Correct formation rules
Not every candle with a lower wick is a hammer. The actual conditions:
| Condition | Detail |
|---|---|
| Lower wick | At least twice the body length |
| Body | Small, sitting in the upper third |
| Upper wick | Very short or absent |
| Context | After a clear decline — not mid-range |
Body colour matters less than shape, though a green hammer is considered marginally stronger because the close came above the open.
Hammer vs hanging man vs shooting star
Three candles that look alike but mean entirely different things — a frequent source of confusion:
| Candle | Shape | Appears after | Meaning |
|---|---|---|---|
| Hammer | Long lower wick | A decline | Bullish reversal |
| Hanging man | Long lower wick (identical!) | An advance | Bearish warning |
| Shooting star | Long upper wick | An advance | Bearish reversal |
Note: the hammer and hanging man are shape-identical; the only difference is the preceding trend. This is the practical proof that location outranks shape.
A trading example with numbers
Scenario: gold declines to 2400 where prior support sits. A hammer forms: open 2404, low 2396, close 2408, high 2409.
The body is $4 (2404→2408) and the lower wick $8 (2404→2396) — twice the body, so the condition holds.
| Decision | Value |
|---|---|
| Entry (after confirmation) | 2411 |
| Stop-loss | 2394 (below the wick) |
| Risk | $17 |
| Target | 2445 (resistance) |
| Reward:risk | Roughly 2:1 |
Had the only available target been 2420, the ratio would fall below 1:1 — and the trade should then be declined despite a valid pattern. A good pattern is not enough; the arithmetic must also favour you.
When the hammer fails
- No prior trend: a hammer inside a range reverses nothing, because there is nothing to reverse.
- Away from a level: with no nearby support the pattern loses its logical reference.
- In a strong downtrend: it can simply be a pause before the decline resumes.
- On low timeframes: M5 hammers are abundant and mostly noise.
Practical protection: wait for a confirming candle, place the stop below the wick rather than at an arbitrary price, and size via the calculator so the loss stays within 1–2%. See risk management.