Hammer and hanging man patterns.

Picture a candle with a short body at the top and a long tail hanging below it. During that period sellers drove the price well down, then buyers pushed it most of the way back before the close.

That one shape has two names. After a fall it is a hammer, a hint that selling may be running out. After a rise it is a hanging man, a warning that buying may be tiring.

What does a hammer candle look like?

Every candle has a body, the gap between the open and the close, and wicks, the thin lines out to the high and the low. The body and wick lesson explains how to read each part.

A hammer and a hanging man share the same shape:

• A small body in the upper part of the candle's range.
• A lower wick at least about twice as long as the body.
• A very short upper wick, or none at all.

These limits are conventions, and chart books and software set them slightly differently. Body colour does not decide the name, so a green or a red body can form either pattern.

If the body shrinks to almost nothing, the candle is usually called a dragonfly doji. The upside-down version, with a long upper wick, belongs to the inverted hammer and shooting star lesson.

Measuring a hammer, step by step

Take an hourly EUR/USD candle with round illustrative prices: open 1.08150, high 1.08220, low 1.07900, close 1.08200. A pip on this pair is 0.0001.

1. Body: close minus open, 1.08200 minus 1.08150 = 0.00050, which is 5 pips.
2. Lower wick: the bottom of the body minus the low, 1.08150 minus 1.07900 = 0.00250, or 25 pips.
3. Upper wick: the high minus the top of the body, 1.08220 minus 1.08200 = 0.00020, or 2 pips.
4. Ratio: 25 ÷ 5 = 5, so the lower wick is five times the body.
5. Range: high minus low, 1.08220 minus 1.07900 = 0.00320, or 32 pips. The whole body sits within 7 pips of the high.

The candle passes every shape test. Whether it counts as a hammer depends on what came before it.

Why the same candle gets two names

Read the candle as a short story. Price opened, sellers pushed it 25 pips lower, and buyers then lifted it back to close near the top.

After a fall, that story suggests sellers tried to extend the move and could not hold the lower prices. The low may mark a floor, at least for a while.

After a rise, the same shape tells you something different. Buyers still finished on top, yet sellers managed to knock the price down hard during the session. That can be an early sign of a tiring uptrend.

Here is a hanging man with numbers. After a climb, a USD/JPY candle opens at 150.40, reaches 150.52, drops to 149.90 and closes at 150.48. On yen pairs a pip is 0.01.

The body is 150.48 minus 150.40 = 0.08, or 8 pips. The lower wick is 150.40 minus 149.90 = 0.50, or 50 pips, more than six times the body.

The upper wick is 150.52 minus 150.48 = 0.04, or 4 pips, so the close sits near the high.

There is no exact rule for how long the earlier move must be. You judge it from the chart, usually from recent swing highs and lows, so the label is partly a matter of opinion.

Waiting for confirmation

A single candle covers one session. Confirmation means waiting for the next candle to move the way the pattern suggests before you treat it as a signal.

For a hammer, a common test is a following candle that closes above the hammer's close. Stricter traders want a close above the hammer's high. For a hanging man, the usual test is a close below the bottom of its body.

In the USD/JPY example, the bottom of the body is the open, 150.40. A next candle closing at 150.18 would confirm the hanging man. A close at 150.60, above its high, would cancel the warning.

The hanging man deserves the stricter treatment. Its close sits near its high, so on its own it shows buyers still in charge at the end of the session.

Waiting also costs you on price. By the time the next candle closes, the market has often moved away from the low, so your entry is worse and your stop sits further away.

A worked trade example

The steps below show the mechanics with illustrative prices. They are an example, and they are not a recommendation to trade the pattern.

1. The EUR/USD hammer from above forms after three falling hourly candles. Its high is 1.08220 and its low is 1.07900.
2. The next candle closes at 1.08260, above the hammer's high, which meets the strict confirmation test.
3. You buy at 1.08260 and place a stop loss 2 pips below the hammer's low, at 1.07880.
4. The distance to the stop is 1.08260 minus 1.07880 = 0.00380, or 38 pips.
5. On 0.10 lot of EUR/USD a pip is worth $1, so the planned risk is 38 × $1 = $38.

MetaTrader charts plot the bid price by default, and a buy fills at the ask. Your real entry is higher by the spread, so the true risk is slightly more than 38 pips.

The long wick is what makes the stop wide. To risk about $20 instead, divide $20 by 38 pips to get $0.53 per pip. Round down to 0.05 lot, where a pip is worth $0.50 and the risk is 38 × $0.50 = $19.

The position size lesson explains this method in full, and the pip value calculator handles pairs where the pip is not worth a round number.

Where the pattern lets you down

A hammer describes one candle, and it carries no promise about the next one. Plenty of hammers appear in the middle of a fall that simply keeps going.

Where the candle forms changes how much weight it deserves. A hammer whose low touches a support level the market has bounced from before gives you a reason to watch it. One in the middle of a range gives you less.

Short timeframes print hammer shapes constantly from ordinary noise. On a one minute chart, a 3 pip wick can pass the shape test and mean almost nothing.

Candle shapes also depend on your broker's server clock. A daily candle closes at a time the broker sets, so one platform can show a hammer where another shows a different candle.

The evidence is thin as well. Published tests of candlestick patterns have reached mixed results, and there is no solid evidence that a hammer or hanging man on its own gives a reliable edge after trading costs.

If you want to use the pattern, test it on your own pair and timeframe on a demo account first, and record the signals that failed as carefully as the ones that worked.