Hammer is a bullish reversal candlesticks pattern. It is the opposite of hanging man. In order to provide valid signals a downtrend must be in place before the pattern occurs. Hammer can be either color, green or red. Bellow follows its graphical representation.

The next day after the red candlestick opens with a gap down and price continues dropping, but during the session buyers are taking control again and finally price closes a little above (green hammer) or a little below (red hammer) its opening. This is a sign that after a price decline buyers are taking control again.

Trade set up using hammer

In CTRP daily chart price is visiting a strong support for the first time. This a high probability trade by itself, but the formation of a hammer above support augments greatly the probabilities of success. Preferably, in order to magnify further the possibility of success we want the market to be in a midterm uptrend or forming at the same day a bullish candlesticks pattern after visiting for the first time a support level.

The stop should be placed below support like we do in the case of entering a reversal without confirmation, or bellow the low of the hammer if we open the position based on the candlesticks pattern.