Bullish Hammer is a candlestick pattern that works around 62% of the time. This pattern is comprised of only one candlestick.
This is how to spot a Bullish Hammer pattern on a candlestick chart:
1) Like in all the patterns we are going to discuss, the long-term trend (1-year trend) should be in an uptrend. There is very little chance to succeed if the long-term trend is against your favor. Remember, it is difficult to swim against the tide. Our job as technical chart readers is to wait for the right time when the tide itself is going where we want to go.
2) The intermediate-term trend (3 months trend) should also be preferably bullish.
3) There should be a minor correction or a pullback. Remember, as a trend follower, a minor pullback after a bullish upswing is the best time to enter.
4) The candle has a small real body. The candle may be red or green. It really does not matter. The lower shadow is long.
5) There is little or no upper shadow. Thus, the small body, long lower shadow/ wick, and absence of an upper shadow makes the candle look like a hammer at the bottom of a downtrend. This is how the pattern got its name.
6) The probability of a bullish reversal can be increased by waiting for an additional bullish candlestick confirmation on the next day.
7) It is better if the hammer is a gap down from the previous bearish candle.
8) The downtrend might continue for a few more days in some cases because of the selling momentum. Nonetheless, the appearance of hammer signals that the downtrend is nearing its end.