Figure 4: Example of Hammer resting on support

In Figure 4, we show how to interpret a Hammer pattern together with both the 50 day moving average and the Stochastic indicator. Firstly, the price had been trading lower since early April'07 and a Hammer pattern was formed (denoted by the small arrow). It was then observed that the end of the lower shadow sits on the 50-day moving average. As moving average can be used as support or resistance, in this case, we say that the price is supported by 50-day moving average. Lastly, Stochastic indicated oversold level has reached. When the stochastic is in oversold, there is a possibility of the price moving up. Hence with the Hammer pattern indicating a strong change in power from the bears to the bulls and with the moving average supporting the price and Stochastic indicating oversold, the probability of the price turning higher is very high.

In this article we have learnt how to interpret candlestick patterns namely Hammer and Hanging Man. Also, we have discussed how we can combine this analysis with indicators to give us an upper hand in trading.