What Is a Golden Hammer?

A golden hammer is excessive dependence on a specific tool to perform many different functions. In investing it is when a trader depends on one particular analysis tool or viewpoint to make all decisions.

Key Takeaways

  • A golden hammer refers to the over-reliance on one skill.
  • This type of narrow skillset is fraught with issues because there is a bias to the familiar.

Golden hammers also happen in the business world when a company uses a single demographic or analytic to make strategic decisions. As they say, when you give a corporation’s management team a hammer, then everything around them appears to be a nail.

The golden hammer principle is also known as the law of the instrument or Maslow's hammer.

Understanding a Golden Hammer

While the golden hammer term mainly applies to education, research, and scientific fields, it can also relate to an overdependence on a tried-and-true business strategy or investment approach. Using a golden hammer may reflect a bias toward the familiar. It also may be seen as a solution without refinement. The golden hammer may work, although a less drastic approach may be more appropriate. 

Technical Analysis and Golden Hammers

The golden hammer should not be confused with a hammer in the field of technical analysis, a discipline that involves the study of past price charts to predict future prices. In this instance, a hammer is a single candlestick pattern with a long lower wick, a short body at the top, and with a little upper wick. As a rule of thumb, the lower wick must be at least twice as long as the upper wick to be a hammer.

A hammer pattern can also coincide with so-called golden ratios, also known as the Fibonacci retracement levels of roughly 161.8%, or more commonly, its inverse, 61.8%. When this happens, technical traders tend to view the hammer as a particularly strong signal that a stock price may reverse its prevailing trend.

However, this combined signal is not necessarily known as a golden hammer. Rather, it is simply a hammer pattern that takes place at a 61.8% golden retracement.

Golden Hammers in Gaming

Of note, the golden hammer has made its way into several successful video games, in which it is a go-to weapon. For instance, a golden hammer appears in several titles in the Super Mario game family. While it works like a regular hammer to smash obstacles that might kill the player’s on-screen character, the golden hammer is more powerful and can allow the character to float in midair. Thus, accurate to the definition, it is a weapon for nearly all uses.