When a stock or an index traded lower than its opening price, started rally and closed near the opening price within a particular timeframe forms a hammer shaped candlestick pattern in trading chart.In the hammer shaped candlestick thus formed, the lower shadow is at least twice the size of the real body formed.
The body of the candlestick pattern shows the difference between the opening price and closing price of the stock/index.The shadow of the candlestick pattern represents the highest and lowest.
Step 1
Decide timeframe. Different timeframe can be selected by the trader such as daily charts, weekly charts, monthly chart.
Step 2
Identity price decline or downtrend of the stock/index price in the previous days/previous weeks/previous months.
Step 3
Identify whether a hammer candlestick pattern is formed after a downtrend or a price decline.
Assumption
The hammer candlestick pattern is a bullish reversal candlestick that appears at the end of a major downtrend or price decline.Therefore it is considered a hammer candlesticks pattern indicates a potential price reversal to the upside.
