The Hammer (also known as a Pin bar):

The Hammer and Hanging man look exactly alike but have totally different meanings depending on past price action. Both have cute little bodies (green or red), long lower shadows/ wicks and short or absent upper shad- ows/ wicks. 

 

The Hammer is basically a bullish reversal pattern that forms at the end of a downtrend. It is named a Hammer because the market is 'hammering' out a bottom. When price is falling, a hammer signals that the bottom is near and price will start to rise again. The long lower shadow / wick indicates that sellers pushed the price lower but buyers were still able to overcome this selling pressure and closed relatively near the open price.

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As a word of caution, when you see a hammer it does not necessarily mean that that you should go and place a buy order. One will need more bullish confirmation to do so. Use the hammer signal as a warning, a potential upside reversal.

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How to recognize a Hammer, the Japanese candlestick reversal pattern? It is fairly easy. The long shadow is about two or three times of the real body. There is little or no upper shadow. The real body is at the upper end of the trading range and the colour of the real body is not too important but a green hammer gives stronger confirmation.