Hammer
A hammer is a popular candlestick pattern used in technical analysis to forecast potential reversals in the price of an asset. It is a bullish reversal pattern that forms after a decline in the price of an asset.
Characteristics of a Hammer
The hammer pattern consists of a single candlestick with a small body and a long lower wick. The body of the candlestick is typically located at the top of the trading range, while the long lower wick extends downwards below the body. The long lower wick indicates that sellers pushed the price lower during the trading session but were ultimately unable to sustain the downward pressure, resulting in a rebound in the price.
Interpretation of a Hammer
The presence of a hammer pattern suggests that buyers are stepping in to support the price of the asset, signaling a potential reversal in the prevailing downtrend. Traders often look for confirmation of a bullish reversal by observing follow-through buying in the next trading session.
Limitations of a Hammer
While the hammer pattern can be a useful tool for identifying potential reversals in the price of an asset, it is important to consider other technical indicators and factors when making trading decisions. Like all technical analysis tools, the hammer pattern is not foolproof and should be used in conjunction with other analysis methods.
