The ‘Hammer’ is a single candlestick bullish reversal pattern occurring at the bottom of a bear market. Its body could either be black or white, the more salient feature its size. The body of a ‘Hammer’ is small compared with the size of its tail the name is derived from its similarity to the proverbial hammer. It could be said that the pattern is hammering out a floor for the bear market. Though widely popular among candlestick practitioners this is considered to be a low credibility pattern.
Technical Description
1) The preceding trend must be bearish.
2) The latest candlestick opens with at least a body gap down and has a very small or no wick.
3) The body of the Hammer should be small, either black or white no more than a third of the candlesticks range.
4) Price action for the period should see a long tail develop ideally more than half the day’s range.
Mark’s Perspective
The ‘Hammer’ pattern is more effective when the body of the candlestick is white. A black body should be considered more a sign of weakening bear trend instead of a reversal signal. Generally speaking longer tails are preferred as they suggest greater bull power. To trade longs must be taken only if the latest candlestick has gapped up at the open or when we can confirm the change of sentiment with a white body and a higher close. Stop losses must be placed below the low of the candlestick.