What does this candle say about the fight between buyers and sellers? The hammer has a small real body,
so we can say that during the session there's been a pretty even balance between buyers and sellers.
This is also the reason why the colour of the real body is not important.
It's the size of the real body that is important.
Now let's have a look at conditions
two, three and four to check if this candlestick is telling us something more about the fight between
bulls and bears.
The real body is at the top end of the session's range.
There's a very small or no upper shadow but there is a very long lower shadow, at least twice the height
of the real body.
About this last condition that I've mentioned,
you don't need to buy a ruler and measure the hammer every time. The meta trader will show you open,
close, high and low prices,
if you just put the cursor over the candlestick.
But in any case you don't need to be super rigid about this rule.
You will develop an eye for it.
So the small upper shadow and the long lower shadow are saying that there hasn't been much action over
the opening price because as soon as the session started the bears were in control and immediately pushed
the price down. Before the end of the session,
the bulls managed to push back the price near the opening price recovering all the loss that they had
during the session.
So it is very simple so far.
Sellers had control at the beginning of the session.
Buyers managed to push the price back by the end of the session.
Now last condition is very important
and unfortunately often forgotten.
So always keep it in your mind. The hammer is a very strong reversal signal when it appears in a falling
market, when there is a clear down trend. Here you can see three hammers appearing after a down move.
What's the logic behind this pattern? In the previous sessions,
the market sold off dramatically, then a hammer appears.
Think about what we have said about the hammer. At the beginning of the session,
the sellers are in control.
So nothing new because we have seen that in the previous sessions the price was going down,
so everyone is expecting to see that the price continues to go down.
But, suddenly, the bulls appear and they have the power to push the price back,
near the opening of the session.
This means that after many sessions dominated by the sellers, the price has become attractive enough
to convince the buyers to take action and buy the couple. To have a better understanding of this pattern,
we will go inside it and check the price action that leads into the formation of a candlestick of this
shape. The best way to do it is to identify a hammer and then switch to a lower time frame to check what
happened over the session.
Here we have dollar Japanese yen on a daily chart.
We can see three hammers. The first two highlighted in green didn't really have success.
The price went up after the first hammer, but then it started to go down again.
The second one has the shape of a hammer but I would not consider it after just two bearish sessions.
I can't certainly say that the price was going down.
It looks that at that point the couple was in a sideways trend more than a downtrend.
Last one, the one highlighted in yellow, is the one that we are going to analyze. The candlestick that forms the
hammer pattern appeared on a daily chart on the 17th April,
so the best thing to do is to switch to a hourly chart and check what happened in those 24 hours.
These 24 candles on a one hour chart form the hammer that we have seen on the daily chart.
That's exactly what we have said at the beginning about the hammer.
The sellers start having control of the market,
so the price is going down.
At one point, the price becomes convenient for buyers to open their positions.
So buyers step into the market, the demand increases and the price goes higher.
I want to clarify just last thing, because you will see in many forums that there are a lot of discussions
about this.
Does the colour of the real body matter? Hopefully this figure will leave no other doubts. As you can see
in both cases the price went down a long way and then it came back.
If you got the logic of the pattern, you understand that the important thing is that the buyers recovered
from a very bad start of the session.
So no, the colour of the real body doesn't matter when it comes to the hammer.
There can be a psychological belief that a green body is better than a red body.
But in my experience the market makes no differentiation between red and green real bodies of
this pattern.
It's not about the colour but it's about the size.
The longer the lower shadow, the shorter the upper shadow, the smaller the real body, the more meaningful
the hammer will be.