A hammer is a price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies within the period to close near opening price. This pattern forms a hammer-shaped candlestick, in which the lower shadow is at least twice the size of the real body. The body of the candlestick represents the difference between the open and closing prices, while the shadow shows the high and low prices for the period.
- Hammers have a small real body and a long lower shadow.
- Hammers occur after a price decline.
- The hammer candlestick shows sellers came into the market during the period but by the close the selling had been absorbed and buyers had pushed the price back to near the open.
- The close can be above or below the open, although the close should be near the open in order for the real body to remain small.
- The lower shadow should be at least two times the height of the real body.
- Hammer candlesticks indicate a potential price reversal to the upside. The price must start moving up following the hammer; this is called confirmation.
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