How to Trade Using the Hammer Candlestick Pattern

The inverted hammer candlestick pattern is made up of a candle with a small lower body and a long upper wick which is at least double the short lower body. Bullish hammer candles appear during bearish trends and indicate a potential price reversal, marking the bottom of a downtrend. In the example below, we have a bullish hammer candlestick (image from TradingView).

Hammer candlestick patterns are one of the most used patterns in technical analysis. Not only in crypto but also in stocks, indices, bonds, and forex 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.

How to handle risk with the Hammer pattern?

Still, the bears still have control and they push back the price action to close near the lows. On the other hand, an inverted hammer is exactly what the name itself suggests i.e. a hammer turned upside down. A long shadow shoots higher, while the close, open, and low are all registered near the same level. There was so much support and subsequent buying pressure, that prices were able to close the day even higher than the open, a very bullish sign.

After seeing this chart pattern form in the market most traders will wait for the next period to open higher than the close of the previous period to confirm that the buyers are actually in control. If you are short-selling an asset and in a long downtrend has formed, but things look like they are stalling, then when a hammer pattern is formed, you should take note. The “Pin Bar” is something https://www.bigshotrading.info/ used to explain a hammer candlestick and a shooting star candlestick in a lazy way. This is one of the most common candlestick patterns and it is often seen in bearish trends. There are no definite guarantees when it comes to trading, which is why we introduced the RSI indicator to help you spot the forex hammer candle patterns that may lead to the highest probability reversals.

Trading Example:

Many traders use Japanese candlestick charts to analyze the price of an asset. This type of chart depicts the price action over a certain period and helps a trader check the trend’s strength and predict an upcoming reversal through Japanese candlesticks’ analysis. Japanese candlesticks (parts of the Japanese candlestick chart) are very informative technical analysis instruments. This article will introduce you to one of the most famous single-candlestick patterns – a hammer candlestick pattern. To identify the Hammer candlestick pattern, a trader needs to open the trading platform and find it on the chart.

• If a trader follows the intraday opportunities on smaller timeframes (H1), a Hammer pattern near the daily support may help identify a Buy entry.
• This type of candlestick shows market indecision when neither bulls nor bears dominate.
• A long shadow shoots higher, while the close, open, and low are all registered near the same level.
• The hammer candlestick chart patterns tend to work better when combined with other trading strategies, such as moving averages, trendlines, RSI, MACD, and Fibonacci.
• Discover the range of markets and learn how they work – with IG Academy’s online course.
• As a result, the next candle exploded higher as the bulls felt that the bears were not so dominant anymore.

Unlike the hammer, the bulls in an inverted hammer were unable to secure a high close, but were defeated in the session’s closing stages. Still, the mere fact that the buyers were able to press the price higher shows that they are testing the bears’ resolve. It is exactly the high close that signals that the bulls have just assumed control over the price action, as they defeated the bears in an important fight near the session lows. Hammer candles have their advantages and their limitations; therefore, traders should never rush into placing a trade as soon as the hammer candle has been identified. Between 74%-89% of retail investor accounts lose money when trading CFDs.

What Does the Hammer Candlestick Look Like?

They also have a wick (or shadow), which indicates the highest and lowest prices within that period. It indicates a buying pressure, followed by a selling pressure that was not strong enough to drive the market price down. The inverse hammer suggests that buyers will soon have control of the market. We want to clarify that IG International does not have an official Line account at this time.

• Also, keep in mind that performing a thorough market analysis and using prudent risk and money management methods remain essential components of a successful forex trading approach.
• The hammer candlestick’s strength as a bullish reversal indicator is also increased with the length of the lower candlestick shadow.
• This will help you calibrate your trade more accurately and help you develop structured market thinking.
• A single Doji is neutral, but if it appears after a series of bullish candles with long bodies, it signals that buyers are becoming weak, and the price may reverse to the downside.
• Hammer candlestick is formed when a particular stock moves prominently lower than the opening price but demonstrates in the day to close above or close to the opening price.
• Candlestick charts are one of the most popular components of technical analysis, enabling traders to interpret price information quickly and from just a few price bars.

The inverted hammer candlestick, like the bullish hammer, also provides a signal for a bullish reversal. The candle has a long extended upper wick, a small real body with little or no lower wick. The inverted hammer candlestick pattern is observed after a downtrend and is usually considered to be a trend reversal signal. The inverted hammer looks like an inverted version of the hammer candlestick pattern, and when it emerges after an uptrend is called a shooting star candlestick pattern.