The Hammer Candlestick pattern is a bullish reversal pattern that appears at the bottom of a downtrend.
It consists of a small body, having a little or no upper wick, and a long lower wick. It looks like a hammer and the alphabet T.
What is a Hammer Candlestick Pattern?
The Hammer Candlestick Pattern suggests that the price dropped to a new low, but the buying pressure moves the price to a high, signaling a possible reversal.
Hammer’s body defines the difference between the opening and closing prices, while its wick represents the high and low price for the period.
When the highs and close are similar, the bulls take over and push the price beyond its opening. Conversely, when the highs and open are the same, the Hammer Candlestick is less bullish. In this case, the bulls defeat the bears but not bring the price back to its open.
One thing you need to remember is the Hammer Candlestick doesn’t signal a reversal until its confirmation.
If the candle before the Hammer closes above the closing price, it’s often seen as a confirmation of the Hammer Candlestick Pattern.
Here’s what the Hammer looks like on a chart.
The Hammer has one variation; the Inverted Hammer Candlestick Pattern. As the name suggests, the pattern is the opposite of the Hammer. It consists of a long upper wick with smaller or no lower wick. It also appears at the bottom of a downtrend, signaling a bullish reversal.
Many users find the Doji Candlestick Pattern and the Hammer Candlestick similar. But there is a difference. The Hammer emerges in a downtrend, signaling a potential reversal, and has a long lower wick. Whereas, the Doji indicates indecision in the market, and contain longer upper and lower wick.
How to use the Hammer Candlestick Pattern?
The Hammer Candlestick Pattern usually indicates a price reversal. So, when the pattern appears, we may look to go long. We could also consider to place a stop-loss below the Hammer’s body if there is a continuous uptrend.
Also, traders can take advantage of the Hammer by going short. As it signals a reversal, this tells that the selling pressure is declining, and we can look to go short.
Traders often use momentum oscillators with the Hammer for overbought conditions as the Hammer doesn’t describe the direction of the trend and can give false signals. This is because there is no guarantee that the price will continue to move upwards.
You can see on the chart below even though the Hammer appears; the Stochastic Oscillator is telling an oversold condition.
The Hammer and the confirmation candle can push the price somewhat high. This may not be a good buying trade as the stop-loss can be further from the entry point.
The bearish version of the Hammer Candlestick is the Hanging Man Candlestick Pattern. It appears in an uptrend and indicates a bearish pattern.
Hammer Candlestick Pattern trading strategy
The Hammer can be a useful tool for determining a price reversal. However, you shouldn’t solely depend on it. The price can move upwards even if there is no Hammer Candlestick Pattern.
One forex trading strategy with the Hammer is to trade with the trend. You can use the moving averages to define the trend.
Hammer Candlestick Pattern buy strategy
- The price bar should be in a downtrend.
- Wait for the price bar to go bullish before entry.
- Set a stop-loss near the recent low from the Hammer’s body.
- Exit when the price declines.
Hammer Candlestick Pattern Conclusion
The Hammer Candlestick Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. The Hammer Candlestick Pattern can help tell price reversal as part of a reversal trading strategy.
I would prefer to use the majority of candlestick patterns such as the Hammer Candlestick Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Hammer Candlestick Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Hammer Candlestick Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Hammer Candlestick Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.