Hammer Candlestick Formation in Technical Analysis: A Definition With Chart Example
In this pattern, the open, close and high prices are very close to each other, giving it the ‘hammer’ type look. The lower shadow or wick in a Hammer Candlestick is always more than double the candlestick’s body size. This pattern generally occurs when the currency pair is in a downtrend, which in turn indicates a possible market reversal. Then, as soon as you identify a candle that closes above the closing prices of the bullish hammer candle, you can enter a long trade (as you can see in the EUR/USD chart below). The hammer candlestick in Forex or any other market is easy to spot and analyze.
- Inverted hammer – “Shooting star” on the PrimeXBT platform.
- You can rely on the hammer candlestick as a primary element to formulate a trading strategy.
- Crucially, the pattern could indicate a trend reversal, or it may appear during a correction of the primary trend.
- You should only trade in these products if you fully understand the risks involved and can afford to incur losses that will not adversely affect your lifestyle.
It is a dual candlestick pattern with the first candlestick being light in color and having a large real body. The second candlestick must be dark in color, must open higher than the high of the first candlestick and must close down, well into the real body of the first candlestick. The deeper the second candlestick penetrates the first, the more reliable the pattern becomes. A green hammer is a hammer candle with a closing price higher than the open. It can be bullish if it aligns with a support level or appears after a series of bearish candles. When you see a hammer candlestick, look at the price action context to help you read the significance of the candle. With practice, you can find superior entries with excellent profit potential.
Bulkowski on the Hammer Candle Pattern
Notice the blue hammer has a very tiny upper shadow, which is acceptable considering the “Be flexible – quantify and verify” rule. If the paper umbrella appears at the top end of an uptrend rally, it is called the ‘Hanging Man’.
The Bullish Candlestick is an indicator that the selling pressure in the market was more than the buying pressure initially, leading to the currency pair prices hitting an extreme low. A hammer candlestick appeared on the chart of Exxon Mobil after six prior days of bearish candlesticks and reaching a historical support area. By being aggressive, a trader could buy the close of the hammer candlestick formation and place a protective stop loss order at the low of the hammer candlestick. The hammer candlestick pattern is often seen testing support lines and trend lines to verify their strength. The bearish inverted hammer is a single candlestick pattern with a small body and a long upside wick. In this pattern, the opening price remains above the closing price, pointing out less buying pressure at the time of closing.
Consecutive Hammer Candlesticks are Strong
But let’s dive in and analyze the meaning of a hammer candlestick. This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.
- In this pattern, the open, close and high prices are very close to each other, giving it the ‘hammer’ type look.
- Confirmation occurs if the candle following the hammer closes above the closing price of the hammer.
- The main difference between the two patterns is that the Shooting Star occurs at the top of an uptrend and the Inverted Hammer occurs at the bottom of a downtrend .
- Knowing how to spot possible reversals when trading can help you maximise your opportunities.
- After a long bearish trend, the hammer has a higher possibility of showing a solid market reversal.
As the stock is turning into bearish we are coming out of the trade. I guess the Hammer Candlestick Patterns last two example patterns in ‘The shooting star’ candlestick are interchanged.
Placing Stops and Taking Profits
Moreover, this pattern shows that sellers or bears entered the market, pushing the price, but the bulls absorbed the pressure and overpowered them to drive up the price. Suppose a trader, Mike, is tracking the price movements of XYZ stock. After looking at the security’s candlestick chart, he identifies a bullish hammer in a downtrend after four declining candlesticks. Hoping it is an indicator of a trend reversal, he buys 50 shares of XYZ stock at $5 per share.
A bullish inverted hammer is a single candlestick pattern with a small body and a long upside wick. In this pattern, the closing price remains above the opening price, pointing out a buying pressure https://www.bigshotrading.info/ at closing. The bullish inverted hammer appears after a prolonged downward pressure and indicates a buying possibility. The success rate of this pattern depends on the body and the wick’s length.