Hammer Candlestick Patterns: How to Interpret it?

Understanding candlestick patterns is a key part of learning how markets behave. One important pattern to know is the hammer candlestick. It often shows up when prices are falling and may signal a change in direction. In this article, we’ll explore what a hammer candlestick is, its types, and why it matters to traders.

Hammer Candlestick Patterns: Demystifying The Potential Trend Reversal Pattern

Candlestick patterns are reliable formations to indicate price movement. Though it originated in Japan, it is now used worldwide by traders as a technical trading tool that helps them visualise the price opening, closing, high, and low of a day in long candle-shaped patterns with upper and lower shadows. Hammer candlestick belongs to the same legion, and is a price pattern candlestick.

Hammer candlestick has got its name from its unique shape. It has a relatively short real body and a downward shadow that is twice the size of its body. The body of the candle represents opening and closing, while the shadow reflects the high or low the asset price has moved. Price action, along with the position of the hammer pattern, throws a revealing light on the market when viewed with the ongoing trend. It is, therefore, important for traders not only to be able to identify a hammer candlestick pattern but also to understand hammer candlestick meaning from a market perspective.

What Is a Hammer Candlestick?

The hammer candlestick is a special candlestick pattern that suggests a possible trend reversal. It usually appears during a downtrend and signals a return to a bullish (upward) trend. It is shown as a short green candle with a long lower shadow, which means that the market rejected the lower prices. The bullish hammer is more commonly seen, but traders also watch for a similar pattern called the Inverted Hammer.

A hammer candlestick appears during a downtrend and points to a possible bullish reversal. It has a short real body and a long lower wick, making it look like a hammer. It’s a green candle, standing out from the red candles before it. The closing price is higher than the opening price, and the long shadow shows sellers were active early in the session. However, buyers pushed the price up by the close, showing strength.

Types of Hammer Candlestick Patterns

There are 2 main types of hammer candlestick patterns:

• Bullish Hammer: Appears at the bottom of a downtrend. It has a long lower shadow and a small body at the top. It shows rejection of lower prices and a possible start of an upward trend.
• Inverted Hammer: Also appears after a downtrend. It has a small body and a long upper shadow. It hints that buyers tried to push prices up and could take control in the next session.

Importance of Hammer Candlestick Patterns

Hammer candlestick patterns are important because they can signal a potential shift in market direction. When seen after a downtrend, a hammer may suggest that the sellers are losing control and buyers are stepping in. Traders often wait for a confirmation candle, one that closes above the hammer, to strengthen the signal before making a trade. Although these patterns don’t guarantee a reversal, they are a useful tool when combined with other signals or indicators.

These patterns are especially helpful for beginner traders, as they are easy to spot and provide clear visual cues. When used properly, hammer candlesticks can form part of a larger strategy to manage risk and identify entry points.

Key Takeaways

• Hammer is a price candlestick that indicates a potential trend reversal
• It forms around downtrend
• A short real-body and downward or upward shadow is typical of a hammer pattern
• It signifies price rejection
• The lower shadow is twice the size of the real body
• Bullish hammer is more common, but inverted hammer patterns are also recognised by traders
• When it forms, traders keep a lookout for confirmation, which is a candlestick forming after the hammer

Interpreting Hammer Candlestick Patterns

Traders expect a trend reversal when they spot a hammer. It occurs when the asset price is declining, indicating that the market is trying to find the bottom and an eventual shift in momentum. Formation of a hammer candlestick in the downtrend suggests an active day in the market – the price fell after opening but pulled back up to close at higher than the opening price, all happening during one period.

The position of the hammer also bears vital signs. Traders consider it a strong signal if it is preceded by three or more bearish candles. Also, the next candle forming after a hammer candlestick should act as a confirmation and must close above the closing of the hammer candle. When all these occurrences fall into alignment, traders can consider it a strong enough signal of potential trend reversal and enter a long position. It is during the formation of the confirmation candle traders take a position to enter the market. But like other candle formations, hammer candlestick patterns shouldn’t be treated alone.

Conclusion

Hammer candlestick signals a bullish trend reversal, but it should be considered with its limitations. Usually, the reversal isn’t confirmed until the next candle appears, which closes at a higher price than the hammer. A long-shadowed hammer candle and a robust confirmation candle can push the price up significantly, making it difficult for traders to place a stop-loss and increasing their risk.

Further, a hammer pattern doesn’t indicate a price target. So, traders seek confirmation from other trading tools to guess potential risk-reward from the condition.

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