Hammer

The hammer is a single-candle pattern whose presence in a downtrend signifies that the trend is about to undergo a bullish reversal. The hammer looks like a mallet held upright, as it has a long shadow and a short body that is attached to the upper end of the body. For a candlestick to be called a true hammer, two conditions must be met:
  • The body must be attached to the upper end of the shadow.
  • The length of the shadow must be at least two times that of the body.

The longer the shadow, the stronger the hammer signal is. On its own, the hammer cannot be used to make bullish reversal calls. It must be backed up by another indicator or market condition that points towards a bullish reversal for it to be used for trading purposes. So as a trading signal, it has moderate reliability.

Hammer

The long shadow is formed by buyers getting into the trade and forcing the sellers to back off, with prices going up close to the open price. This is a sign that selling strength is exhausted and if the next candle is bullish, it confirms a trend change.