As we told you earlier, this is the opposite of Hanging Man. The formation looks similar to a Hanging Man and the differences are that the Hammer will be positioned in a downtrend stock chart and is considered a bullish chart pattern. In other words it will indicate a reversal in the downtrend of the stock prices.
This pattern is considered to be formed when there is a significant sell off at the market open but buyers are able to push the prices back up at the market close above or near the open price. It is considered an early signal that the bullish trend is about to reverse. Overall, this candlestick placed in a downtrend stock chart serves as an early indication that the bullish traders are gaining momentum.
For this signal to be effective the following confirmations are considered to be necessary:
• The lower wick/shadow should be several times as long as the body of the candle because longer the lower wick stronger the sellers have been in pushing down the price and more bearish the signal is;
• Although the color of the candle is not considered when identifying a Hammer, if the candle is white the stronger the bullish signal is to be considered as the bullish traders have succeeded in pushing up the closing price above the opening level. In other words, if the Close is higher than the Open of the Hammer then it is considered a strong bullish signal.
Therefore if you see a Hammer at the bottom of a downtrend stock chart it is a sign of a reversal in the trend and is a BUY signal. However, other considerations should also be taken into account when taking the final decision.