Bulkowski’s Hammer

Written and copyright © 2008-2010 by Thomas N. Bulkowski. All rights reserved.

In my book, Encyclopedia of Candlestick Charts, pictured on the right, I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines in the tests.

The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines, performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators), and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy by clicking on the above link.

The hammer is another candle pattern that many traders rely on. It is supposed to act as a bullish reversal and testing reveals that it does 60% of the time, placing the reversal rank at 26. That is quite respectable. Once price reverses, though, it does not travel far based on the overall performance rank of 65 where 1 is best out of 103 candle types.

Important Results

Theoretical performance: Bullish reversal Tested performance: Bullish reversal 60% of the time Frequency rank: 36 Overall performance rank: 65 Best percentage meeting price target: 88% (bull market, up breakout) Best average move in 10 days: -4.12% (bear market, down breakout) Best 10-day performance rank: 48 (bear market, down breakout) All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.

Hammer

Discussion

The hammer is a single line candle that appears in a downward price trend and it signals a reversal 60% of the time. That’s not bad, but it’s also not far from random (50%). Once the candlestick appears and price breaks out, the move is unexciting, ranking 65 out of 103 candles where 1 is best. But the hammer appears frequently, so if you blow one trade you can try again to compound the loss.

If you project the height of the candle in the direction of the breakout (candle top for upward breakouts and candle bottom for downward ones), price meets the target 88% of the time, which is very good. The best average move occurs after a downward breakout in a bear market. Price drops an average of 4.12% after a hammer, placing the rank at 48 where 1 is best. That, of course, is just mid range out of the 103 candle types studied. A good performance would be a move of 6% or more.

Identification Guidelines

Three Trading Tidbits

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.

1. Hammer candles that appear within a third of the yearly low perform best -- page 351.
2. Hammers within a third of the yearly high frequently act as reversals -- page 353.
3. Trade white bodied hammers for the best performance -- page 353.

Example

The chart shows a hammer candlestick on the daily scale at point A. After two weeks of trending lower, the stock reaches a support level and a hammer appears.

The small body with long lower shadow and no upper shadow qualifies the candle as a hammer. Price bounces off support and closes above the top of the hammer the next day, staging an upward breakout and forming a doji. The doji speaks of indecision and the following day, price opens lower but closes higher forming a tall white candle in the process. A day later, price gaps upward in a burst of enthusiasm but cannot hold it. Price collapses in the days that followed, returning it back to the support area where the hammer appears.

If the hammer’s body color was white, it would also qualify as a bullish harami since the hammer snuggles inside the body of the prior candle.

-- Thomas Bulkowski