The hammer is a one candle line. On the opening, the price should immediately continue lower, which is natural, since it is in a downtrend. The bears should push the price down at least 2-3% at some point during the day. Then, when there does not seem to be the faintest ray of hope, the bulls must come out of hidding, and begin eating away at the bears advancement. By the end of the day, the bulls actually close the price near the day's high, and above the previous day's close. Please click on the following chart to see 3 examples of this in action.
The rationale behind this candle is that it shows a major shift of physchology taking place. The bears are left stunned at what just happened. The bulls feel much more confident after this victory, which is why this candle usually marks significant bottoms. As you can see in the above chart, these lines physically look like hammers, and it is said that the market is hammering out a bottom at these times. Example number 3 in the above chart has still not proven to a major bottom, but time will tell if I am right. Like all candle lines, the hammer is equally potent on weekly charts, or any other time frame.
