Very interesting thought. Thanks for posting
Fun, Fun, Good stuff Fellas, keep rockin it
Was going to do The Hammer and The Hanging Man together but I thought I would split them up:
Let’s look at the criteria for a candlestick being classed as a Hammer according to the Wizard of Wicks, Mr Steve Nison (hitherto to be referred to as “The Guy With The Porn Star Moustache” or simply Mr Candlesticks)
A Hammer will be found at the BOTTOM of a DOWN move.
The real body is at the upper end of the candle’s trading range. (colour of the real body is unimportant)
A long lower shadow should be TWICE the length of the real body
It should have no, or a very short, upper shadow.
The Hammer
So here is an image of a “classic” hammer
The Hammer is supposed to be a bullish one candle reversal signal. In the above picture I guess you have what you could say to be the classic image of a reversal hammer. Price moves down, the hammer appears so price then moves up. Easy eh?
Although Mr Candlesticks says the colour of the real body of the hammer does not matter, he DOES say that the longer the lower shadow, the smaller the real body, and the shorter the upper shadow the more bullish the implications of the hammer. He also says that if the small real body of the hammer is an up move, it is slightly more bullish than if the small real body was a down move.
The Hammer, however, is no guarantee that price will reverse it’s direction so abruptly. A reversal signal is ONLY in indication that price MAY change direction. This could either be, in the case of the hammer, from down to up, or from down to sideways after which price may continue downwards.
Look at this image
Why didn’t the hammer marked in this image cause a reversal? After all, it came at the bottom of a down move. Well, more than likely there were a couple of reasons that contributed to that failure to reverse.
First one, as Mr Candlesticks pointed out, we’re really looking for the lower shadow to be AT LEAST twice the length of the real body, and the real body is supposed to be as small as possible. Were those two criteria met?
Second thing, which yunny alluded to in his post, and was exampled by Mr C later in the “hammer” section, it’s also about market psychology. Look at the candle immediately before the hammer. It was a strong down candle, opening at it’s high and closing near it’s low. It’s a sign of the conviction of the bears at this moment in time. Price did move sideways for 3 or 4 sessions afterwards, but then resumed it’s slide.
Now let’s go back to the first picture;
Here we have another hammer appearing in the same picture, so why didn’t it cause a reversal? It has a lower shadow which is more than twice the real body, it has a small real body and a small upper shadow, so why no reversal??
Well what is there to reverse? Did this hammer appear at the bottom of a down move? No, it didn’t, so there was nothing to reverse.
My Take On It;
Obviously a hammer forming is an indication that a change in direction may well be ahead, and it should be noted, however there are more things to consider than just the candlestick alone.
Did it adhere to the criteria to be a hammer in the first place?
Where has it formed in the movement of price?
What was the market sentiment like just before the hammer? Is it in a strong down move or a fading down move? A strong down move may only indicate a pause before another move down.
And again as yunny showed us, it is more significant if the hammer confirms a rejection of a previous support, or swing low level. Acting on the hammer alone may be a shot in the dark
I’ve always wondered if it matters I the candle is bullish or bearish. Like say price opens at 1.22 goes down 20 pips to 1.218 then closes ten pips higher at 1.2230. That’s a hammer but a bullish candle. Is that more significant than a bearish hammer?
Or a hammer that also has a slight wick at the top.
One thing to keep in mind is that it’s not about the particular candle shape/color but rather where it’s occurring. Let me give you an example of a trade I took yesterday. This is a NZDUSD 4 hour chart, I’ve marked up the chart so refer to that. That was a horrible looking inverted hammer but at a very very good place to expect a short. Now this particular broker’s server time is set to UTC +2 i believe, on a different timezone it may look completely different. It might even look like a perfect inverted hammer. Does that mean I should only take the trade if I just happened to be looking at a particular broker with their particular timezone at the time?
What do you guys think?
Looks great to me mozdef, a nice clear chart, but then I am a newb. One question: Is the range determined by previous week high & low or last swing high/low?
Since Im new, can I get some feedback on the S/R on this foll. chart, please? I’m trying to follow ICT’s methods but I feel there must be a “ICT for dummies” link somewhere :). The chart is GBPUSD weekly. Thanks.
I think the candle you are asking about did occur in a good place to short, and that is a good point, which yourself and yunny have made that WHERE in the movement of price any candle occurs has a direct bearing (if you’ll excuse the pun) on what happens next.
However, the candle you are asking about, while it may or may not be a good example of an “inverted” hammer, isn’t a hammer, which as you know occurs at the bottom of a down move and is what we are talking about. I think an inverted hammer would come under the “shooting star” section, which is yet to be discussed.
Going by the chart you posted mozdef, the second last candle from the right, down at the red line, may well be an example of a hammer, and as we see from the last candle, price changed direction from the down move
Hi DonaldQ
I think the range is determined by price itself, and not by any timeframe. If price moves sideways and bounces between two price points for any length of time, that would be considered a range.
