Mastering Hammer candlestick - Everything in 3 minutes

 Hammer Candlestick

The hammer candlestick is a popular pattern used in technical analysis to analyze price charts in financial markets. It is named after its shape, which resembles a hammer, with a small body located at the top of a long lower shadow. The hammer pattern is typically considered a bullish reversal signal when it appears after a downtrend.

Hammer candlestick pattern

Here are some key characteristics and features of the hammer candlestick pattern:

Shape: 

The shape of a hammer candlestick is characterized by the following elements:

1. Small Real Body: The real body of the hammer is relatively small compared to the overall length of the candlestick. The real body represents the price range between the opening and closing prices of the trading session. It can be bullish (green or white) or bearish (red or black), but the color is not as significant as the overall pattern formation.

2. Long Lower Shadow: 

The long lower shadow of the hammer represents the price low. It shows that prices fell significantly during the trading session but managed to recover and close near the opening price or higher. The longer the shadow, the stronger the potential reversal signal.

3. Absence or Short Upper Shadow: Another characteristic of the hammer candlestick is that it typically has either no upper shadow or a very short one. The upper shadow, if present, represents the intraday high of the trading session. However, it is often negligible or nonexistent in the case of a hammer pattern.

Bullish Reversal Signal: 

The hammer candlestick is generally interpreted as a bullish reversal signal. It suggests that selling pressure has been exhausted, and buyers are entering the market, potentially leading to a trend reversal.

Hammer candlestick story

Downtrend Requirement: 

For a hammer to be considered a valid bullish reversal pattern, it should occur after a downtrend. This indicates that the sellers have been dominant but are losing control, and the buyers may take over.

Trading Strategies: 

Here's a trading strategy using the hammer candlestick pattern in simple language:

Hammer candlestick formation

Step 1: Identify the Downtrend

Before looking for hammer candlestick patterns, you need to identify a clear downtrend in the price chart. This can be done by observing a series of lower highs and lower lows.

Step 2: Spot the Hammer Candlestick

Once you've identified the downtrend, look for a hammer candlestick formation. A hammer has a small body at the top of the candlestick, a long lower shadow, and little to no upper shadow.

Step 3: Confirm the Pattern

To increase the reliability of the hammer pattern, look for confirmation signals. These signals could include a higher close in the next candle after the hammer or an increase in trading volume compared to previous candles.

Step 4: Enter the Trade

If the hammer candlestick is confirmed, consider entering a long (buy) position. Place a stop-loss order below the low of the hammer candlestick. This will protect you in case the price continues to decline.

Hammer candlestick entry point

Step 5: Set Profit Targets

Identify potential profit targets based on your trading strategy. You can use previous resistance levels, Fibonacci retracement levels, or other technical indicators to determine your targets. Consider taking profits as the price reaches these targets.

Step 6: Manage the Trade

Once you're in the trade, monitor its progress closely. If the price moves in your favor, you may want to adjust your stop-loss order to protect your profits. Trailing your stop-loss order, meaning adjusting it as the price moves in your favor, can help you lock in profits if the trend reverses.

Step 7: Exit the Trade

Decide when to exit the trade. You can choose to exit completely when the price reaches your profit target or use a trailing stop to capture more gains if the price continues to rise. If the price starts to show signs of reversal or violates your stop-loss order, exit the trade to limit potential losses.

It's important to note that while the hammer pattern can be a useful tool for analyzing market sentiment, it should not be used in isolation. Traders should consider other technical indicators, chart patterns, and fundamental factors before making any trading decisions. Additionally, the effectiveness of candlestick patterns can vary depending on the market and timeframe being analyzed.

 

 

How to Practice This Strategy

There is no more efficient way of practicing that than in a Demo Trading Account with a real trading environment.