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Context: Nifty has surpassed the 19,850 hurdle and formed a hammer candlestick pattern. Analysts suggest that a sustainable move above 19,900 levels could lead to Nifty reaching new all-time highs.

What Is a Hammer Candlestick?

• A hammer candlestick is a type of chart pattern that signals a potential reversal in the price trend of an asset.
• It is formed when the price of an asset opens, falls significantly, and then closes near the opening price, creating a long lower shadow and a small body. The name comes from the resemblance of the pattern to a hammer.
• It indicates that the sellers pushed the price down during the trading session, but the buyers were able to overcome the selling pressure and drive the price back up. This shows that the selling momentum is weakening and that a bullish reversal may be imminent.

To confirm a hammer candlestick, traders should look for the following criteria:

• The lower shadow should be at least twice as long as the body.
• The upper shadow should be very small or nonexistent.
• The colour of the body can be either green or red, but a green body is more bullish than a red one.
• The hammer candlestick should occur after a downtrend or at a support level.

A hammer candlestick is not a guarantee that the price will reverse, but it provides a strong signal that the trend may change. Traders should use other technical indicators and market context to validate the hammer candlestick and enter a trade accordingly. For example, traders can look for a bullish confirmation candlestick, such as a green engulfing or piercing pattern, in the next trading session. Alternatively, traders can use volume, moving averages, trend lines, or other tools to confirm the reversal.

Conclusion

• A hammer candlestick is one of the most powerful and reliable reversal patterns in technical analysis. It can help traders identify potential entry points and exit points for their trades. However, traders should always be aware of the risks involved in trading and use proper risk management techniques to protect their capital.

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