What is a hammer?
Considered a reversal formation and forms when the price moves well below open, but then rallies to close near open if not higher. (inverted hammer is the mirror opposite)
Forms a candlestick with a long lower shadow (tail), and a small body with little or no wick–looks like a hammer or mallet. (inverted hammer is the mirror opposite)
Depending on the previous trend, a hammer may be referred to as a hanging man or shooting start, but the same concept applies. Bullish or bearish bias depends on previous price swings or trends.
A hammer after an uptrend is called a hanging man.
An inverted hammer after an uptrend is called a shooting star.
Why are hammers important?
May act as a leading indicator suggesting a shift in bullish/bearish momentum
Completed hammers may help to either confirm or negate, a potential significant high or low has occurred. –price drives higher or lower «hammering» out a top or bottom before closing back towards open
Significance increases with the length of shadow (ideally 2-3 times the size of the body) as well as the timeframe
Hammers may also help confirm, or strengthen, other reversal indicators (i.e. may occur as part of the tweezer formation, or next to doji, etc.)
A hammer «fails» when a new high is achieved immediately after completion (candle), and a hammer bottom «fails» if the next candle achieves a new low.
A hammer «fails» when a new high is achieved immediately after completion (candle), and a hammer bottom «fails» if the next candle achieves a new low.
A hammer «fails» when a new high is achieved immediately after completion (candle), and a hammer bottom «fails» if the next candle achieves a new low
