Hammer Candlestick Pattern Physical Description:

The Hammer Candlestick is a bullish reversal formation that occurs after an established downtrend. This candle gets it’s name from it’s hammer like appearance and indicates that the market is “hammering” out a base or bottom. The candle has a small real body which can either be black or white along with a long lower shadow.

Hammer Candlestick Pattern Chart Criteria:

• Appears in the context of a downtrend

• Lower shadow must be 2-3 times the length of the real body

• Can be either a white or black candle

• No upper shadow (or very short)

Hammer Candlestick Pattern Market Psychology:

When it comes to the Hammer Candlestick Pattern, the previous downtrend indicates that the sellers have been winning the war against the buyers controlling the direction of price action. With the formation of the hammer, which a known as a spinning top in Candlestick Analysis, this indicates that the strength of the previous trend may be weakening and that the bears may be starting to lose control.

The long lower shadow demonstrates that the sellers took price down at some point during the trading day but buyers came into the market and closed the price well above the intra day lows. This is a bullish signal and could indicate that a trend reversal is occurring.

If the real body of the hammer candle where to form as a doji this it would be called a “Dragonfly Doji.”

Hammer Candlestick Pattern Trading Implications:

Traders and investors should look at this as a potential bottom reversal pattern. Look for the next day to close above the high of the Hammer candle line for confirmation of a reversal. When this formation occurs in combination with other Technical Analysis resistance levels this can indicate a higher probability of trend reversal.

Factors that Increase The Strength Of a Hammer Candlestick Patterns:

• When occurs after an extended sell off with little or no “rest” days

• When occurs at or near significant levels of support

• When other technical indicators show a weakening in trend strength (RSI, Stochastic, etc…)

• As with all Candlestick Patterns wait for confirmation of reversal before making stock, option, or other security trading decisions. Use the presence of the Hammer Candlestick to “put you on notice” that the prevailing trend may be weakening or about to reverse and make decisions accordingly.