-to-one ratio is necessary but not sufficient. A hammer whose entire range is four dollars, on a day when gold is moving thirty dollars an hour, has rejected a trivial amount of ground and should be ignored. Measure the candle against the average true range on the timeframe you are reading. As a working rule, a hammer or hanging man worth acting on has a total range at least equal to the average true range of the last fourteen candles, and the best ones are larger. The lower wick alone should be a meaningful fraction of a normal candle; a wick that would be a small candle on its own has rejected a small amount of ground. This is the sizing idea Module 14 develops across all patterns, and the hammer is where it matters most because small hammers are extremely common. Many traders lose money on hammers not because the pattern fails but because they trade miniature versions of it that never had enough energy behind them to mean anything.
Confirmation and entry
A hammer is confirmed when the next candle closes above the hammer high. That close shows that the buyers who rejected the low were willing to pay more than the hammer close, which is the difference between a rejection and a bounce that fades. There are two entries. The direct entry is on the confirming close, which is simple and gets you in but at a price a long way from the stop. The pullback entry waits for price to retrace into the hammer body or the top of the wick and enters there, which gives a tighter stop but misses the trades that run immediately. Both are valid; pick one and keep it. The stop goes below the hammer wick low in both cases, with a small allowance for spread and noise, because a trade below that low means the rejection the hammer recorded has been undone. The first target is the nearest structural level above: the last swing high, the previous day high, the top of the range. Module 16 adds the sizing and the risk check. A hammer that has not been confirmed is still a hammer, but it is not yet a trade.
Does the body colour matter?
Less than most lists suggest. A bullish hammer, one that closed above its open, has its close at the very top of the range and shows the buyers finished in full control. A bearish hammer, closed slightly below its open, still has a long lower wick and a close in the top third, and records the same rejection with a marginally weaker finish. In practice the difference between the two is a few dollars of close location and it is dwarfed by the questions of context and size. Where colour matters more is the hanging man. A hanging man that closed bullish shows buyers absorbed the dip and finished strong, which keeps the warning mild. A hanging man that closed bearish, below its open, shows the dip left a mark and that the recovery was incomplete, and it is the stronger warning of the two. Across the course the same principle holds: colour is the least informative part of a candle, and ratio and position are where the reading lives.
Where hammers fail on gold
Three failure patterns recur. The first is the hammer inside a range: the wick rejected a price nobody was defending, and the next candles drift back into the range as if nothing happened. Module 3 covered this and it is the most common. The second is the news hammer: a scheduled release spikes gold down twenty dollars and back in ninety seconds, printing a perfect hammer whose wick represents a few seconds of thin liquidity rather than a contest between buyers and sellers. Those wicks are often retested and broken. The third is the hammer in a strong downtrend without a level: sellers paused, bought-the-dip traders stepped in, and the trend resumed through the hammer low on the next candle, trapping everyone who entered on the shape. The confirmation rule protects you from most of the second and third cases, and the location rule from the first. Module 15 returns to failed hammers in detail, including how to read a broken hammer low as a short clue rather than just a loss.
FAQ
What is a hammer candlestick?
A candle with a small body in the top third of its range, a lower wick at least twice the height of the body, and little or no upper wick, formed after a decline. It records a low that sellers reached and buyers fully rejected by the close. It needs a level under it and a confirming close above its high before it is a trade.
What is the difference between a hammer and a hanging man?
Nothing in the shape; everything in the context. The same candle after a decline is a hammer, a bottoming clue. After an advance it is a hanging man, a warning that supply appeared in a rising market. The hammer is the stronger pattern; the hanging man needs a close below its body to mean anything.
Does the colour of a hammer matter?
Only slightly. A bullish hammer closes at the very top of its range and is marginally stronger. A bearish hammer still records the rejection. Colour matters more for the hanging man, where a bearish close shows the dip left a mark and strengthens the warning.
Where do I put the stop on a hammer trade?
Below the hammer wick low, with a small allowance for spread. A trade below that low means the rejection the hammer recorded has been undone, which is the honest invalidation. The entry is either the confirming close above the hammer high or a pullback into the body.
How big should a hammer be?
Big enough to have rejected meaningful ground. A working rule is a total range at least equal to the average true range of the last fourteen candles on that timeframe. Small hammers are common and mostly noise; trading them is a frequent source of candlestick losses.