What it is
A hammer is a single candle with a small real body near the top of its range, a lower shadow at least twice the length of the body, and little or no upper shadow, appearing after a decline. The story it tells is that price was pushed sharply lower during the session and was bought back up to close near the high.
How it works
Shape alone is not enough. The identical candle occurring after an advance is called a hanging man and carries the opposite implication. This is the general rule of candlestick analysis: the preceding trend is part of the definition, not optional context. A hammer at the low of a multi-day decline into a tested support zone on above-average volume is a materially different event from the same shape in the middle of a range.
How traders use it
Traders typically wait for the next candle to close above the hammer's body or high before entering, and place the stop below the wick low, which gives the pattern a natural invalidation point. Because that wick can be long, the resulting stop distance sometimes makes the trade unattractive on risk-reward grounds even when the read is correct. Size the position from the stop rather than forcing the stop to fit the size.
Where it breaks down
On low timeframes, long wicks are frequently a microstructure artefact — a thin book, a sweep, a single large order — rather than a meaningful rejection, so the pattern degrades as the interval shrinks. A hammer also describes only what happened in one session and says nothing about follow-through, which is why confirmation and defined risk do most of the work in any hammer trade.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.