Hammer is a single candlestick bullish reversal pattern. This occurs after a prolonged down trend.
Ideally there should be a gap down opening and bears should be able to push the price lower as a continuation of a down move.
At this point, bulls should overpower bears and push price higher and make close near to the opening price.
The candle formed in this process should be having a small body, a big lower shadow and a negligibly small upper shadow.
Ideally the lower shadow should be at least twice the length of the body.
The colour of the body can be either green or red, but if the body colour is green, then the hammer is considered a little more bullish, as the bulls were strong enough to close the price higher than the open price.
The next day or in next two three days, ideally there should be a gap up opening or price should move above the high of the hammer candle.
This is called confirmation or validation of the pattern. A hammer like candle, without validation has no real significance.
If price moves above the high of the hammer a buy trade can be taken with a stop loss below the low of the candle.
[…] confirmation a buy trade can be initiated with a stop loss below the low of the candle. Inverted hammer occurs little less frequently in market as compared to hammer […]