A few posts back on this thread I posted a video of how I mark my S&R levels. I’m by no means what you would call a successful trader, having already tanked one account, but I think S&R levels may well be drawn in different places by different traders.
Then, after a few weeks of drawings lines on charts, you will start to notice where price has reacted. I start by trying to identify the major weekly reaction points, then the daily, then the 4 hour and finally the 1 hour, obviously giving more weight to the higher time frames.
ICT videos are fantastic and Michael is a very knowledgeable trader. Personally, (and this may well be because I am a little bit thick) I found some of the concepts he uses to be a little difficult to understand coming from a total newbie perspective. That’s why I think it’s good to go through the whole process, from the basics, like we’re trying to do here. Learn as we go sort of thing.
The chart you posted looks pretty good for S&R levels, but as I say, I use different timeframes, and use different coloured lines to mark the S&R levels which correspond with the difference of those time frames.
If this isn’t what you asked DonaldQ, then I apologise for rambling on like an idiot in this post, as opposed to just rambling on like an idiot in every other post LOL!!
According to Mr candlesticks the colour of the body doesn’t matter. However, the longer the lower wick, the smaller the body and the shorter the upper wick the better. And yes, he does go on to say that a bullish hammer carries slightly more significance than a bearish hammer because of the underlying psychology behind them.
Price would have sold off sharply, but couldn’t hold those lows and the bulls managed to drive price back above the open. So slightly more bullish
Yes, as HOG said the range is determined by price itself…it is very obvious on the 4 hour chart as I’ve posted.
Yeah, I’m not sure what to call that candle…it has a pretty big wick on top which is almost but not quite 50% of the entire candle. I took a retracement of that candle short but a more conservative entry would be a break of the low. On checking the 1 hour, there is a very nice looking pin bar/shooting star/inverted hammer that occurred during that 4 hour candle.
Subscribed. This is an excellent thread. I’ll be following it closely and contributing if I can add any value of course. Thanks HoG and everyone who has posted charts and contributed. 
That’s an interesting point. I use candlesticks on most of my charts - well, the higher timeframe ones - and have always used red and green with a black background. Based on seeing a coach’s screen one time, I tried changing all the candlesticks to plain white, ie. I could not tell which was a bearish and which was a bullish candle, all I had was the pure PA, relative sizes of bodies and wicks. I have to say, it made no difference to my trading, and if anything made the charts clearer to me.
I would recommend everyone to try it some time, paper trade it if necessary, and just see whether they prefer it. I think that a very overlooked element of trading - and apologies if I am straying from subject here - is the appearance of the desktop. That is our interface through which we read Price and make our money, yet I see so many traders who leave many of the features at their default value, when generally everything can be customized. It’s our office, and it’s where we make our money, I believe we should all have it just the way we want it, rather than having a particular appearance purely because we didn’t think to try an alternative.
But that’s just me, maybe I just love fiddling with settings!!
ST
I think everything is a matter of “comfort” ST. There are certain colour schemes on my trading platform that just plain old hurt the eyes. And the black and white settings just fall into that category for me.
If you have to be staring at ANYTHING for any length of time, you want it to be easy on the eye, just like picking a wife really !! LOL 
The very second you get involved Aesthetic you have added value, the regulars on the 2nd floor welcome you.
Thank you sir.
Incidentally, it’s funny how coincidence works isn’t it. ST posted this yesterday after being in his AUD/CAD short for a little while, just as we started to talk about the Hammer. And what I ask you all has now formed on the AUD/CAD Daily chart ???
Granted the last candle is today’s so as of yet it hasn’t closed and therefore it’s difficult to act on it, but yesterday’s candle, a hammer after a down move no? Also seems to have confirmed a previous low.
Interesting to watch that over the next few days as we’re on the subject anyway
2nd EDIT: May have to bear in mind the 3rd candle from the right though (large red down candle before the two hammers) as it seemed to be a strong down move and therefore the down move may just be pausing, or reaction to the support level before it continues down.
Like I said above, a well timed coincidence
Exactly, that’s my point: to many traders I chat to never think about quite how flexible their platform is, they just accept what they are given and trade off that. You have picked what you like, and rejected the alternative deliberately, which is what I think more should do. I changed computers yesterday and it took me ages to get all my charts back to how I like them!
Yes, interesting stuff - if things stay broadly as they are, today’s Daily could mark a second low test in a row which is also an Inside Bar, plus there is some RSI divergence going on, as well as rejection of a key level (check out the Weekly chart). Makes my TP from yesterday’s Short of 1.0080 look like the right call!
I have had a Support line drawn on my chart at 1.0056 for ages, and today’s low is right around that level at the moment. This trade was also an exercise in patience - I actually entered off the Daily high test on 14/09, not the more recent one, so I had to weather quite a storm before hitting TP. Slow and steady wins the EOD race!
ST