The hammer puts in its appearance after prolonged downtrend. On the day of the hammer candle, there is strong selling, often beginning at the opening bell. As the day goes on, however, the market recovers and closes near the unchanged mark, or in some cased even higher. In these cases the market potentially is “hammering” out a bottom.
In order for the Hammer signal to be valid, the following conditions must exist:
- The stock must have been in a definite downtrend before this signal occurs. This can be visually seen on the chart.
- The lower shadow must be at least twice the size of the body.
- The day after the Hammer is formed, one should witness continued buying.
- There should be no upper shadow or a very small upper shadow. The colour of the body does not matter, but a white body would be more positive than a black body.
For example
