Hammer Candlestick Pattern, Explained

What the shape is

A hammer has three properties, and all three are required:

A small body, sitting in the upper part of the candle's range.
A lower wick at least twice the body — usually much more.
Almost no upper wick.
And it appears after a decline. The identical shape after an advance is a hanging man, which is a different claim entirely.

What it records is a period that went badly for buyers and then recovered. Price fell a long way, and by the close almost all of that fall had been bought back. The tail is the part that matters: it is the visible record of a price area where selling met something.

When it means something

A hammer is informative when the tail reaches into a place that was already significant — a level price had turned at before — and is pushed back out of it.

A hammer with something underneath itIllustrative

The tail reaches well below the low of the whole decline, and the close comes back above it. That is two separate pieces of evidence pointing the same way: a price everyone was watching, and visible rejection of everything beneath it. The candles after it never revisit the low.

Notice what the chart gives you that the candle does not. The line was drawable before the hammer formed — it is simply the lowest point of the decline so far, and every other participant could see it too. The hammer is evidence about that line, not the discovery of it.

The same shape, meaning nothing

A hammer in open spaceIllustrative

Identical proportions — small body up top, long tail, no upper wick — partway down a decline with nothing beneath it. One period of buying interest, absorbed, and the fall continued. A long tail tells you buyers showed up; it does not tell you there were enough of them.

Falling markets produce hammers constantly. Every sharp decline contains periods where price drops hard and bounces before the close. Most of them are noise. Treating each one as a floor is how people end up buying repeatedly into something that keeps going.

A hammer says buyers turned up. It does not say they won.

Telling them apart

Was the level there first? If you could have drawn the line before the hammer appeared, the hammer is evidence. If you drew the line because of the hammer, you have drawn a line through one candle's low.
How far into the decline is it? A hammer three candles into a fall is usually just a pause. One that arrives after the move is extended, at a level, is a different proposition.
What happened to the low afterwards? The hammer's claim is that the low is defended. If the next periods trade below it, the claim is simply false and you know that quickly.
Was there participation? A long tail on heavy volume means a lot of trade happened down there and was absorbed. The same tail on nothing means very little was tested at all.

The hanging man

The same shape at the top of an advance has a different name — hanging man — and is read as a warning rather than a floor. The candle is identical in every measurable way. Only its position differs. That should tell you how much of the meaning is coming from the shape and how much from the context.

The honest summary

A hammer is one period's worth of evidence that selling met resistance at a particular price. On its own it is close to worthless, because declines are full of them. Paired with a level that existed beforehand and a low that holds afterwards, it is a useful piece of a picture — and still only a piece.

Terms used

Hammer: A small body at the top of the range with a long lower wick, after a decline.
Hanging man: The identical shape after an advance, read as a warning instead.
Tail: The long lower wick — the part of the move that was given back.
Rejection: Price reaching a price area and closing back out of it.

Patterns are the easy half

Reading the chart underneath them is the part that decides whether any of this is useful. The Charts track works through levels, volume, trend and timeframes from the beginning.

Start the Charts track