Trader's Corner

The ancient Japanese employed extremely picturesque terminology while talking about chart patterns. For example, no one in a healthy state of mind can feel happy when they hear terms such as ‘hanging man’ or ‘abandoned baby’. These patterns imply downward reversals. Though the term ‘harami’ might sound insulting to those who speak Hindi, its meaning is pretty innocuous. The word harami means pregnant in Japanese.

The harami pattern consists of two candlesticks. One long candlestick followed by a small candlestick that is completely within the body of the first candlestick. In bearish harami pattern the first candle is white and the second is black, though the colour of the second candlestick is not important. The upper and lower shadows of the second candlestick do not have to be limited within the body of the first candlestick. However, it is preferable if the shadows are limited.

Bearish hanging man pattern is a distinct candlestick pattern. It looks like a cross and occurs near the end of an uptrend. The 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).

Though both the bearish harami and the 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 the stock. A long black candle with a shaven head would be ideal for confirming the trend reversal. 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.