A hammer candlestick pattern is a type of bullish reversal candlestick pattern, made up of just one candle, found in price charts of financial assets. The candle looks like a hammer, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. The body of the candlestick represents the difference between the open and closing prices, while the shadow shows the high and low prices for the period.
- Hammers have a small real body and a long lower shadow.
- Hammers occur after a price decline.
- The hammer candlestick shows sellers came into the market during the period but by the close the selling had been absorbed and buyers had pushed the price back to near the open.
- The close can be above or below the open, although the close should be near the open in order for the real body to remain small.
- The lower shadow should be at least two times the height of the real body.
- Hammer candlesticks indicate a potential price reversal to the upside. The price must start moving up following the hammer; this is called confirmation.
- Trades are typically taken after the confirmation candle, not before.
When the high and the close are the same, a bullish Hammer candlestick is formed and it is considered a stronger formation because the bulls were able to reject the bears completely plus the bulls were able to push price even more past the opening price.
In contrast, when the open and high are the same, this Hammer formation is considered less bullish, but nevertheless bullish. The bulls were able to counteract the bears, but were not able to bring the price back to the price at the open.
The long lower shadow of the Hammer implies that the market tested to find where support and demand was located. When the market found the area of support, the lows of the day, bulls began to push prices higher, near the opening price. Thus, the bearish advance downward was rejected by the bulls.