The Hammer candlestick pattern is a bullish reversal signal that indicates a possible change in price direction. It usually appears at the end of a downtrend and suggests that buyers may be taking control. Its name comes from its shape, which resembles a hammer with a long handle and a small head.
How to Identify a Hammer
The Hammer consists of a single candle with three main characteristics:
Small Body: The difference between opening and closing is small, and it can be bullish (green) or bearish (red). Long Lower Shadow: It should be at least twice the body of the candle, indicating rejection of lower levels. Little or No Upper Shadow: Ideally, there should be no upper shadow, but a small one may still be acceptable.
For it to be a valid Hammer, it must appear after a downtrend. If it arises after an uptrend, it is known as a 'Hanging Man' and can be a bearish signal.
Psychology of the Hammer
Before its formation, the market is usually in a downtrend, dominated by sellers. On the day it appears, prices open, fall significantly, and then recover, closing near the opening price. This recovery indicates that buyers have intervened strongly, rejecting low prices and weakening sellers.
Although the Hammer is a signal of possible reversal, it is advisable to wait for confirmation in the following candles. A bullish close or an upward gap in the next session increases the likelihood that the trend change will be consolidated.
