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. The hammer patern indicates that sellers entered the market, pushing the price down, but were later outnumbered by buyers who drove the asset price up.
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.
A bullish candlestick hammer is formed when the closing price is above the opening price, suggesting that buyers had control over the market before the end of that trading period.
The bearish hammer candlestick is known as a hanging man. It occurs when the opening price is above the closing price, resulting in a red candle. The wick on a bearish hammer indicates that the market experienced selling pressure, which suggests a potential reversal to the downside.
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
Hammer candlestick patterns are one of the most used patterns in technical analysis. Not only in forex but also in stocks, indices, bonds, and crypto trading. Hammer candles can help price action traders spot potential reversals after bullish or bearish trends. Depending on the context and timeframe, these candle patterns may suggest a bullish reversal at the end of a downtrend or a bearish reversal after an uptrend. Combined with other technical indicators, hammer candles may give traders good entry points for long and short positions.
The hammer candlestick is found at the bottom of a downtrend and signals a potential (bullish) reversal in the market. A hammer is a candlestick pattern, when a currency pair opens then moves a lot lower during the day then rallies back near the opening price.
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.
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