What is a Hammer Candlestick Pattern?

Have you ever been lost on an unknown road because you didn’t have the proper directions or missed a turn on Google Maps? Trading without a thorough knowledge of the stock market is exactly like this. You may enjoy the journey, but you will miss the road to great returns or hit speed bumps in the dark. A trader enjoys going with the flow in the market but fears the risk of such speed breakers called reversals, which can be challenging.

Technical analysis, especially candlestick patterns, help in reducing the risk. It helps in predicting price movements by analyzing historical data of stock price and volume while providing early indications of a trend reversal.

Candlesticks, particularly, help in comparing the price and volume data of a particular stock. Understanding candlestick patterns will help you stand out from the crowd of novice traders. Additionally, a pattern is said to be a reversal pattern when the trend direction of stock reverses from the prevailing one. The Hammer Candlestick Pattern is one such trend reversal pattern

Basic of Hammer Candlestick Pattern?

Hammer candlestick pattern is a bullish reversal pattern. A bullish reversal is when the bearish market starts moving in the opposite direction where today’s low is lower than the previous day and today’s closing price is higher than the previous close. A hammer candlestick pattern is formed in the lower trend of the chart. It consists of a single candle that looks like a hammer.

When the market opens, the stock price is high. Therefore, sellers push the prices lower by taking control of the market. This pressure from sellers plummets the stock price which then attracts huge buying pressure and increases the price again. Usually, this buying pressure tends to be so high that the closing price goes above the opening price.

Thus, the price reversal needs to go upward to confirm the hammer candlestick pattern. It rejects lower prices. A hammer candlestick pattern is confirmed when the candle next to the hammer closes at a higher price than the closing price.

The effectiveness of this pattern is assured when led by three or more declining candles. Declining candles are those candles that have closing prices lower than a candle before it. Hammers take place in any time frame such as minute, daily or weekly charts. Short-term and long-term traders both can take advantage of this pattern.

Another hammer candlestick pattern is the inverted hammer candlestick. As the name suggests, it creates a shape like an inverted hammer. It has a long shadow above the body, instead of below the body.

How to identify Hammer Candlestick Pattern?

This pattern can be identified when the body on top of the candle is smaller, the shadow below it is at least 2 to 3 times larger but No or little upper shadow is formed. This candlestick is ‘T’ shaped, and looks similar to a hammer. The ratio of the distance of the shadow from the body of the candle is the most critical factor.

The body of the candlestick indicates the difference between the opening and closing prices. The shadow below, which is also called wick, represents high and low prices for the trading period. The length of the shadow indicates the trading period.

How to Trade using Hammer Candlesticks?

Traders first identify the candlestick pattern and then use it. They use hammer candlesticks to decide when to enter the market. Some may also use this pattern as stop loss. The hammer pattern formation shows a possible uptrend in the near time frame.

Along with identifying hammer candlestick patterns, the traders use indicators, technical analysis, and support and resistance levels to trade in the market.

Final Words

To summarize, it can be said that the hammer candlestick pattern is that bullish reversal pattern that occurs in the downtrend and closes at the price higher or nearer to the opening price. Just like other technical patterns, it gives an early indication of price reversals. Though, it should be adapted considering its limitations.

If the trader considers this pattern as a singular form of gaining profits in the stock market, there are chances of huge losses. If considered along with other technical patterns and indicators, it attracts huge profit. Though the hammer candlestick pattern does not provide any price target, It makes be difficult for one to book profits by adopting this pattern.