Time to backtest the Hammer and Hanging Man Candlestick Patterns.

The Hammer and Hanging Man Candlestick Patterns are actually quite different.  Their nature are different despite extremely similar appearances.  These are candles found in different situations and the context defines the pattern and whether they are effective.  Hammer Candlesticks and Hanging Man Candlesticks (the name of this candlestick is grotesque, but it is the name) are both reversal pattern candlesticks.   How will they fare and what exactly is the difference between the Hammer and Hanging Man?

The Hammer Candlestick’s 4 Different Forms

The Hammer Candlestick comes in four different forms and their defined by their situational context and the bearishness or bullishness of the candle itself.

The illustration below provides a rough look at what the Hammer Candlestick and its forms look like, but note that that the Open or Close depending upon the candle must be equal to the High or Low.

Hammer:  This a Bullish Candle that has a High that is equal to the Close or the Open.  When the prevailing trend has been bearish, it is a bullish reversal candle.  This is a candle that specifically comes in two kinds.

• The Bloody Hammer:  This is a Hammer with an Open that is equal to the High that features a short body (distance between the Open and Close) and a long wick that places the low relatively far off from the Close.
• The Money Hammer: This is a Hammer with a Close that is equal to the High that features a short body (distance between the Close and Open) and a long wick that places the low relatively far off from the Open.

Why are the two types of Hammers that have the same function given different names?  It is for the purposes of distinguishing them from one another.  In the same situational context, which is a bearish trend, it would indicate a bullish reversal.  Both of the Hammer Candlesticks need to be coded in an algorithm.  The Bloody Hammer is named for the fact that a bearish-looking candle would be red and because red is the color of blood, the name sticks.  The Money Hammer is named for the fact a bullish-looking candle would be green and because green is the generally accepted color of money, the name sticks.

Inverted Hammer:  This is another bullish candlestick reversal pattern.  When the prevailing trend is Bearish, this is a signal of a reversal, at least in theory.  This a Bullish Candle that has a Low that is equal to the Close or the Open.  This is also a candle that specifically comes in two kinds.

• The Inverted Bloody Hammer:  This is an Inverted Hammer with a Close that is equal to the Low that features a short body (distance between the Open and High) and a long wick that places the High relatively far off from the Open.
• The Inverted Money Hammer: This is a Hammer with an Open that is equal to the Low that features a short body (distance between the Close and Open) and a long wick that places the High relatively far off from the Close.

The Hanging Man:  This is a bearish candlestick pattern that comes in two forms just like the Hammer and Inverted Hammer.  This pattern is a reversal pattern that may appear when the prevailing trend is Bullish and in theory, signals the end of the bull rally by nominal and figurative asphyxiation.

• The Bloody Hanging Man:  This is a Hanging Man with an Open that is equal to the High that features a short body (distance between the Open and Close) and a long wick that places the low relatively far off from the Close.
• The Wealthy Hanging Man: This is a Hanging Man with a Close that is equal to the High that features a short body (distance between the Close and Open) and a long wick that places the low relatively far off from the Open.

What makes the Hanging Man different from the Hammer?  Situational context.

The Shooting Star:  This is a bearish candlestick pattern that comes in two forms just like the previous three candlesticks.  This pattern is a reversal pattern that may appear when the prevailing trend is Bullish and in theory, signals the end of the bull rally by knocking down shots and sending the market to cool down in Splash City.

• The Bloody Shooting Star:  This is a Shooting Star Candlestick with a Close that is equal to the Low that features a short body (distance between the Open and High) and a long wick that places the High relatively far off from the Open.
• The Money Shooting Star: This is a Shooting Star Candlestick with an Open that is equal to the Low that features a short body (distance between the Close and Open) and a long wick that places the High relatively far off from the Close.

Testing Conditions for the Hammer Candlestick Family

The Hammer Candlestick Family will be tested on a 1 Hour Chart with EURUSD and AUDUSD.  They will be tested from June 1, 2016 through May 31, 2018.  These are the conditions that they will be tested.

• Effectiveness as a group, which combines all patterns.
• Effectiveness when combined with Supply and Demand concepts.

Each of these situations has its own rules that will be explained in each testing segment.

Hammer Candlesticks with All Patterns Combined into One Test

Hammer Candlestick:

• Entry:  Price Closes above the High of a Hammer Candlestick.
• Stop Loss: 15 pips below the Lowest point of the past 24 periods.
• Take Profit:  Closes above the High of the previous 10 candles.

Inverted Hammer Candlestick:

• Entry:  Price Closes above the High of a Hammer Candlestick.
• Stop Loss:  15 pips below the Lowest point of the past 24 periods.
• Take Profit:  Closes above the High of the previous 10 candles.

Hanging Man Candlestick:

• Entry:  Price Closes below the Low of a Hammer Candlestick.
• Stop Loss:  15 pips above the Highest point of the past 24 periods.
• Take Profit:  Closes below the Low of the previous 10 candles.

Shooting Star Candlestick:

• Entry:  Price Closes below the Low of a Hammer Candlestick.
• Stop Loss:  15 pips above the Highest point of the past 24 periods.
• Take Profit:  Closes below the Low of the previous 10 candles.

EURUSD 1 Hour

AUDUSD – 1 Hour

Hammer Candlesticks with Supply and Demand Concepts

If the high or low enters the supply or demand zone, respectively short or long.  Exit 5 pips before the next supply or demand zone to take profit.  The stop loss is 12 pips below the low of the Hammer Candle.

EURUSD

AUDUSD

What can we conclude?

Based on this limited round of testing, there were few opportunities to place a trade based on the criteria commonly associated with the Hammer Candlestick Family.  The results were not lovely on a 1 Hour Chart and on a 4 Hour Chart, there were hardly any instances that met the criteria of what would be a Shooting Star, Hammer, Inverted Hammer or Hanging Man Candlestick.

For all of the fuss made about this candlestick, it does not seem worth the effort chasing after it based on this limited sample.  However, future updates to the article may be made to extend out the experimentation further.  The Dragonfly Doji yielded better success.

The post Hammer and Hanging Man Candlestick Patterns Backtested appeared first on Freevestor.