The hammer candlestick
A single candle at the end of a downtrend: a small body near the top, little or no upper shadow, a lower shadow at least twice as long as the body. It shows sellers pushed the price down but buyers dragged it back up.
The hammer is one of the best known single candlestick patterns. It appears after a decline and counts as a possible first sign that selling pressure is easing.
What it's about
Within one day the price falls sharply, then turns and closes near its opening price. The long lower shadow shows how far sellers pushed the price down in between, before buyers took over.
How to recognise it
- A short body in the upper third of the trading range.
- A lower shadow at least twice as long as the body.
- Little or no upper shadow.
- The pattern sits after a clear downtrend, otherwise the shape means nothing.
What usually happens afterwards
A hammer on its own isn't a buy signal. Most traders wait for the next candle: if it closes above the hammer, the pattern counts as confirmed. Without confirmation, it was just one striking candle with no consequence.
Where it misleads you
A small body with a long shadow also shows up in the middle of a sideways range, with no meaning at all. And even after confirmation, the price often only turns briefly before the downtrend continues. As studies of single candlestick patterns show, the hit rate without extra context, such as a support zone, is not much better than a coin flip.
An example trade with made up numbers
Jonas has €10,000 in his account and risks at most €150 per trade. A stock falls from €40 to €28, forms a hammer there with a low of €26 and closes clearly above it the next day at €29.80. Jonas buys at €30.00 and sets his stop loss at €25.80. With that distance, he buys 35 shares for €1,050.00. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.
If it works: The price rises to €36.00 and Jonas sells. Jonas is €210 ahead. After €2 in fees and €1.40 in spread, €206.60 is left.
If it goes wrong: The breakout fails and the stop fills at €25.70. That's a €150.50 loss, €153.90 with costs.
Jonas only bought after the confirming candle, not at the hammer itself. The stop below the shadow is tight, so plenty of shares fit inside his €150 risk.
Japanese candlestick charting became known in the West mainly through Steve Nison's book „Japanese Candlestick Charting Techniques“ (1991), which builds on centuries old records from Japanese rice traders. The hammer is named for looking like a hammer with a short head and a long handle.
The key distinction is with the so called hanging man, which looks identical but sits at the end of an uptrend, where it counts as a warning sign rather than a buy signal. The candle shape alone says nothing, the context before it decides.
Summary
- A hammer sits at the end of a downtrend, small body on top, long lower shadow.
- Without confirmation from the next candle it's just a striking shape with no statement.
- The same shape at the end of an uptrend is called a hanging man and means something different.
Did you get it?
How do you recognise a hammer?
Small body on top, lower shadow at least twice the body length, little upper shadow, after a downtrend.
Is a hammer alone enough as a buy signal?
No, most traders wait for a confirming candle that closes above the hammer.
What does the same shape mean after an uptrend?
Then it's called a hanging man and counts as a possible warning sign, not a buy signal.
Sources and further reading
- StockCharts ChartSchool, Hammer. View source ↗
- Steve Nison: Japanese Candlestick Charting Techniques, 2nd edition 2001.
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