Hammer

A stock has been falling. One session it drops further, then turns around and closes back near where it opened.

What the candle records is that sellers tried to push the price lower and could not hold it there. By the end of the session the selling had been absorbed and buyers had taken the price back up.

The candle looks like a hammer: a small body at the top with a long handle hanging down. It is read as a possible end to the fall.

The price then has to actually start moving up. The workbook calls that confirmation, and without it there is no trade.

Chapter 15.5.2 defines the hammer against the hanging man: "quite similar to a hanging man but occurs after a price decline."

What it captures. The seller's inability to take prices lower. By the end of the day the selling gets absorbed and buyers push the price back near the open.

The shape. The closing price can be above or below the open, but the close should be near the open so the real body stays small. The tail should be at least 2 times the height of the real body.

The signal and its condition. A hammer usually indicates a potential price reversal. The workbook then adds the condition: "The price must start moving up following the hammer; this is called confirmation." Trades are typically taken after the confirmation candle, not before.

Note what is not in the definition. There is no minimum length for the preceding decline, no volume test and no colour requirement. The 2-times tail is the only figure the workbook attaches to the pattern.

Illustrative. A stock has fallen from Rs 1,180 to Rs 940 over 3 weeks. The next session opens at Rs 938, sells down to Rs 902, and closes at Rs 944.

The tail is 6 times the body, well past the 2-times minimum, and the close sits Rs 6 above the open — near it, as required. This is a hammer.

A trader does nothing yet. The next session closes at Rs 962, above the hammer's Rs 944 close: the price has started moving up, so the pattern is confirmed and the long trade is taken there. Had the next session closed at Rs 921 instead, there would be no confirmation, and buying on the hammer day alone would have been a trade the workbook specifically warns against.

Chapter 15.5.2 (Hammers) follows the hanging man directly, and the workbook defines it by reference to that pattern. Section 15.2.3 separately names the hammer as one of the patterns a candlestick chart is best suited to spotting, and 15.4.3 lists candlestick patterns among the tools for reading a tertiary trend.

The questions are pairing questions. Given a described candle and the trend before it, place it as a hammer or a hanging man. Sample Question 2 in the chapter runs this from the hanging man side, with "a bullish reversal candlestick pattern that occurs after a down move" as the hammer description planted among the options.

• A hammer follows a decline; a hanging man follows an up move. The two candles are the same shape. What precedes them is the whole distinction.
• The tail must be at least twice the real body, measured against the body, not against the whole candle.
• The close can be above or below the open. A hammer is not required to be green.
• Confirmation is part of the pattern, not an optional extra. The workbook says the price must start moving up after the hammer, and that trades are typically taken after the confirmation candle.
• A hammer is 1 candle. The morning star in 15.5.7 is 3. Both are bullish and both appear after weakness, so the candle count is the clean discriminator.