The Hammer candlestick is a single candle considered by many to be a reliable bullish reversal signal.
Typically Hammer candles appear within downtrends and can be found frequently on all time frames on most assets.
Hammer’s have long lower wicks that should be at least 2 to 3 times the length of the candle’s body. The open and closing price that make up the body should be relatively small. There should also be little to no upper wick.
The Hammer can be a bullish or bearish candle, as long as it exhibits the technical properties of a Hammer.
According to Bulkowski’s testing, the Hammer candle has an accuracy rate of 60%. Even though this candlestick is fairly reliable, its upward breakouts are weak.
A good rule of thumb for trading off this candle: Measure the height of the candle and use it as your take profit level. This works 88% of the time.
While an accuracy rate of 60% is pretty close the near random range (50% – 59%) that we try to stay away from, if you see a Hammer and the trade is a bust, you can always wait to look for another one to pop up to compound your loss.
The opposite of the Hammer candlestick is the Hanging Man candle.