Hammer Candlestick Pattern: Definition, Structure, Trading, and Example

The extended lower wick is indicative of the rejection of lower prices. An inverted hammer occurs at the bottom of a downtrend and could indicate a bullish reversal. It looks exactly the same as the bullish hammer, except that it is found at the end of a downtrend. The Hammer’s bullish implications are strengthened if further upside confirmation occurs on the next 1-2 candles after the pattern. A doji after a trend is often just neutral until confirmed further by a breakout in either direction in subsequent price action.

Stops can be placed below the zone of support while targets can coincide with recent levels of resistance – provided a positive risk to reward ratio is maintained. Hammers occur on all time frames, including one-minute charts, daily charts, and weekly charts. Our mission is to empower readers https://www.topforexnews.org/software-development/razordeveloper-razor-developer/ with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications.

  1. Hammers occurring after prolonged downtrends are seen as more reliable indicators of a potential bullish reversal than those appearing during sideways movements or within uptrends.
  2. For a hammer candlestick to provide a high-probability bullish reversal signal, traders should look for it to form after a well-defined downtrend.
  3. Failure of indicators like RSI to turn up from oversold levels hints that buyers still lack strength.
  4. The morning star pattern signals a bullish turn following a pair of bearish candles.

Spinning top candles have small, real bodies like the Hammer, but they lack an elongated lower shadow. The inverted Hammer is the opposite structure of the Hammer, with a small body near the low and long upper shadow. Lastly, the dragonfly doji has the open, high, and close all at the same level, lacking the long lower tail of the Hammer.

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

What Does the Hammer Candlestick Look Like?

Keep reading if you want to increase your trading profits and best traditional traders by understanding what history says about the best hammer candle trading strategy. The bullish Hammer marks potential exhaustion bottoms with precision, but traders must filter signals thoroughly and wait for proper confirmation before acting. Seeing prices fall below oversold levels on momentum oscillators like RSI also carries more weight.

You should consider whether you can afford to take the high risk of losing your money. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own.

Hammer Candlestick in Various Market Types

Under these circumstances, the signal you’re keeping an eye out for is a hammer-shaped candlestick with a lower shadow that is at least twice the size of the real body. The closing price may be slightly above or below the opening price, although the close should be near the open, meaning that the candlestick’s real body remains small. As we have seen, an actionable hammer pattern generally emerges in the context of a downtrend, or when the chart is showing a sequence of lower highs and lower lows.

The longer the tail, the more intense the buying as prices reached lower levels. Other indicators should be used in conjunction with the Hammer candlestick pattern to determine potential buy signals. 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.

Looking for Confirmation

The next candle should provide upside confirmation; otherwise, the Hammer could indicate a bearish reversal, commonly referred to as a shooting star. This shows lower prices were rejected, but the market is not ready to reverse the downtrend just yet. Additional bearish candles will confirm the downtrend is still intact. Hammers also don’t provide a price target, so figuring what the reward potential for a hammer trade is can be difficult.

It is not a solicitation or a recommendation to trade derivatives contracts or securities and should not be construed or interpreted as financial advice. DailyFX Limited is not responsible for any trading decisions taken by persons not intended to view this material. 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. Strike offers free trial along with subscription to help traders, inverstors make better decisions in the stock market.

Proper candlestick pattern identification helps gauge shifts in supply and demand to spot potential trend change opportunities. The hammer candlestick is a bullish trading pattern that may indicate that a stock has reached its bottom and is positioned for trend reversal. Specifically, it indicates that sellers entered the market, pushing the price down, but were later outnumbered by buyers who drove the asset price up. Importantly, the best online stock trading courses in 2021 upside price reversal must be confirmed, which means that the next candle must close above the hammer’s previous closing price. The Hammer candlestick pattern is considered a moderately reliable reversal signal in technical analysis, with an estimated accuracy rate of around 60% when properly identified. However, the exact accuracy percentage fluctuates based on factors like the preceding trend, volume, and other confirming indicators.

Failure to make a new swing high after entering invalidates the Hammer’s bullish potential. Watch for downside gaps, bearish engulfing candles, and high volume selling as warning signs not to chase trades. Failed hammers highlight https://www.day-trading.info/blog/ the need to wait for confirmation before acting on candlestick signals. Typically, yes, the Hammer candlestick formation is viewed as a bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends.

Oversold readings on oscillators like RSI add credibility to hammer reversals. The reversal is better confirmed if indicators aligned with the price action. In January 2022, BA had been in a sustained downtrend since November 2021. The stock fell from over Rs. 233 down to around Rs. 180, a decline of nearly 25%. The selloff was marked by a series of lower highs and lower lows in price action. Selling pressure eventually dries up as buyers perceive value in the lower prices.

Prolonged selling pressure pushes the price lower and lower over multiple candles or trading sessions. Like the Hammer, an Inverted Hammer candlestick pattern is also bullish. The Inverted formation differs in that there is a long upper shadow, whereas the Hammer has a long lower shadow.

The Hammer aims to catch a potential bottom and reversal point, making it ideal for downtrend trades. The doji, at times, is useful in any trend, downtrend, or uptrend when it signals indecision during a move. Numerous statistical studies and backtests of the hammer pattern in different markets have shown it produces profitable trading results. However, performance is greatly enhanced by only taking trades with directional confirmation and a proper risk/reward ratio. Traders should allow upside follow-through to develop before acting and use tight stops below the Hammer low to limit the downside.