Candlestick Patterns 101: Hammer

One of the great things about candle patterns is the visual that the name conjures up. One of the first patterns that most people identify with that matches what the trader envisions is a Hammer. The idea of a hammer pounding or hammering out a bottom is very descriptive, easy to identify, and even more fun to apply

Hammer Basics

When you break down a candle into the components of a real body and shadows, it makes it easy to understand the psychology of traders. A long lower shadow with little to no upper shadow reflects the price rallying into the close to finish near the high of the day. The small real body reflects the relative balance or indecision between buyers and sellers. The fact that it forms after a pullback is a good indication of exhaustion by the sellers. That exhaustion opens the door for the buyers to take charge.

Overall Rating: 2 Star

Directional Bias: Bullish Reversal

Number of Candles: 1

Frequency Rating: 3 Star

Pattern Description:

The Hammer candle pattern forms at the tail end of a downtrend. The price opens at or very near the high of the session and falls throughout the session before rallying to close near the opening price, forming a small real body. The formation has little or no upper shadow and a lower shadow that is at least twice the length of the body.

Volume Description:

Above average volume during the formation of the Hammer and as the price closes higher the next day increases performance.

Statistical Notes:

Taller Hammer candle patterns with open real bodies that occur in a neutral or bullish primary trend outperform. Looking for a confirmation of a higher close the next day also increases performance.

Measuring Technique:

Add the trading range of the pattern to the high of the day.

Conclusion

The Hammer candle pattern is a frequently occurring pattern by is still reasonably effective. The longer the lower shadow and higher the volume adds increased intensity to the trading that went on and indicates even greater potential. Looking at how the market traded the past couple days, you’ll likely find many of these patterns have formed yesterday and confirmed today.

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