Definition - Located at the bottom of a trend or in the middle of a downtrend, a bullish hammer site literally hammers at the bottom. Normally, it will be represented by one candlestick with a small body and long lower shadow. In terms of the body, it will be found towards the top of the daily trading range.
- Firstly, there has to be a prevailing downtrend in place.
- Secondly, the body will be half as long as the lower shadow.
- In terms of the upper shadow, it should be fairly non-existent.
- Although the colour itself isn't too important, the upper trading range will see a smaller body.
Patterns and Flexibility
With a small body, the lower shadow is at least double the length of the body; however, it should never be shorter than the average candlestick. In the perfect scenario, there will be a very small or no upper shadow at all. Finally, the two preceding black candlesticks must be higher than than the bottom of the Hammer’s body that follows.
Behaviour of Trader
To start, a downtrend is where the hammer is seen before it moves sharply as the market opens. When the decline finishes, the market can actually return back to the high of a particular day; on the selling side, the market struggles to continue. In the short-term, traders will feel uneasy with their stock showing bearish properties. On the flip side, the bullish traders will be happy when the body is white as this will look promising.
Buy/Stop Loss Levels
As soon as the prices cross above the confirmation level at the top of the Hammer’s body, confirmation is seen. In terms of the stop loss level, this will normally be defined as the last low. After a buy, the stop loss will be triggered when prices go down and there are two consecutive daily lows underneath the stop loss level with no bearish pattern to be seen.