Hammer candlestick

A hammer is a single candle with three features: a small real body at the upper end of the range, a long lower wick and little or no upper wick. It counts as a hammer only when it appears after a decline.

The pattern comes from Japanese candlestick charting. Steve Nison describes it with the phrase that the market is hammering out a base.

The meaning is in the path price took. At the open sellers were still in control and pushed price to a new low. At that low buying appeared and was strong enough to lift price back to the area of the open by the close.

Sellers lost the whole move within one period. That does not prove the decline is over, but it shows a price at which buyers were ready to act. The low of the hammer becomes the level the pattern depends on.

• Body – small and in the upper part of the candle.
• Lower wick – at least twice the height of the body. A longer wick is read as a stronger rejection.
• Upper wick – none or very short.
• Trend – a decline before the candle. The same shape after an advance is a hanging man.
• Location – a hammer gets more weight at support, at a previous low or at a Fibonacci retracement level.

The body of a hammer can be either color. A green hammer closed above its open: buyers recovered the whole drop and added to it. A red hammer closed slightly below its open: buyers recovered most of the drop.

Both are valid hammers. Nison treats the color as secondary. A green hammer is read as slightly more bullish, and in both cases the long lower wick and the decline before it matter more than the color.

The two candles have the same shape. The difference is the trend before them. A hammer forms after a decline and is read as bullish. A hanging man forms after an advance and is read as bearish: the long lower wick shows that sellers pushed price far down for the first time in the move.

Two related candles: an inverted hammer is the same idea turned upside down, with the long wick above the body, and a dragonfly doji is a hammer with no body at all.

A hammer is a reason to look for a long, not an entry on its own. Most traders wait for the next candle. In Replay mode on Charts you can step through history candle by candle and see how hammers on your market behaved.

• Confirmation – the next candle closes above the high of the hammer, or at least above its body.
• Entry – on that close, or on a break of the hammer's high.
• Stop – below the low of the hammer. A very long wick means a wide stop and a smaller position.
• Target – the nearest resistance, the start of the last leg down, or a fixed multiple of the risk.
• Filter – rising volume on the hammer and an oversold RSI are common additions.

• Calling every candle with a lower wick a hammer – the wick has to be at least twice the body, and the body has to sit at the top.
• Trading a hammer with no decline before it – inside a range it has nothing to reverse.
• Buying before the candle closes – the shape is known only at the close.
• Skipping confirmation in a strong downtrend, where hammers often fail.
• Confusing it with a hanging man – same shape, opposite trend and opposite reading.