Hammer is a one candle pattern that occurs in a downtrend when bulls make a start to step into the rally. It is so named because it hammers out the bottom. The lower shadow of hammer is minimum of twice the length of body. Although, the color of the body is not of much significance but a white candle shows slightly more bullish implications than the black body. A positive day i.e. a white candle is required the next day to confirm this signal.
Criteria
- The lower shadow should be at least two times the length of the body.
- There should be no upper shadow or a very small upper shadow.
- The real body is at the upper end of the trading range. The color of the body is not important although a white body should have slightly more bullish implications.
- The following day needs to confirm the Hammer signal with a strong bullish day.
Signal enhancements
- The longer the lower shadow, the higher the potential of a reversal occurring.
- Large volume on the Hammer day increases the chances that a blow off day has occurred.
- A gap down from the previous day’s close sets up for a stronger reversal move provided the day after the Hammer signal opens higher.
Pattern psychology
The market has been in a downtrend, so there is an air of bearishness. The price opens and starts to trade lower. However the sell-off is abated and market returns to high for the day as the bulls have stepped in. They start bringing the price back up towards the top of the trading range. This creates a small body with a large lower shadow. This represents that the bears could not maintain control. The long lower shadow now has the bears questioning whether the decline is still intact. Confirmation would be a higher open with yet a still higher close on the next trading day.
