WHAT IS 'Golden Hammer'

Golden hammer is an excessive dependence on a specific tool to perform all sorts of functions. The golden hammer principle, also known as the law of the instrument, states that given a specific tool to use, all of the world looks like an appropriate place to use that tool. For example, give a corporation’s management team a hammer, and everything around them appears to be a nail.

BREAKING DOWN 'Golden Hammer'

While the term mainly has applications in education, research and science fields, it also relates to an overdependence on a tried-and-true business strategy or investment approach. Using the golden hammer may reflect a bias toward the familiar. It also may be seen as a solution without nuance; the golden hammer may work, although a less-drastic approach may be more appropriate.

Of note, the golden hammer has made its way into several popular 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 mid-air. Thus, true to the definition, it is a weapon for nearly all uses.

‘Golden’ and “Hammer’ in technical trading

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 and a very short body at the top, with no upper wick, or hardly any 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 0.618% golden retracement.

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