BULLISH HAMMER
Definition
This pattern occurs at the bottom of a trend or during a downtrend and is called a Hammer, as it hammers out a bottom. It is a single candlestick pattern characterized by a long lower shadow and a small body at or very near the top of its daily trading range.
Recognition Criteria
1. The market is characterized by a prevailing downtrend.
2. A small body at the upper end of the trading range is observed. The color of the body is not significant.
3. The lower shadow of this candlestick is at least twice the length of the body.
4. There is (almost) no upper shadow.
Pattern Requirements and Flexibility
The body of the Hammer should be small. The lower shadow should be at least twice the length of the body, but not shorter than an average candlestick. Ideally, there should be no upper shadow, or only a very tiny one. The bottom of the Hammer’s body should be lower than both of the two preceding black candlesticks.
Trader’s Behavior
The Bullish Hammer appears in a downtrend, sharply selling off following the market opening. After the decline ceases, the market almost returns to the day’s high. This failure to continue selling reduces previous bearish sentiment, causing short traders to feel increasingly uneasy with their bearish positions. If the body of the Hammer is white, it further strengthens the bullish outlook
Buy/Stop-Loss Levels
The confirmation level is defined as the top of the Hammer’s body. Prices should cross above this level for confirmation.
The stop loss level is defined as the most recent low. After a BUY, if prices decline instead of rising, and close or make two consecutive daily lows below the stop loss level, while no bearish pattern is detected, then the stop loss is triggered.