The Bullish Hammer is a type of bullish reversal candlestick pattern, made up of just one candle. The candle looks like a hammer, as it has a long lower wick and a (very) short body at the top of the candlestick with little or no upper wick. It's generally assumed that - in order to be a valid bullish hammer pattern - the shadow of the candle has to be at least twice as long as the body.
The typical characteristics of such a candle tell us a number of things:
During the trading session, sellers have the upper hand and the price is pushed down. At first it looks like a new long falling candle is going to be formed. However buyers are entering the market and the price is being pushed firmly upwards. Eventually the price is almost completely recovering as a result of which the typical undertail of the bullish hammer is being formed. In some cases the price is even closing in on 'the high' of the day. In those cases the body will turn green with a long undertail. If this candle occurs after a series of falling candles, this is a strong signal that the current drop is losing momentum at the very least. As a result of this, the price level on which the pattern is showing, is becoming interesting for buyers.
Just like the Bullish Engulfing pattern or the Bullish Harami Pattern, a Bullish Hammer pattern is a reversal pattern. It is an indication that the current existing downward trend (short or long term) is coming to an end and a positive trend reversal is imminent.
Please keep in mind that the pattern in itself is only an indication of a change of direction, but is by no means sufficient on its own to be used arbitrarily as an entry setup.
The graph above shows a very strong bullish hammer candle with a massive tail. As already mentioned the candle on it’s own is by no means a buy signal. But if we take into account some other key elements, things begin to look interesting…
Points 1 and 2 are important because a possible buysetup will be in line with the existing trend.
See how the stock price has risen in the next days/weeks.
Anyone looking for such candles will notice that they are quite common on a price chart. It's important to look for several confirmation signals on the chart which support this candle (as explained above). The most important tip is to only search for bullish candles at the end of a price drop in an existing uptrend. You're sure to find a lot (maybe even more) of such candles in case of stocks which are experiencing a very sharp drop and consequently are in a clear downtrend. You may think that a bullish hammer at that level will give you the opportunity to buy the stock at rock bottom prices, but remember the rule: never catch a falling knife.
Filtering stocks based on candlestick patterns can be done in the stock screening section under the tab indicators. You'll not only find the Bullish Hammer there, but also numerous other popular candlestick patterns.
To make sure we are only looking for bullish hammer candles in a long uptrend I use the following screen settings.
The screen filters used are indicated in the red rectangle, this is the link to the same configuration. Be aware that this filter is pretty strict. By defining that the current price should be lower than the 10 day price average but higher than the 50 and 200 day price average, we are actually looking for shares in a strong uptrend that are experiencing a slight decline. In many cases, this filter will produce no or only a few results.
You can even apply the filter to a date in the past via the main tab 'General' > Historical Date.
In the example above i’ve changed the date to 14 July 2020. On that day no less than four stocks met the screening criteria with a very nice bullish hammer pattern! (direct link is on the next page)
To view the charts of those historical results, it is easier to set the historical date as the last or second last day on the chart. This is done in the stock screening tool via the ‘main chart’ tab.
In the next screen, click on the gear icon and set the end date to 14 July 2020.