Last updated on: January 11, 2024
Candlestick patterns are trustworthy indications of price change. Despite having its roots in Japan, this technical trading tool is now utilised by traders all over the world to assist them to visualise the price opening, closing, high, and low of a day in the form of lengthy candle-shaped patterns with upper and lower shadows. A candlestick with a price design, the hammer candlestick is a member of the same legion.
Due to its distinctive design, the hammer candlestick earned its moniker. It has a short genuine body and doubles the length of its body’s downward shadow. The body symbolises opening and shutting, while its shadow displays the asset price’s recent high or low. When considered in the context of the current trend, price action and the location of the hammer pattern shed information on the market. Traders must comprehend the significance of hammer candlesticks from a market viewpoint in addition to being able to recognise hammer candlestick patterns.
Hammer Candlestick Pattern
A probable trend reversal is indicated by the special candlestick pattern known as the hammer candlestick. Since it appears during a decline, traders view the hammer as a sign that the market is about to resume its bullish trend. Short green candle with lengthy lower shadow indicating market rejection of lower price. However, traders also recognise another hammer-like structure they termed the Inverted Hammer pattern. It is less often than the Bullish Hammer.
In a downturn, a hammer candlestick occurs, indicating a bullish turnaround. It resembles a hammer since it has a short actual body and a long downward wick. In contrast to earlier red candles that formed, this one is green. The difference between the opening and closing prices is greater, and the extended shadow indicates the seller’s early market participation. Finally, the market rejects the lower price, though, & the bull force drives the price higher.
How to Use a Hammer Candlestick
According to the timescale you select each candle represents one period in a candlestick chart. Every candle on a daily chart corresponds to a single trading day. Each candle on a 4-hour chart indicates 4 hours of activity. The candle body is made up of the open price and closing price of each candlestick. Additionally, they have a wick (or shadow) that shows the greatest and lowest prices throughout that period.
The formation of a hammer candlestick design is rather easy. It generally develops near the conclusion of a negative trendline, to start. This means that it is not always a smart idea to purchase when you observe a hammer candlestick pattern in a range market.
A candle that first bursts out in the green before losing part of those gains is said to have formed a hammer pattern. However, the price then finishes marginally higher than the prior close, as seen above. It is distinguished by a tiny body and a lengthy lower shadow. The candlestick may occasionally cast only a slight top shadow or none at all.
It is referred to as a hanging man and is often a negative indicator when a hammer appears during a positive trend. When it has a tiny body and a lengthy top shadow, it can also be a shooting star pattern.
What the Hammer Pattern Means in Stock Trading
When you notice the inverted hammer candlestick pattern, you should begin trading by looking for further signs that support a potential reversal. Using CFDs or spread bets, you can trade if you think it will happen. Since these items are derivatives, you can speculate on both growing and falling prices.
You can “buy” into an upswing to trade (go long). You can “sell” if you believe that the signal is insufficiently strong and that the downward trend will continue (go short).
When you notice the inverted hammer candlestick pattern, you can trade using the following steps if you have a live IG trading account:
- Log in to your trading account
- Search the ‘finder’ panel for the asset
- Input your position size
- In the deal ticket select to buy or sell
- Confirm the trade
On a risk-free IG demo account, you may practise identifying the inverted hammer and placing trades.
Types Of Hammer Candlestick Patterns
Hammer candlestick pattern- When the closing price is higher than the beginning price, a bullish candlestick hammer is created, indicating that buyers were in charge of the market before the end of that trading period.
Inverted hammer candlestick pattern- When the opening price is less than the closing price, an inverted hammer is created. The price was attempting to move higher due to purchasing pressure, as shown by the lengthy wick above the body, but it was ultimately brought back down before the candle closed. The inverted hammer is a bullish reversal pattern that emerges after a downturn, albeit it is not quite as bullish as the conventional hammer candle.
Hanging man candlestick- A hanging man candlestick represents a bearish hammer. A red candle results from it when the initial price is higher than the ending price. A bearish hammer’s wick indicates that the market was under selling pressure, which points to the possibility of a downside reversal.
Shooting star candlestick- A shooting star candlestick is a bearish inverted hammer. Although it has the same appearance as a typical inverted hammer, this one suggests a potential bearish reversal rather than a bullish one. Inverted hammers, or shooting stars, are candlestick patterns that appear following an increase. They develop when the beginning price is higher than the closing price, with the wick signalling an impending conclusion to the upward market action.
In any financial market, no technical analysis tool or indicator can promise a 100 per cent profit. When used in conjunction with other trading systems like moving averages, trendlines, RSI, MACD, and Fibonacci, the hammer candlestick chart pattern often performs better. Any financial market may benefit from using the hammer candlestick pattern to identify trend reversals. Hammer patterns are useful in both swing trading and day trading because they can be used by traders in a variety of timeframes.
Although the hammer candlestick pattern is a helpful tool for traders to identify probable trend reversals, it is not always a buy or sells signal on its own. Hammer candles are more effective when used in conjunction with other technical indicators and research tools, much like other trading systems. As part of effective risk management, you should assess the return to risk of your transactions. Stop-loss orders should also be used to reduce losses when volatility is high.