Hammer

Every trading book has a chapter on candlestick patterns. A Hammer after a selloff means the bulls are stepping in. A Bearish Engulfing at the top of a run means the party is over. The pictures are convincing, and the stories behind them make sense. But do they actually predict anything? Our daily candlestick scanner has been detecting these patterns every evening, so we stored three years of prices and every pattern the scanner found, then checked what each stock did next. ...

The hammer is probably the first candlestick pattern anyone learns, and it has a great story behind it. Sellers push the stock down hard during the day, buyers step in and drive it most of the way back up, and the candle that’s left looks like a hammer: a small body at the top and a long handle underneath. The story says that’s a bottom forming. Our scanner has flagged 8,594 hammers across 559 US stocks and ETFs over the past three years, so I went and checked. ...