Hammer

The hammer has a look of a dragonfly doji, but the difference is that the hammer has actually changed in value enough to where a candlestick is actually visible. A hammer develops in this way:

1. The stock opens up and then goes down in value by a significant amount. A stock opens at 40 and then falls to 30 during the trading day.
2. The stock will eventually move back up in value. The stock might close the day at 38.
3. The candlestick formed will show that the price of the stock went down, but it also rebounded by during the day.

Whereas a dragonfly doji shows that a stock might fall in value, the hammer shows that the stock is actually getting into a bearish position already. It is even more noticeable when the stick is going in the opposite direction of all the other sticks that came before it. However, there is also a chance that the stock might move upward after the hammer is reached. This may suggest that people are becoming bullish about a stock and will have stopped the decline of that stock. In other words, the hammer might mark when the bottom of a stock value has been reached and when it is about to go back up again.

Keep a close eye on any stock that reaches a hammer. Enter a trade about two or three sticks after the hammer appears if possible. The chances are the stock is not going to experience any significant single-stick rises that might keep you from getting the best profit. Don’t forget to enter a stop-loss order on the opposite end just to be safe.