How To Trade With Hammer Candlestick Patterns

How To Trade With Hammer Candlestick Patterns

Intermediate
แƒ’แƒแƒ›แƒแƒฅแƒ•แƒ”แƒงแƒœแƒ”แƒ‘แƒฃแƒšแƒ˜ Mar 25, 2022แƒ’แƒแƒœแƒแƒฎแƒšแƒ”แƒ‘แƒฃแƒšแƒ˜ Jun 15, 2023
5m

TL;DR

Hammer candlestick patterns are one of the most used patterns in technical analysis. Not only in crypto but also in stocks, indices, bonds, and forex trading. Hammer candles can help price action traders spot potential reversals after bullish or bearish trends. Depending on the context and timeframe, these candle patterns may suggest a bullish reversal at the end of a downtrend or a bearish reversal after an uptrend. Combined with other technical indicators, hammer candles may give traders good entry points for long and short positions.

Theย bullishย hammer candlesย include the hammer and inverted hammer, which appear after aย downtrend. The bearish variations ofย hammer candlesย include theย hanging manย and theย shooting star, which occur after anย uptrend.


Introductionย 

The hammer candlestick is a pattern that works well with various financial markets. It is one of the most popular candlestick patterns traders use to gauge the probability of outcomes when looking at price movement.

Combined with other trading methods such as fundamental analysis and other market analysis tools, the hammer candlestick pattern may provide insights into trading opportunities. This article will take you through what hammer candlestick patterns are and how to read them.



How do candlesticks work?

In aย candlestick chart, every candle relates to one period, according to theย timeframeย you select. If you look at aย daily chart, every candle represents one day of trading activity. If you look at a 4-hour chart, every candle represents 4 hours of trading.

Each candlestick has anย open price andย close price that form the candle body. They also have aย wick (or shadow), which indicates theย highest andย lowest prices within that period.

If youโ€™re new toย candlestick charts, we recommend reading ourย Beginnerโ€™s Guide toย Candlestick Charts first.


What is aย hammer candlestick pattern?

A hammer candlestick is formed when a candle shows aย small bodyย along with a longย lower wick. The wick (or shadow) should have at least twice the size of the candle body. Theย long lower shadowย indicates that sellers pushed the price down before buyers pushed it back up above theย open price.

Below you can see theย opening priceย (1), theย closing priceย (2), and the highs and lows that form the wick or shadow (3).


Bullishย hammers

Hammer candlestick pattern

Aย bullish candlestickย hammer is formed when theย closing priceย is above theย opening price, suggesting that buyers had control over the market before the end of that trading period.


Inverted hammer candlestick pattern

An inverted hammer is formed when theย opening priceย is below theย closing price. The long wick above the body suggests there wasย buying pressureย trying to push the price higher, but it was eventually dragged back down before the candle closed. While not asย bullishย as the regularย hammer candle, the inverted hammer is also aย bullish reversal patternย that appears after aย downtrend.


Bearish hammers

Hanging manย candlestick

The bearish hammer candlestick is known as aย hanging man. It occurs when theย opening priceย is above theย closing price, resulting in a red candle. The wick on a bearish hammer indicates that the market experiencedย selling pressure, which suggests aย potential reversalย to the downside.


Shooting star candlestick

The bearish inverted hammer is called aย shooting star candlestick. It looks just like a regular inverted hammer, but it indicates a potential bearish reversal rather than aย bullishย one. In other words,ย shooting starsย candlesticks are like inverted hammers that occur after anย uptrend. They are formed when theย opening priceย is above theย closing price, and the wick suggests that the upward market movement might be coming to an end.


How to useย hammer candlestick patternsย to spot potentialย trend reversals

Bullish hammer candles appear during bearish trends and indicate a potential price reversal, marking the bottom of a downtrend. In the example below, we have a bullish hammer candlestick (image from TradingView).


Aย bearish hammer candlestick can be either aย hanging man or aย shooting star. These appear afterย bullishย trends and indicate aย potential reversalย to the downside. In the example below, we have aย shooting starย (image fromย TradingView).

As such, to use hammer candlesticks in trading, you need to consider their position in relation to previous andย next candles. Theย reversal patternย will either be discarded or confirmed depending on the context. Letโ€™s take a look at each type of hammer.


The strengths and weaknesses of theย hammer candlestick patterns

Every candlestick pattern has its pros and cons. After all, no technical analysis tool or indicator can guarantee a 100% profit in any financial market. The hammer candlestick chart patterns tend to work better when combined with other trading strategies, such as moving averages, trendlines, RSI, MACD, and Fibonacci.

Strengths

  • Theย hammer candlestick patternย can be used to spotย trend reversalsย in any financial market.

  • Traders can use hammer patterns in multiple timeframes, making them useful in both swing trading and day trading.

Weakness

  • Hammer candlestick patternsย depend on the context. There is no guarantee that theย trend reversalsย will occur.

  • Hammer candlestick patternsย are not very reliable by themselves. Traders should always combine them with other strategies and tools to increase the chance of success.


Hammer candlestick vsย Doji: whatโ€™s the difference

Dojisย are like hammers without a body. Aย Doji candlestick opens and closes at the same price. While a hammer candlestick indicates a potential price reversal, a Doji usually suggests consolidation, continuation or market indecision. Doji candles are often neutral patterns, but they can precede bullish or bearish trends in some situations.

The Dragonfly Doji looks like a hammer or hanging man without the body.ย 


The Gravestoneย Dojiย is similar to an inverted hammer or aย shooting star.

Still, hammers and Dojis donโ€™t say much on their own. You should always consider the context, such as the market trend, surrounding candles, trading volume, and other metrics.


Closing thoughts

Although theย hammer candlestick patternย is a useful tool that helps traders spot potentialย trend reversals, these patterns alone aren't necessarily a buy or sell signal. Similar to otherย trading strategies,ย hammer candlesย are more useful when combined with other analysis tools andย technical indicators.

You should also make use of proper risk management, evaluating the reward ratio of your trades. You should also use stop-loss orders to avoid big losses in moments of high volatility.

แƒžแƒแƒกแƒขแƒ”แƒ‘แƒ˜แƒก แƒ’แƒแƒ–แƒ˜แƒแƒ แƒ”แƒ‘แƒ
แƒ“แƒแƒ™แƒแƒ•แƒจแƒ˜แƒ แƒ”แƒ‘แƒฃแƒšแƒ˜ แƒกแƒขแƒแƒขแƒ˜แƒ”แƒ‘แƒ˜
How to Use MetaMask
How to Calculate Position Size in Trading
BNB Chain: Things to Avoid
แƒ“แƒแƒแƒ แƒ”แƒ’แƒ˜แƒกแƒขแƒ แƒ˜แƒ แƒ”แƒ— แƒแƒœแƒ’แƒแƒ แƒ˜แƒจแƒ˜
แƒ—แƒฅแƒ•แƒ”แƒœแƒ˜ แƒชแƒแƒ“แƒœแƒ˜แƒก แƒžแƒ แƒแƒฅแƒขแƒ˜แƒ™แƒแƒจแƒ˜ แƒ’แƒแƒ›แƒแƒกแƒแƒงแƒ”แƒœแƒ”แƒ‘แƒšแƒแƒ“ แƒ’แƒแƒฎแƒกแƒ”แƒœแƒ˜แƒ— Binance-แƒ˜แƒก แƒแƒœแƒ’แƒแƒ แƒ˜แƒจแƒ˜ แƒ“แƒฆแƒ”แƒกแƒ•แƒ”.