A very important signal is the Hammer signal. It is extremely easy to spot since it really does look like a hammer, the body is fairly square, there is little or no wick on top, and the lower shadow is generally at least twice the length of the body.
The Hammer is a single candle. At the bottom of a downtrend, the trade opens near or slightly below the previous days trade, drops down during the day to some value, and closes slightly above or below the open. This is an indication that the buyers are stepping in and may be the beginning of the reversal. If the close is higher than the open, this is a slightly stronger indication of a reversal than if the close is lower than the open. To be sure, it is wise to wait another day to make sure the trend has really reversed.
Rules
The lower shadow should be at least two times the length of the body..
The real body is at the top end of the trading range. While a white body is slightly stronger, it is not required to signal the reversal.
There should be little or no upper wick.
Watch the next day to ensure the reversal is not a “fake”.
Signal Strengtheners
The longer the lower shadow, the higher probability of a reversal.
A gap below the previous day’s close indicates a stronger reversal if the following day after the Hammer opens higher.
Large volume trading on the Hammer day indicates that the reversal is occurring.
General Analysis
The market trend was on its way down. The price opens and starts moving down as investor sentiment is still in sell. The buyers step in and start pushing the price back up, thinking they have hit the low end and its time to buy. The price moves back up to the top of the trade range, closing either slightly below or slightly above the opening. This shows the sellers could not maintain control and the downtrend is slowing down. The upward rally of the price starts the sellers thinking that the decline is over. If the next day opens higher, this indicates the sellers have given control back to the buyers, and the reversal is likely to be continued.