The Hammer is a bullish reversal pattern.

It consists of just one candlestick and a prerequisite condition is the existence of a decline. We may consider this decline, a correction or retracement as it is also known, or even a downtrend. What I am trying to say here is that the Hammer may appear at the bottom of a short or long decline.

Now, what are the characteristics, features or specifications of the Hammer?

  1. It has a long lower shadow.
  2. It has a very small or no upper shadow at all.
  3. The body or real body as both terms are used interchangeably may be bullish or bearish, black or white.
  4. The body is small
  5. The lower shadow is 2 to 3 times the height of the body.

A buy order may be placed after the Hammer’s completion, but I prefer to place a buy right above the Hammer’s high price. This will not only confirm my expectation, but it will also boost my confidence. Needless to mention, a stop loss is imperative to protect our capital. So, I would place a stop loss right below the low of the Hammer.

Before I let you go, let’s mention that although the existence of the Hammer occurs after a decline, a confluence of factors will increase its forecasting power. Say, that it appears near a support area, an uptrend line, near the lower Bollinger band or even at extremely oversold prices as indicated by oscillators being in the oversold zone.

I am sure this helps. Stay tuned for more.