what is a hammer candle

Other indicators should be used in conjunction with the Hammer candlestick pattern to determine potential buy signals. To some traders, this confirmation candle, plus the fact that the downward trendline resistance was broken, gave them a potential signal to go long. There are two other similar candlestick patterns, which can lead to some confusion for new traders. So, in this case, it’s best to place your stop loss below the lowest price level of the bullish hammer candle. As for taking profit targets, you can place the order at one of the following Fibonacci ratio levels. When used with other indicators or at the very least support and resistance, these candlesticks can be a crucial part of any trading system.

what is a hammer candle

The hanging man emerges after an uptrend and suggests a potential bearish reversal. It resembles the hammer with a small real body near the top and a long lower wick, but the crucial difference is that it occurs in an uptrend. The hanging man implies that sellers are starting to exert influence, potentially leading to a reversal in the market.

What Is the Hammer Candlestick Formation?

Lastly, the gravestone doji has the open, low, and close all at the same level, lacking the long lower tail of the bearish Hammer. So, while similar in some aspects, the bearish Hammer’s unique lower tail sets it apart from other single candle formations and accounts for its potency as a reversal indicator after uptrends. In a downtrend, a hammer candlestick forms when selling pressure pushes the price steadily lower, making up the long lower shadow. But by the end of the period, buyers resurface and bid prices back up to close near the open. The price’s ascent from its session low to a higher close suggests that a more bullish outlook won the day, setting the stage for a potential reversal to the upside. A hammer is a price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies within the period to close near the opening price.

  1. The following sections contain bullet points that highlight the characteristics of the hammer versus doji candles.
  2. The long lower shadow of the hammer indicates that the buying pressure is strong and can potentially lead to further upward movement in the market.
  3. The Hammer is a single candlestick pattern that forms during a downtrend and signals a potential trend reversal.

For example, an analysis of the S&P 500 over the past decade shows that only 1 out of every 40 candles (2.5%) qualified as a valid hammer. The percentage was slightly higher for small-cap stocks in the Russell 2000 index, at 3.2% of daily sessions forming hammers. But overall, all market examinations point to hammers appearing on under 5% of price charts. Seeing prices fall powertrend below oversold levels on momentum oscillators like RSI also carries more weight. Finally, the reversal has a higher probability of success if the prior uptrend showed signs of weakness before rolling over into the downtrend. Adhering to these rules helps distinguish high-quality hammer setups from those with a lower probability of reversing the prevailing downtrend.

The pattern can certainly assist traders in identifying a reversal in the price action, regardless of the trading strategy they use. Technical analysis is a commonly used approach in the financial markets. It involves studying historical price data and patterns to make informed trading decisions. Among the various tools and formations employed in technical analysis, the hammer candlestick pattern stands out as a powerful indicator. This article will delve into the meaning of the hammer candlestick pattern and explain how traders can interpret it when trading.

Confirmation could come from a close above the Hammer’s high or a bullish engulfing bar. Momentum oscillators like RSI turning up from oversold levels improve the odds. Taking trades with a hammer candlestick pattern is really simple and easy. We trade with the hammer when the next candle starts to trade above the high of the hammer ndax review candle. In addition, Julie was interviewed for various financial markets magazines and news wires in her professional capacity as a forex and derivatives expert. He has also developed extensive experience in performing and using fundamental economic and corporate analysis to inform his trading and investment activities.

How to Use a Hammer Candlestick: An Example

Taking long positions, therefore, taking the very start of the trend can provide strong profit margins to a trader. Both the hammer and inverted hammer are created at the end of a downtrend, signaling bullish reversals in the market trend. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. It is worth noting that certain factors influence the reliability of the Hammer formation in actual trading. For example, Hammers showing up after extended or very sharp downtrends tend to be more accurate versus a shallow pullback. Volume levels also matter – Hammers on the heaviest volume have a higher win rate.

Seeing upside confirmation after the initial bottom signal provides greater validity to the potential reversal. In a downtrend, the hammer pattern indicates that the downtrend is coming to an end and that an upside reversal will shortly follow. It indicates that after a series of lower lows and lower highs, buyers are finally gaining strength and starting to overwhelm the sellers, which could lead to a trend reversal. The increase in buying pressure shows demand is returning to the market after an extended decline. Yes, the hammer candlestick pattern is profitable for traders in the right circumstances.

A valid hammer signal has little to no upper shadow protruding from the top of the real body. Pivot points are just automatic support and resistance indicators that calculate levels using math formulas. As we know, it’s a bullish reversal pattern, so we need a move from down to up, and that’s why we are going to trade the hammer candle using the support level. If you’ve spotted a hammer candlestick on a price chart, you may be eager to make a trade and profit from the potential upcoming price movement.

The hammer candlestick pattern is considered a relatively rare formation, occurring only 1-2% of the time, according to most quantitative analyses. This infrequency is one reason technicians view the Hammer as a high-probability reversal signal when it does occur at the end of a downtrend. Hammers would become less significant and less of a focus for traders if they formed more frequently.

A hammer candle or candlestick is a widely recognized chart pattern that can be used by forex traders to identify potential bullish or bearish trend reversals. The resulting candlestick shape resembles a hammer, with a small body located at the top and a long lower shadow situated below it. The hammer candlestick pattern is used by seasoned professionals and novice traders. The hammer tends to occur at the end of a trend and signifies a potential reversal in the forex market. Although it is most recognized as a bullish reversal candlestick pattern, the bullish hammer candle is either a trend reversal or a continuation pattern. Therefore, it largely depends on the candle’s location on candlestick charts.


A bullish, engulfing bar overtakes the entire range of the previous candle. While these all indicate potential trend reversals, the Hammer stands out with its very long lower tail or wick. This shows that intraday selling was overwhelmed by buying pressure, which pushed the price back up by the close. The Hammer’s unique structure demonstrates buyers avatrade reviews reasserting control after substantial selling, making it a high probability reversal sign. No other bottoming pattern reflects this intense upside rejection of bearish momentum in a single candle. The bullish inverted hammer candlestick pattern, also known as the inverse hammer, is a significant candlestick chart signal for forex traders.

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It has no or a very small real body and a long lower shadow that is two or three times the length of the body. The long lower wick shows that sellers initially pushed the price lower, but buyers later overwhelmed them and pushed the price back up to close near the open. This transition from selling pressure to buying pressure is what gives the Hammer its bullish implications. The hammer candlestick pattern is considered a bullish reversal pattern in technical analysis.

Let’s compare the hammer to other candle formations you may spot on charts. Join thousands of traders who choose a mobile-first broker for trading the markets. Strike offers free trial along with subscription to help traders, inverstors make better decisions in the stock market.

The bearish Hammer sometimes hints that buying pressure is waning and the uptrend could be ending. The bullish hammer pattern hints at a potential reversal of a downtrend. Both hammers have long lower shadows, but the bullish version signals upside potential while the bearish hints at a peak. Identifying where they occur within the broader trend is key to interpreting the formation correctly. Don’t let the name confuse you, the shooting star is still a type of hammer candlestick but it’s a hammer candlestick in uptrend and signals potential bearishness ahead.