Both the hammer and the hanging man are probably the most basic, but at
the same time, the most efficient candlestick patterns to trade Forex
with if your goal is to jump in a trade when the market is about to
reverse. That is why they belong to the category of one-candlestick
reversal patterns. The hammer is the bullish pattern that appears at the
bottom of the trend after a substantial price decline, whereas the
hanging man is a bearish pattern that can be seen at the top of the
uptrend. Both these patterns are tradable on any time frame higher than
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　　The ability to recognize and trade off these patterns is invaluable
for any successful Forex trader because they hint at the probable top,
or the probable bottom, of a trend and signal that traders should start
looking for the most optimal exit or entry points.

The hammer pattern emerges when a currency price drop substantially
lower than the opening price of the day, but then the buyers step in and
drive the price back to the level near the day‘s open, thus forming the
one-candlestick pattern with a large lower wick (shadow), a relatively
small real body at the absence, or a very small, upper wick. The color
of the real body doesn’t bear much significance - it can be red (black)
at the bottom of the downtrend or green (white) at the top of an
uptrend. Certainly, a green body of a candlestick that flags the
possible trend reversal might look more reassuring, but in reality,
there have been many strong uptrends that stemmed from the hammer with
the red body.

　　It‘s important to know that the proper hammer pattern should have the
lower wick at least twice as large as the candle’s real body; otherwise,
that Forex candlestick pattern must be deemed as neutral. Also,
remember that the real body of either a hammer or a hanging man must
stay close or be within the upper (lower) price range.

　　When this formation appears, traders say that the market is hammering
out, and the reversal could be in the making. But the real essence of
this candlestick pattern is best described by its Japanese name,
“takuri”, which can be roughly translated as “testing the depth of the
water by trying to reach for the bottom with a leg,” which makes a lot
of sense when you look at its structure.

　　The rule of thumb for using both these patterns is quite simple: the
strength, or the reliability, of a hammer or a hanging man depends on
the length of the lower wick, the size of the real body, and the
presence of the absence of an upper wick and its size. The most
meaningful patterns have a very long lower wick, small bodies, up to the
point where they look like a dragonfly doji, and a very little or no
upper wick.

　　There is another hint regarding this pattern that we‘d like to share
with you: when the hanging man appears at the presumed top of the
uptrend, don’t rush into selling your position because the market is
still running on the bullish steam, especially if the price movement is
supported by the increasing volume, and there is a good chance that it
would eat up the hanging man and continue pushing northward. Instead,
wait for the next session to see whether the Forex market opens lower
than the previous day‘s close. If that’s the case and the price drops
with a considerable gap, the viability of the hanging man increases
dramatically, and you can consider going short on that particular Forex
pair.

Shooting star and inverted hammer point at the exit/entry points

　　A shooting star and an inverted hammer are basically a hanging man and
a hammer turned upside down that also act as the reversal patterns that
emerge at the probable finale of a strong trending movement. The
pattern is formed when the price of the particular Forex pair opens
slightly above the close of the previous day, rallies strongly at first,
but then gets pressurized by the sellers almost to the open of the
trading session, thus forming the pattern with a long upper shadow, a
small body, and little to no lower shadow. Please remember that the
shooting star pattern can be considered as tradable only in trending
markets, especially during powerful rallies, or at the top of the
congestion zone. A shooting star and an inverted hammer in the ranging
market has little to no significance with regard to forecasting the
upcoming price movement.

　　An inverted hammer, on the other hand, appears at the potential bottom
of a downtrend and indicates that the buyers are seizing the
initiative, and the price action might start going in the opposite
direction. Both these patterns indicate that the market participants
couldnt sustain the rally or the downslide.