This is part 11 of the tutorial. In this video, you will learn about the hammer candlestick pattern.
The hammer is essentially a dragonfly doji formation with a slightly bigger body. The hammer is formed when the opening price (O) and the closing price (C) occur near the same level. The vertical line represents the lowest trading range (L) of that specific timeframe. The hammer pattern is formed when the following two conditions are present.
1. The length of the lower shadow must be at least twice the size of the body of the candle. The longer the shadow, the stronger the potential for a reversal.
2. There is no upper shadow (perfect hammer). However, if there is a very small upper shadow, the formation is still considered a hammer pattern.
The upper shadow represents the highest trading price (H) of that specific timeframe. If the closing price is higher than the opening price, the color of the candle is green. If the closing price is lower than the opening price, the color of the candle is red. A red hammer has more bearish energy than a green hammer. A green hammer has more bullish energy than a red hammer. The color of the candle is not as important as the position where the hammer is located in the trend. When the hammer appears at the bottom of a downtrend or after a series of red candles and possibly in oversold conditions, this indicates that a reversal is about to occur.
In this case, the hammer pattern is a bullish reversal. However, further bullish confirmation is required. If the next day, the price opens above the previous day close and the bulls (the buyers) are taking the price up, this is the bullish confirmation that the reversal has occurred. It is time to buy or go long.
On the other hand, if the next day the price opens below or near the previous day close and the bears (the sellers) start taking the price down, this indicates that we are still in a downtrend. Be patient and wait for further bullish patterns to form. In this lesson, you are learning about the hammer as a bullish reversal pattern. In the following lesson, you will learn the hammer bearish counterpart, the hanging man.
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