One of the most visually compelling candlestick patterns is the hammer signal. This signal is easily recognized by the lower shadow also known as the tail that protrudes to the downside after an extended downtrend.
The hammer signal is comprised of one candle and it is easily identified by the presence of a small body with a shadow at least two times greater than the body. It is found at the bottom of a downtrend and this shows evidence that the bulls started to step in. The color of the small body is not important but a white or green candle has slightly more bullish implications than a black or red body. A positive day is then required the following day to confirm this signal.
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Criteria for the hammer signal
After a downtrend has been in effect the atmosphere is very bearish. The price opens and starts to trade lower. The bears are still in control but the bulls then step in and they start to bring the price back up towards the top of the trading range. This creates a small body with a large lower shadow and represents that the bears could not maintain control. The long lower shadow now has the bears questioning whether the decline is still intact and a higher open the next day would confirm that the bulls had in fact taken control.
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Author: Stephen Bigalow
Company: Candlestick Forum
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Stephen W. Bigalow has nearly 40+ years of investment experience, including eight years as a stockbroker with major Wall Street firms: Kidder Peabody & Company, Cowen & Company and Oppenheimer & Company.