Hammers Candlestick Pattern

Along with the shooting star, the hammer is probably one of the most powerful single candlesticks you can trade. It normally forms at the end of a downtrend, signaling that the downtrend may be ending, as it is running out of momentum. In this scenario, the market falls significantly, but runs out of strength in the end. The buyers reenter the market, and as a result the wick on the bottom of the candle is fairly long. If you look at it, you can imagine the hammer as the long wick below is the handle, and the small body is the hammer’s head.

hammer

hammer

This shows that there was a significant attempt to break the market down, but the sellers lost the momentum by the end of the session. The sellers simply couldn’t hang onto the losses in value, and as a result now suddenly may have to worry about the market turning around on them. The sellers exhausted themselves, and simply have stopped pushing the market lower.

If the market breaks above the top of the hammer, it is a classic signal that the trend may be changing. This is because the sellers are now worried about losing money. As a result, they may have to buy the position back in order to cover losses. This in turn will put upwards pressure on the market as well, leading to a self-fulfilling prophecy of sorts. If the market is in an oversold condition and forms a hammer, this can be a very powerful signal to start buying.

On the chart below, you can see this candlestick in action. The sellers that tried to push the market lower started to lose money, and by the time we broke above the top of the range for the session, the sellers had to start buying in order to protect their account. With this, there is plenty of increasing pressure to the upside.

Hammer starts rally

Hammer starts rally

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