How does a 'Hammer' candlestick pattern form on a price chart, and what market dynamic does it capture?

[ A ]Forms at market peaks; features a massive red body with no shadows; signals instant bankruptcy of the issuing company.

[ B ]Forms after a price decline (downtrend); features a small real body near the top of the range and a long lower shadow at least twice the body size; captures sellers pushing prices sharply lower during the session, but buyers completely absorbing the selling and driving prices back up to close near the open.[ CORRECT ]

[ C ]Forms only on weekend market holidays when trading volume is zero.

[ D ]Represents a continuation pattern signaling that prices will drop by 50% for the next 10 consecutive weeks.

Takeaway

Option B is correct: Forms after a price decline (downtrend); features a small real body near the top of the range and a long lower shadow at least twice the body size; captures sellers pushing prices sharply lower during the session, but buyers completely absorbing the selling and driving prices back up to close near the open.

Derivation

A Hammer is a potent bullish reversal candlestick pattern: (1) Location: It must be preceded by an established downtrend or price decline. (2) Structure: Small real body at the top of the price range (can be green or red) with a long lower shadow (at least 2x the body length) and negligible upper shadow. (3) Market Psychology: Sellers pushed prices to sharp intraday lows, but aggressive buyer demand emerged, absorbing all supply and pushing the close back near the day's open. This price rejection indicates sellers are losing control. A bullish confirmation candle following the hammer validates upward reversal entries. This tests hammer mechanics. A common mistake is executing trades before the confirmation candle closes.

Why the others fail

A — Forms at market peaks; features a massive red body with no shadows; signals instant bankruptcy of the issuing company.

A hammer forms at the bottom of downtrends (not market peaks) and reflects strong buyer support, not company insolvency.

C — Forms only on weekend market holidays when trading volume is zero.

Candlestick patterns are formed from active electronic trading sessions during open market business hours.

D — Represents a continuation pattern signaling that prices will drop by 50% for the next 10 consecutive weeks.

A hammer is a classic bottom reversal pattern, not a bearish continuation signal predicting further price collapses.