What’s a Hammer Candlestick?
A hammer is a candlestick chart pattern where an asset trades below its initial price but rises to close near it. This design creates a hammer-shaped candlestick with a lower shadow at least twice the body size. The candlestick body depicts the difference between opening and closing prices, while the shadow displays high and low prices for the time.
Understanding Hammer Candlesticks
When a security’s price drops, a hammer indicates the market is trying to find a bottom.
Hammers imply sellers can capitulate and establish a bottom, while price rises indicate a possible price reversal. In one session, the price declines after opening but regroups to close around opening.
Hammers should resemble “T.” This suggests a hammer candle. A hammer candlestick does not suggest an upside price reversal unless confirmed.
If the candle after the hammer closes above its closing price, confirmation occurs. This confirmation candle should indicate heavy purchasing. Candlestick traders often engage in long- or short-term trades during or after the confirmation candle. New long positions can have a stop loss below the hammer’s shadow.
We seldom use hammers alone, even with confirmation. Traders often use price or trend analysis or technical indicators to confirm candlestick patterns.
Hammers appear on one-minute, daily, and weekly charts.
The following candle confirmed the trend, with the price rising and ending above the hammer’s closing price.
Traders make purchases during the confirmation candle. To set a stop loss, place it below the hammer’s low or even below its body if the price rises rapidly during the confirmation candle.
The Difference Between Doji and Hammer Candlesticks
Doji candlesticks have a small, actual body. Because of their higher and lower shadows, dojis represent hesitation. Depending on confirmation, dojis may indicate a price reversal or trend continuation. This differs from the hammer, which happens after a price decrease, indicating an upside reversal (if confirmed), and has a lengthy lower shadow.
Limited Use of Hammer Candlesticks
There is no guarantee that the price will rise after the confirmation candle. A long-shadowed hammer and robust confirmation candle may drive the price high in two periods. As the stop loss may be far from the entry point, the trader may take on too much risk for too little return.
Hammer trades lack a price goal, making it hard to determine the possible profit. Exits require other candlestick patterns or analysis.
Hammer psychology
As said, an actionable hammer pattern usually appears during a downturn or a series of lower highs and lows. The hammer signals that bullish buyers are buying the stock and that the negative price trend may terminate.
The long lower shadow on the hammer candlestick shows an attempt to prolong the price decline, but the higher close on the actual body indicates sellers failed to maintain the price at the intraday low. Price rose from its session low to a higher finish, suggesting a bullish perspective won the day, laying the way for an upward reversal.
Used in Practice
You may trade a hammer candlestick on a price chart to profit from a price move. Before placing your order, look at some practical tips to maximize hammer pattern trades.
The Hammer Signal
First, verify if the candlestick chart shows a hammer pattern. A hammer signal that suggests an upside reversal should occur in a downtrend or decreasing price action with lower highs and lower lows
In these conditions, a hammer-shaped candlestick with a lower shadow at least twice the body size is the indication. Close should be around open, so the candlestick’s actual body stays modest. The closing price may be a little higher or below the opening price.
Seeking Confirmation
Price movement confirms a hammer signal by confirming a trend reversal. The candlestick after the hammer signal should confirm the price move higher. Traders await a hammer signal to purchase during this upward confirmation candle.
Stopping and Profiting
Use stops to safeguard your position if the hammer signal doesn’t work out as expected in any trade. Your stop level depends on your trade confidence and risk tolerance. Set a stop loss below the bottom of the hammer pattern to protect yourself if the downward pressure returns and the upward advance never occurs.
If the price rises after recognizing the hammer signal, you must choose an exit level to capture your winnings. Hammer signals alone don’t indicate where to put your take-profit order. When considering exit points, consider neighboring resistance levels, like swing lows.
Hammer candlesticks—what are they?
A hammer candlestick is a technical trading pattern that resembles a “T” in which a security’s price falls below its opening price, creating a lengthy lower shadow, then reverses and closes near its opening. Hammer candlesticks follow downtrends. They typically indicate a reversal.
Should hammer candlesticks be bullish?
Hammer candlesticks are bullish trading patterns that may suggest a stock’s bottom and trend reversal. In particular, sellers joined the market, lowering the price, while purchasers overwhelmed them and raised it. Significantly, the following candle must close above the hammer’s closing price to confirm the upside price reversal.
What is the difference between a hammer candlestick and a shooting star?
Hammer candlesticks imply a bullish turnaround, while shooting star patterns forecast negative price trends. Shooting star patterns show an upper shadow following a market upswing. A shooting star candlestick rises after opening but ends at the same level as the trading period. A shooting star pattern indicates a price peak.
Bottom Line
Security trades much lower than its opening but rises to close around its beginning price in a hammer candlestick pattern. The chart shows a hammer-shaped candlestick with a lower shadow at least twice the body size. The pattern implies that sellers tried to decrease the price, but purchasers took over and restored it to its starting level. The trend suggests an upward price reversal.
Conclusion
- Hammer candlesticks follow price declines. Their body is small, and their shadow is long.
- The hammer candlestick happens when sellers enter a falling market. Buyers absorb selling pressure and drive the market price near the opening price by market close.
- The close might be above or below the beginning price, but it should be around the open to keep the candlestick modest.
- The lower shadows should be twice as tall as the body.
- Hammer candlesticks may imply an upward price shift. The price must rise after the hammer, known as confirmation.
