Hammer is a one candle pattern which have a long shadow under it’s body which means the close and high is same for that particular period and it has made a low far lower than it’s open price for that particular period such candle have a white or green body, you can see the same in the image illustrated below. Such formed candle is basically in a shape of a real life hammer therefore it has been named as Hammer.
A hammer is a type of bullish reversal candlestick pattern, made up of just one candle, found in price charts of financial assets.
Hammer occurs in a downtrend when bulls are ready to rally in the underlying security. It basically hammers the bears from the bottom and from where the Bulls starts to rally hence it reverses the previous downtrend of the underlying security as you can see in the image below.
Now, we will discuss that how to identify the good hammer and what is the interpretation of this candlestick chart pattern and what are the future expectations after such pattern occurs.
How to Identify a Good Hammer?
1. Lower Shadow should be two times the length of the body of the candle.
2. No Upper Shadow or very Small Upper shadow.
3. White Body (Green) have more Bullish implications or more chances of the prices to go up.
4. Next Candle to the hammer has to confirm the good hammer by the bullish opening of that candle.
Interpretation of Hammer Pattern in Candlestick Chart Patterns
1. Longer Lower Shadow means higher the potential of stock reversal.
2. Large Volume during the same hammer makes it more good hammer.
3. A gap down forming of hammer candle pattern from the previous candle and the gap up of next candle from the hammer candle makes hammer pattern more stronger.
Why & How Hammer Pattern Forms?
Hammer Pattern forms by the downtrend in the market, so due to the bearishness in the underlying security it makes new lows but that particular period ends up making new highs which means that bulls have entered into the underlying security, hence it forms the hammer pattern.
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- candlesticks forex