A hammer 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. In order for a candle to be a valid hammer most traders say the lower wick must be two times greater than the size of the body portion of the candle, and the body of the candle must be at the upper end of the trading range.
The Hammer candlestick formation is viewed as a bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends. It is a reversal candlestick pattern with long lower shadow and no upper wick. It is a simple candlestick pattern made of a single candleline. They are bullish in nature.
Hammers are most effective when they are preceded by at least three or more consecutive declining candles. Declining candles are indicated with lower low tails. This means prices reach a lower price than the low of the prior candle period. This illustrates the continuation of fear and selling pressure by participants feeling the pain of declining prices. Eventually, the pain becomes too great and forces the remaining sellers to panic out of their positions in a final selling frenzy, indicated by the lowest price being reached, followed by a quick rebound from the lowest price to close the candlestick with a small body. The tail should be at least twice the size of the candlestick body. It should look similar to a capital ‘T’. This indicates the potential for a hammer candle.
Formation of Hammer Candlestick Pattern
A hammer typically appear at the end of a down trend. They have a small real body at the upper end of the candle. The body may be red or green. They have a long lower wick which is double the height of the real body. The upper wick may be absent or very short.
It is formed because of the overpowering of bulls over bears. After opening the sellers push the prices down by over supplying the stock. But later in that time period the buyers increase in number and the demand for the stock increases. The price moves up and closes near the opening, either just below or just above the opening price.