This pattern occurs at the bottom of a downtrend. This is a single candlestick pattern that has a long lower shadow with a very small body or very near the top of its daily trading range.
Recognition criteria:
- The market is characterized by a prevailing downtrend.
- A small body at the upper end of the trading range is observed. The color of the body is not so important.
- The shadow of this candlestick is at least twice as the length of the body.
- There is almost no upper shadow.
Pattern requirements and flexibility:
The body of the hammer should be small. The lower shadow should be at least twice as long as the body, but not shorter than an average candlestick. It is desired that there is no or a very tiny upper shadow., The bottom of the hammer's body should be lower than both of the two preceding black candlesticks.
The bullish hammer appears in a downtrend and it sells off sharply following the market open. After the decline ceases, the market almost returns to the high of the day. Apparently, the market fails to continue on the selling side. This observation reduces the previous bearish sentiment causing short traders to feel increasingly uneasy with their bearish positions. If the body of the hammer is white, then the situation looks even better for the bulls. The confirmation level is defined as the top of the hammer's body. Prices should cross above this level for confirmation If prices go down instead of going up and close below the two consecutive daily lows, then the stop-loss is triggered.