What is this hammer candlestick?
This question may arise in your mind if you are new to the stock market and especially technical analysis.
But if you are aware of the stock market especially technical analysis, you may fully aware of the hammer candlestick pattern.
If you are unknown to the market then this article is for you and if you are aware of the market you may still learn some point from this article.
So, Let’s dive in…
What is A Hammer Candlestick Pattern?
Hammer candlestick pattern is a pattern that shows the sentiment of the buyers and the sellers in the market like any other candlestick pattern.
But there are some differences which make hammer candlestick pattern favorite among price action traders.
The main reason why this pattern called hammer candlestick because this looks like a “hammer” or as a “T” latter of the alphabet.
This price pattern normally occurs when there is a big movement in a candle of any timeframe but the opening and closing price is very near.
There is a long wick or tail but a small body in Hammer pattern.
Hammer can be found on the bottom of the downtrend and also on the top of the uptrend.
Types of Hammer Candlestick
Normally we can easily find 2 types of hammer pattern or hammer candle, let’s analyze them in brief
Bullish Hammer Candlestick
The bullish candle appears at the bottom of the downtrend and indicates a higher possibility of a trend reversal.
This candle has a small green body which means the close price of the candle is higher than the open price of the candle.
The longer the wick the higher the possibility of reversal.
Bearish Hammer Candlestick
This candle also is known as an inverted hammer candle. The inverted hammer candle with a red body is highly considerable.
An inverted hammer pattern appears at the top of the uptrend and indicates a reversal.
What Does the Hammer Candlestick Tell You?
Normally hammer or Pin Bar pattern form on the bottom of the trend or the top of the trend.
If it forms near the support level it makes more confirm that trend will reverse from there.
Hammers are more effective when they form with some bullish pattern or bearish patterns (in the case of inverted hammer pattern).
If the body of the hammer pattern is small and the wick is long it means it is more powerful then the big body with a small wick.
When the wick is big and the body is small it means that sellers tried to push the price lower buy they can’t because buyers are more powerful at that time and they resist the price to go down.
So that candle closes near its opening price.
It also tells us that buyers are still in power and they can push the price to go higher.
This is how trend reversal happens.
The same applies to the inverted hammer pattern, the only difference is that there are sellers who are more powerful and they lead the price to go down.
One more important thing is that hammer forms on all time frames from 1 min chart to the monthly chart.
So with the help of this candlestick, you can predict the trend in the monthly timeframe or weekly.
You can make your position in any stock for swing as well as for a longer time.
Example of How to Use a Hammer Candlestick Pattern
This is a chart you can see how could you enter this trade.
If you are looking for a buy trade you should find a stock who is in a downtrend as shown in the chart. It must be in the downtrend.
Then there should be a hammer pattern with a shadow or wick, usually, the length of the shadow is 2-3 times to the body. The hammer indicates the trend reversal, it shows that the seller’s strength is decreasing and buyers may take control.
The confirmation comes to the next candle which has a strong green body that indicates that buyers started taking control. This is the time you should take entry into the trade.
Stop-loss should be below the hammer candle with some buffer. You can make the target at the 1:2, which means the target should be the double of the entry point and the stop-loss point.
Difference between Doji and Hammer Candlestick
This question arises because there are so many similarities in the Doji and Hammer pattern.
Both are more powerful when their wick is long.
But there are some differences also.
In the Doji candle, there is no-body but the hammer pattern has some-body. It might be big or small respective of their strength.
The smaller the body, the stronger the pattern is.
Advantage and Limitation of Using Hammer Candlestick
Like everything hammer pattern also has its advantages as well as limitations.
So traders should have look both part of it.
If you are a price action trader then you should not take a position as well as hammer pattern is form.
Yes, it is a sign of reversal but you should have to check it with some other signs also.
It may be support or resistance or some other sign.
First, let’s talk about benefits of hammer pattern
Hammer pattern indicates the rejection of the lower price.
When the hammer is formed near the support level with a green body and a long wick, there is a strong possibility that the price may reverse from there.
Some times hammer forms in the very long downtrend, there is also a possibility of price or you can say trend reversal.
If you have a short position and there is a downtrend and then hammer candlestick forms it shows that the selling pressure is decreasing and now buyers may be in control, so it’s a sigh that you should exit from the trade.
As we talked before every coin has 2 sides. So let’s talk about the second side of the coin.
No Indication of the Trend
As we all know the stock market is the more game of human physiology and emotion and less of Strategies, some times in an uptrend a hammer candle forms with a red body and a wick but buyers are so aggressive that they don’t let the price to drop. In this case, the hammer doesn’t work properly.
This is why I said that you shouldn’t make a trade just after seeing a hammer formation.
You also look at some other aspects of the market.
In order to enter into high probability trade, you should check some additional pieces of information like supports or some other trend reversal patterns.