Hammer patter formed on the hourly chart - see below
What Does the Hammer Candlestick Tell You?
A hammer occurs after a security has been declining, suggesting the market is attempting to determine a bottom.Hammers signal a potential capitulation by sellers to form a bottom, accompanied by a price rise to indicate a potential reversal in price direction. This happens all during the one period, where the price falls after the open but then regroups to close near the open.Hammers are most effective when they are preceded by at least three or more declining candles. A declining candle is one which closes lower than the close of the candle before it.A hammer should look similar to a "T". This indicates the potential for a hammer candle. A hammer candlestick does not indicate a price reversal to the upside until it is confirmed.Confirmation occurs if the candle following the hammer closes above the closing price of the hammer. Ideally, this confirmation candle shows strong buying. Candlestick traders will typically look to enter long positions or exit short positions during or after the confirmation candle. For those taking new long positions, a stop loss can be placed below the low of the hammer's shadow.
