Page 4 of the handbook, single candle
Hammer
- Signal
- Bullish reversal
- Candles
- 1
- Best found
- At the bottom of a downtrend, ideally at support
What has to be true
- Long lower wick
- Small body at or very near the high
- Found at the bottom of a downtrend
A bullish candlestick pattern found at the bottom of a downtrend.
The hammer candle has a long lower wick and a small candle body, with the body at or very near the high of the candle.
The long bottom wick (especially when found at support, at the bottom of a downtrend) signifies sellers have been exhausted, and buyers have shown presence to stop prices from moving lower.
Side note: the dragonfly doji from the previous section is also a hammer!
This 5 minute chart perfectly illustrates the power of the hammer candle. On this day, the stock had strong selling pressure at the open, but as price reached the previous day's low, sellers lost control as buyer demand increased significantly.
Stacking confirmations
The SPY daily chart is another example of the strength of the hammer candle. After a 61.8% retracement, buyers stepped in on 1/17/2024 and formed the hammer at a price around 472, followed by a non-stop rally to 500.
For additional confidence, look for hammers to appear at the bottom of a downtrend that is secondary to a larger primary uptrend, like this example. Price was already in a strong uptrend; the downtrend to the 61.8% was secondary to the uptrend.
This should add confidence in the hammer because you are stacking confirmations in your favor:
- Bullish primary trend
- Bullish candlestick pattern at a high probability area of retracement
This very same logic can be applied to every candlestick pattern that is covered in the handbook!