Hammer

The Hammer is a bullish reversal pattern that occurs after a downtrend.

It is significant over all time units.

Its characteristics are as follows:

• The Hammer must appear after a downtrend.

• There should be almost no upper shadow.

• The body must be short and on the upper part of the candlestick. It can be green or red but should ideally be green.

• The lower shadow must be red and ideally twice as long as the body.

• Prices must reach a new low compared to the previous candlestick.

On this example, all those requirements are met and the reversal did take place.

Such a Japanese candlestick appears after a downtrend, when prices reach a new low before rising again and closing at almost the same level as they opened. This reveals that a bullish force is starting to emerge. The body should preferably be green since it means that the price finally managed to close above the opening price, which is a good omen for the next session.

The longer the lower shadow is compared to the body and the shorter the upper shadow is (the ideal case being a shaven head like in this example), the more significant the Hammer is. Strong volumes can also confirm the pattern.

Regardless of the quality of the Hammer, it is wiser to wait for the confirmation of the pattern by the next candlestick that should open lower if one wishes to buy on D+1 (D being the day of the Hammer) or be green if one wishes to wait for the next close and buy at the open on D+2. On the same chart, another Hammer is to be seen on D-11, which was not confirmed by the nest session.

The invalidation threshold can be placed either below the lowest point of the Hammer, or according to the Thirds Rule, depending on the investment intentions of the stakeholder.

Moreover, it is interesting to observe both reversal patterns and support and resistance lines. A Hammer can thus appear around a support. Prices can even go below the support during a session; but if they close above the support, the break will not be validated and one might be able to observe a reversal on the support, just like the one on this example around 7500 points.