How To Interpret Hammer Candlestick Pattern?

Hammer Candlestick Patterns - How to Uncover the Potential Trend Reversal Pattern

Candlestick patterns can be used to show price movements. Although it was originally created in Japan, traders use it worldwide as a technical trading tool. It helps them visualize price opening, closing and high of the day in long candle-shaped patterns that have upper and lower shadows. The hammer candlestick is part of the same legion and is a price pattern candlestick.

The unique shape of Hammer candlestick is what gave it its name. It has a short real-body with a twice as long shadow. The candle's body represents opening and closing. The shadow indicates the price at which the asset has moved. When compared with the current trend, price action and the position of a hammer pattern can shed light on the market. Therefore, traders must not only be able identify a hammer pattern, but also understand the market meaning of hammer candles.

What is a Hammer Pattern?

A Hammer candlestick is a distinctive candlestick pattern that signals a possible trend reversal. Because it is formed in a downtrend traders associate the hammer symbol with a return to bullish market trend. This is a short, green candle with a long shadow that is lower than the rest. It signifies lower market rejection. Bullish Hammer is the most common but traders also recognize an alternative hammer-like pattern they call the Inverted Hammer.

A downtrend is indicated by a Hammer candlestick. It resembles a hammer with its short real-body, and long downward wick. It is a green candle unlike any other red candles. The closing price is higher than the opening, and the shadow that lasts for a long time indicates that there was a seller in the market early. The market eventually rejects the low price and the bull force pushes it up.

Inverted Hammer

Inverted Hammers also appear during downtrends. They have a longer upper wick which distinguishes them from bullish hammer patterns. It can also signify a potential trend reversal.

An inverted hammer candle is a small green candle. This indicates that the price rose during the day but then fell to close just above its opening, creating a shorter body.

The Key Takeaways

• A price candlestick called Hammer indicates that there is a trend reversal.
• It is centered around the downtrend
• Hammer patterns are characterized by a short real-body with a downward or upward shadow.
• It is a sign of price rejection
• The shadow below is twice as large as the real-body
• Although bullish hammers are more common, traders also recognize inverted hammer patterns.
• It forms, traders look out for confirmation. This is the candlestick that forms after the hamme.

Interpreting Hammer Candlestick Patterns

When they see a hammer, traders expect trend reversal. This happens when the asset's price falls. It indicates that the market is looking for the bottom and a possible shift in momentum. The formation of a hammer candlestick during a downtrend indicates an active market day. This means that the price fell immediately after opening, but then pulled back up to close at a higher price than opening. The hammer's position also indicates important signs. If it is preceded by three or more bearish candlesticks, traders consider it a strong signal. The confirmation candle must be closed above the closing of hammer candles. If all of these events occur in a coordinated fashion, traders may consider this a strong signal for potential trend reversal. When the confirmation candle forms, traders can enter the market. However, the hammer candlestick pattern should not be considered as a separate entity.

Conclusion

The Hammer candlestick indicates a bullish trend reversal but should be considered in context. The reversal usually isn't confirmed until after the next candle appears. This happens when the next candle closes at a lower price than the hammer. The price can rise significantly if there is a long shadowed confirmation candle or a strong confirmation candle. This makes it more difficult for traders to set a stop-loss, and increases their risk.

A hammer pattern does not indicate a price target. To determine the potential risk-reward ratio, traders will need confirmation from other trading tools.