In candlestick charting, a hammer is a price trend that occurs when a security trades substantially lower than its opening. In order to close near opening price, security rallies within the time. This design produces candlesticks in the form of a hammer.
After a security has been deteriorating, a hammer happens, meaning the market is trying to establish a bottom. One that closes lower than the closing of the candle until it is a decreasing candle. When followed by at least three or more decaying candles, hammers are most powerful. Until it is proven, a hammer candlestick does not imply a price reversal to the upside. If the candle following the hammer closes above the closing price of the hammer, confirmation occurs. Ideally, this confirmation candle demonstrates solid buying, and it is possible to put a stop loss under the shadow of the hammer.
There is no guarantee that the price after the confirmation candle will continue to shift to the upside. The price can be driven very high within two periods by a long-shadowed hammer and a solid confirmation candle. This may not be an optimal place to shop, as a wide distance away from the entry point may be the stop loss.
Get the last hammer candlestick success statistics for free here!
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