What is a 'Hammer'

A hammer is a price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies later in the day to close either above or near its opening price. This pattern forms a hammer-shaped candlestick, in which the body is at least half the size of the tail or wick.

BREAKING DOWN 'Hammer'

A hammer occurs after a security has been declining, possibly suggesting the market is attempting to determine a bottom. The signal does not mean bullish investors have taken full control of a security, but simply indicates that the bulls are strengthening.

Psychology of Hammers

Hammers signal a capitulation by sellers to form a bottom, accompanied by a price rise to indicate a potential reversal in price direction. Hammers are most effective when they are preceded by at least three or more consecutive declining candles. Declining candles are indicated with lower low tails. This means prices reach a lower price than the low of the prior candle period. This illustrates the continuation of fear and selling pressure by participants feeling the pain of declining prices. Eventually, the pain becomes too great and forces the remaining sellers to panic out of their positions in a final selling frenzy, indicated by the lowest price being reached, followed by a quick rebound from the lowest price to close the candlestick with a small body. The tail should be at least twice the size of the candlestick body. It should look similar to a capital 'T'. This indicates the potential for a hammer candle. Note the term "potential."

Hammer Confirmation

The true confirmation of the hammer candle can only be made when the very next proceeding candle closes with a higher low than the hammer candle. This confirms the capitulation from sellers, as buyers have determined the price is too attractive to pass up and quickly buy into the position. When the proceeding candles continue to consecutively form higher lows, it indicates that the buyers are now supporting the pullbacks and bidding up shares. As the price rises higher, it can also cause earlier sellers to reconsider and buy back into the stock or other financial instrument. One thing to remember is that the buyers may not actually be bullish on the stock.

In fact, early buyers can often be composed of short-sellers who must actually buy shares in order to cover their short positions and lock in profits when a hammer candle forms. As the price continues to recover, it can also cause late short-sellers to re-evaluate their short positions as earlier profits turn into losses. Hammers can be measured on any time frame candlestick chart. The larger the time frame chart, the more thorough the hammer candlestick will be, due to the more participants involved.

RELATED TERMS
  1. Unique Three River

    The unique three river is a candlestick chart pattern that predicts ...
  2. Evening Star

    A bearish candlestick pattern consisting of three candles that ...
  3. Three Outside Up/Down

    The three outside up and three outside down are three-candle ...
  4. Upside/Downside Gap Three Methods

    The gap three methods are three-candle reversal patterns that ...
  5. Stalled Pattern

    The stalled pattern, also known as the deliberation pattern, ...
  6. Advance Block

    The advance block is a three-candle bearish reversal pattern ...
Related Articles
  1. Trading

    Stocks With Hammer Candlestick Patterns

    These four stocks may have reached their bottoms.
  2. Trading

    Using Bullish Candlestick Patterns To Buy Stocks

    These five popular candlestick chart patterns signal a bullish reversal in downtrend.
  3. Trading

    Candlesticks Light The Way To Logical Trading

    Crowd psychology is the reason this technique works. Find out how to make it work for you.
  4. Investing

    Tales From The Trenches: Location Is Everything

    When a candle pattern re-occurs near a moving average, it may indicate future support or resistance.
  5. Trading

    Understanding the 'Hanging Man' Candlestick Pattern

    A hanging man is a candlestick pattern that hints at the reversal of an uptrend. Here's how to trade it.
  6. Trading

    Significant Marubozu Candlesticks

    This candlestick pattern can signal a big move, especially if it occurs in the right context. With the context right and pattern present, some big name stocks could see a major move over the ...
  7. Trading

    Why TJX Stock Is on the Verge of a Rally

    A number of technical signs point to a rise in shares of TJX, parent company of T.J. Maxx.
  8. Trading

    What's In Store For These Stocks With Unusually High Volume?

    For these four stocks with recent usually high volume, the overall technical picture will be used to help gauge in which direction the next tradable moves will be.
RELATED FAQS
  1. What Do You Call a Candlestick With No Shadows?

    A candlestick with no shadow is seen as a strong signal of conviction by either buyers or sellers. Read Answer >>
  2. What are the most common Bearish patterns used by traders?

    Discover some of the commonly used bearish chart patterns that traders identify as potential market turning points to the ... Read Answer >>
  3. What is The Candle Maker's Petition?

    The 'Candle Maker's Petition' is a French satire by 19th-century writer Frèdèric Bastiat, targeting government tariffs levied ... Read Answer >>
  4. What are the best technical indicators to complement the Moving Average Convergence ...

    Learn the best technical indicators to use as part of a trading strategy in conjunction with the moving average convergence ... Read Answer >>
  5. How do traders interpret a Dragonfly Doji pattern?

    Read about a rare but significant candlestick chart pattern: the dragonfly doji. Learn what a dragonfly doji says about a ... Read Answer >>
  6. How is it possible to trade on a stock you don't own, as is done in short selling?

    Understand how the process of short selling allows a person to sell a stock without technically owning it. Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center