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Among the myriad trading tools on the market, few are as powerful as the Hammer Candlestick. Hammer patterns, signalling potential trend reversals with striking visuals, can shape the course of trading fortunes.
Let us help you discover the Hammer Candlestick Patterns and understand why it is a powerful tool for traders to shape their trading strategy.
What is a candlestick?
In financial markets, candlestick patterns are graphical illustrations that represent price movements. While using this tool, the length of the candlestick’s wick is in focus, which indicates the price movement and potential market sentiment.
A pattern can be formed with a series of candlesticks representing open, high, low, and close asset prices during a period.
You may also like: Essential guide to candlestick patterns for beginners
What is a Hammer Candlestick pattern?
There can be varied candlestick patterns in terms of formation, each with its own interpretation for price direction. A recognised candlestick pattern is the hammer. The pattern’s name – hammer – is based on its shape’s resemblance to a hammer.
It suggests a downward price swing that has encountered significant buying pressure, resulting in a potential shift in market sentiment and the likelihood of a bullish reversal.
Price action traders can identify reliable price reversal points by observing hammer chart patterns. Hammer patterns usually appear after a period of bearish trend or at the end of a correction.
It is characterised by its distinct appearance, consisting of the following main components:
- Position: A hammer pattern forms near the bottom of a trend.
- Shape: This single candlestick pattern has a small body and a long lower shadow (i.e. shadow extends downward from the body), at least twice that of its body. Generally, the upper shadow does not exist. If present, it usually tends to be of minimal length.
- Colour: Hammer’s body can be green (bullish) or red (bearish).
What is Hammer Candlestick’s interpretation?
Characterised by its short green or red candle and long wicks, hammer patterns signify a rejection of lower market prices.
- Green hammer refers to a higher closing price of the candle than the opening price. On the other hand, a red hammer indicates a higher opening price of the candle than the closing price.
However, the body colour does not matter much because whether the colour is red or green, the hammer pattern often indicates a bullish price reversal.
- A lower wick represents a low price during the session. Therefore, a long lower wick in this bullish reversal pattern suggests prices moved significantly lower during a specific trading period.
The pattern suggests a trend reversal where buying pressure ultimately controlled the final price action.
Confirmation and follow up to validate the signal’s reliability
When considering a hammer pattern in isolation, there is no certainty of a price reversal, and it does not help traders determine the price target.
Therefore, they look for other technical indicators, like divergence on an oscillator, or candlestick patterns, like bullish engulfing patterns, etc., that can support the trend reversal signal identified by the hammer pattern.
Example – Hammer Candlestick pattern
The above chart had a hammer pattern because it began after a correction. This red hammer, formed on 16th March, was the first candle that indicated trend reversal or uptrend.
Another hammer emerged from the top. This candlestick is a hammer because it is still at the bottom of a trend.
On 16th August, a powerful hammer appeared. It was a good indicator because it was green with an elongated lower wick.
The second and third hammers brought trading opportunities as the first two hammers, and the tweezers were the confirmers of the third hammers. Also, it formed after a significantly long downtrend.
Inverted Hammer Candlestick pattern
The Inverted Hammer in the stock market also serves as a bullish reversal pattern, but a long upper wick distinguishes it. It forms when the opening price is less than the closing price. During a downtrend, an inverted hammer indicates that there is buying pressure.
It is less reliable as it is not as bullish as the ordinary hammer candlestick.
The hammer candlestick pattern stands as a prominent tool for technical analysis associated with trend reversal. Skilled traders can leverage the hammer candle patterns with other trading patterns to navigate the complexities of the financial markets and trade cautiously.
A Hammer pattern indication is likely to have a success probability of around fifty percent. However, positions that are based on winning signals tend to stay open for a considerable amount of time, while losing signals are often closed in a very short amount of time.
A hammer candlestick is a buy signal that suggests a bullish reversal. However, it needs confirmation. The next candle must close higher than the hammer’s closing price. This indicates strong buying pressure.
At the bottom of a downtrend, a bullish reversal is represented by a hammer candlestick pattern. Hammers suggests a possible reversal to an uptrend by signalling that the bears are no longer in control of the markets. If the candle following the hammer closes above its closing price, confirmation follows.
Among the most advantageous candlestick patterns are the ascending triangle and the bullish engulfing patterns. Similar to other types of technical analysis, it’s essential to keep in mind that there are no guarantees and to search for bullish confirmation.
This triple candlestick pattern suggests the beginning of a new uptrend and the potential ending of the previous one. The first candle, which has a lengthy bearish candlestick, should be located near the bottom of a downtrend. These characteristics indicate a three-inside-up candlestick formation.