Hammer & Hanging Man Patterns + Examples

Hello and welcome back to Options Trading how to trade kindo slick patterns profitably by wealthy education. In this video I'm taking a look at the hammer and the hanging man patterns so a hammer is pretty straightforward. It is a small body like this and then it has a long way ACC could have a little bit of an upper shadow here. It could be red or green doesn't matter. And what you have is essentially a scenario where little true body and attempt to break the market down and then basically the sellers get burnt in the day and the stick would look something like that. Everybody who's been selling is now losing money and they're starting to become nervous. And what you want to see is this happen at the bottom of a downtrend. It shows an imminent reversal couple of examples can be seen on the Cisco chart. So here's one that's just about perfect. Here's one that works out quite nicely as well. We have the $26 level that has been supportive in the Cisco chards. Previously we've turned around the sellers are starting to lose money in this candlestick here forms a hammer and you can see it begins a nice run higher. Interestingly and I haven't talked about this previously but gaps can offer support because you have to think about this area here of resistance. The market broke up over there without trading at that price that means there's a lot of volume jumping into the market. It works both ways. If you break down with a gap that means there's a lot of volume jumping into the market on the downside like this. You can see that the gap got filled though so it was a short lived thing by this week. So when you look at this chart you can see that we rallied quite a bit and then we fall right back down to the area and went up for me to hammer these people who were losing money. This support is coming into play because it was once resistance and Cisco just shot straight up like that. So again you can sell puts below these things or buy calls above. Either one works out just depending on how far out the premium involved. You know the volatility of the markets at that point. Obviously there are a few other factors but it tells you which direction the market is it wanting to go any more or at least is resisting to go to. And in this case down the same candlestick formation can be called a hanging man and it's actually very bearish. This is a perfect example of that. So hanging man again has in this case a very very tiny body with a long way. Underneath there is your hammer there's your mallet if you will. There's a pole then. Hence the hammer. But this is different because it's at the top of an uptrend. And think about what happened this day. We gapped higher. So this was yesterday we shot straight up like this and rallied a bit. Everybody's feeling good and we fall and then we show indecision basically. That's not a good look in an uptrend. So what happens is it should have you thinking one of two things is going to happen. Either we're going to continue higher like you would in a hammer on the bottom of the downturn and this just shows continued upward pressure or if we break down below the bottom here everybody who got involved that day is now losing money and they have to short to cover if they sell to cover. And you can see we broke down now in this case. This is very interesting. We rallied again and failed right about the same area and then it became a much bigger sell off. So when you see this you should probably wait to see which side of the candlestick you break that's almost like a hold pattern for you but it does give you a heads up as trouble could be coming you sell calls above it starts to lose value you collect your premium for example. These are a little less common than the hammer. But both of these candlesticks are very potent if you know what you're looking for.