Student’s Question:How would one interpret a Hammer candlestick when it appears on a chart? Thanks.Instructor’s Response:A hammer candlestick appearing at the bottom of a bearish move (see the chart below) will indicate the potential for a move to the upside.The long wicks at the base of the hammer indicate that during the time frame of the candle, the pair traded quite a bit below its opening but that the lower price could not be sustained. So, when a lower price is tested but cannot be held, it indicates that the bulls are in control and, as traders, we should be on the lookout for a move to the upside.
Moreover, when hammer candlesticks appear at the bottom of a move to the downside within an overall uptrend as we see on the chart below, they represent a higher probability entry back in the direction of the trend.Note that in the hammer examples on the historical USDCHF chart below (framed in yellow), we see a strong upward move after each hammer.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.