Technical analysts use the hammer candlestick as an indicator for a potential bullish reversal. For most traders, the hammer candlestick is the most reliable indicator in candlestick charting especially when it occurs after a downtrend. Once a trader spots the hammer candlestick, they take is as their cue to buy, while those who are already in short-sell positions close out their trades.

The hammer candlestick has a very distinctive formation and it can therefore be very easy to identify. It has a very short body because the opening price, the high price, and the closing price of the period are all covered by the candlestick formation and they are all very close together. The upper shadow of the hammer candlestick is very small or non-existent. However, the lower shadow of the candlestick is very long. In fact, for a candlestick to be referred to as a hammer, the lower shadow has to be at least twice as long as the body of the candlestick.

The hammer candlestick is formed when sellers push the price significantly lower, but the buying pressure eventually gains control over the price action within the same period. It shows that there was a strong buying momentum during the close of that trading period.

Why is the hammer candlestick considered to be a strong indicator?

The strength of the hammer candlestick as a bullish reversal indicator is directly related to the length of the candlestick’s lower shadow. If a hammer has a lower shadow that is four times longer than the candlestick body, then it is considered to be stronger than if the shadow was only twice as long as the candlestick body. This is because a long shadow shows a more forceful and definitive rejection of lower prices.

If the hammer candlestick is green, it is considered to be a stronger formation because the bulls were able to reject the bears completely. This usually indicates that the bulls were able to push the price past the opening price. Although a red hammer candlestick is still is still a bullish indicator, it is somewhat weaker than a green hammer because it shows that the although the bulls were able to counteract the bears, they were still not able to bring the price back to the opening price.

When the closing price is above the opening price, it makes the candlestick stronger and a more reliable indicator. It indicates a failed attempt at driving the prices lower and strong buying action that ultimately determines the appearance of the hammer candlestick.

The hammer candlestick is a great tool for traders to identify where support and demand are located. Most traders use this candlestick as a signal that the downtrend could be over and that short positions could be covered. It is also a signal to get ready for an uptrend.

For traders who are interested in trading using the hammer candlestick as an indicator, it is important to take a look at other indicators that point towards a trend reversal. For instance, a doji candlestick could be a good indicator of indecisiveness. When a hammer forms after apparent indecision, there could be potential to go long in favor of the bulls.