Figure 1: Example of a Hammer.

In order to use a Hammer pattern effectively, we have to identify the preceding trend before the pattern is formed. This is because while the pattern formed after a downtrend is known as a Hammer, the same pattern can be formed after an uptrend and is known as a Hanging Man. The interpretation is different. When a Hammer pattern is formed, we observe that the bulls are strong and managed to beat the bears by closing the price way above the low of the day. However, when a Hanging Man is formed, we interpret the pattern differently. We observe the long lower shadow as evidence that the bears are flexing their strength in the uptrend but the bulls still manage to stay in control and close the price way above the low during that day. When we trade a Hammer or Hanging Man, we want to see a white confirmation candle and a black confirmation candle respectively.