The Hammer signal can be easily identified by having a small body with a shadow to the downside at least two times greater than the body. When the hammer signal found at the bottom of the downtrend, it shows that the bulls are taking control. The color of the body is not important but the green candle has slightly more strength than the red body. A bullish positive day required the following day to confirm this signal.
Check points:
1. The lower shadow must be at least two times greater than the body.
2. There should be no shadow at the upper side of the body or a very small upper shadow.
3. The body must be at the upper side of the trading range.
4. The color of the body is not important, but the green body has slightly more strength.
5. The conformation must be needed with the following strong bullish day.
Signal strength points:
1. Longer lower shadow shows higher reversal strength.
2. Higher volumes on hammer day increase chances of reversal.
3. Gap down hammer from previous day shows more reversal strength provided that the next day candle opens higher.
Psychology:
Consider the downtrend is running bears are in control, then the price opens and starts to trade lower, the bulls then step in and they start to move price up toward upper trading range. It creates a small body with large lower shadow. This states that the bears are losing control. Higher open the next day would confirm that bulls have taken control.
Study Examples:
We will study following examples, how Hammer signal indicates strong reversal when occurred at the bottom of the downtrend.
In above example the hammer signal occurred at the bottom of the down trend(fig.1.1). the next day candle opened higher, this confirms that up trend has started and this can be the entry point for long position.opened higher, this confirms that up trend has started and this can be the entry point for long position.
The color of the hammer body doesn't
matter, we should focus that hammer
signal candle has gapped down and
made the strong reversal signal(fig. 1.2).
The positive open after the hammer
confirms that the bulls have taken control
and this can be the entry point for long
position.
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