Japanese candlesticks - Hammer
Definition: A hammer structure is comprised of a single Japanese candlestick. The candlestick has a small body, bullish or bearish, with a long low wick which is at least twice as long as the body. The closing price of the next candlestick must be higher than the top of the hammer.
Characteristic: A hammer often forms after a significant drop characterized by several large red Japanese candlesticks. If the pattern is formed after a bullish trend, it is called a hanging man.
Significance: A hammer is a reversal pattern, it indicates a bullish trend reversal. This reflects an over-sold market where buyers eventually gain the upper hand at the end of the period.
Note: It is better is the candlestick is bullish, this reinforces the hammer’s relevance but a bearish candlestick does not invalidate the pattern. A hammer doji is ideal. The larger the shadow and the smaller the body, the stronger the pattern.
Invalidation: If the next candlestick is not bullish or does not open on a bullish gap, the hammer is invalidated.