The hammer candlestick pattern is often used by investors to predict a potential trend reversal that may occur in the price of a financial asset. It is not known when and by whom this pattern was introduced, but it is thought that the “Doji” candlestick patterns originated in Japan. The hammer candlestick pattern is usually formed after the price of a financial asset has decreased and is interpreted by investors as the market trying to determine a bottom. Since the candlestick formed after the price dips resembles a hammer, this pattern is called the hammer candlestick pattern.
For a hammer candlestick pattern to occur, certain conditions must be met. These conditions are as follows:
- There should be a long lower/upper shadow at least twice the size of the body.
- There should be a long thin line on the body, and the top or bottom of the candlestick should resemble a hammer head.
- The pattern should be formed after the price of the relevant financial asset enters a period of selling pressure.
- The candlestick that will form after the pattern should be in a strong uptrend.
Investors interpret the pattern as a sign that the selling pressure, which lowers the price of the financial asset, is easing and buyers are stepping in. The formation is also considered as the bottom point.
However, the hammer candlestick pattern is only part of technical analysis and should be used in conjunction with other technical indicators to make any investment decisions.