Some candlestick patterns such as hammer, hanging man, inverted hammer and shooting star are formed with a single candlestick. Hammer and inverted hammer are formed following a decline and are bullish reversal patterns, while the hanging man and shooting star candlestick patterns are formed following an up move and are bearish reversal. Among these patterns, we shall discuss hammer and hanging man candlestick patterns in detail. Hanging man pattern is similar to a cross in appearance and occurs near the end of an uptrend. This pattern is formed when the stock opens high and there is an intra day sell-off followed by a sharp recovery that brings the stock back near its opening level. So, the pattern has a small body with a long lower shadow (twice the length of the body).
The preceding trend determines the classification that the pattern as hanging man or hammer pattern. A hanging man candlestick pattern is seen in the Jindal Steel chart. The stock found support at around Rs 1,600 in early July 2008 and was on a medium-term uptrend. In early August, the stock formed a hanging man candlestick pattern, signalling trend reversal.The candlestick formation of bullish hammer patterns is almost similar to the hanging man pattern except the point of its occurrence. When the same pattern, that is, when the stock opens high and there is an intra day sell-off followed by a sharp recovery that brings the stock back near its opening level is formed after a downtrend, it is called a hammer pattern.The BHEL chart illustrates the hammer pattern. The stock’s downtrend, which commenced in September 2008, reversed, shaping a hammer candlestick pattern at Rs 1,000. The stock moved up in the two weeks following this pattern.
Note: Though both the bullish hammer and the bearish hanging man pattern do signal an impending trend reversal, it is best to wait and see the candlestick patterns on the subsequent days before selling or buying any particular stock. A long black candle with a shaven head would be ideal for confirming the trend reversal in hanging man pattern. On the other hand, for bullish hammer, a long white candle would be a perfect conformation of trend reversal. Moreover, you can also confirm the signal with the help of other tools such as oscillators, moving averages etc. before deciding to act based on these patterns