Hammer Candlestick Guide
Hammer and inverted hammer candlestick formations are famous patterns in forex, crypto, indices, commodity, and stock trading. In fact, Both of them deliver reversal signals at the bottom of a downtrend. Consequently, it is crucial to be able to interpret green and red hammer candlestick structures once you spot them on your trading chart. Moreover, the bullish hammer candle suits CFD forex traders also. This review will analyze reversals in the price direction when a hammer candlestick occurs after a bearish move.
Hammer Candle FAQ
What is hammer Pattern?
The hammer candle means a probable reversal pattern towards a bullish direction. This candlestick looks like a hammer and is often observed in the forex market at the bottom of a downtrend. The Hammer candlestick forms when high, open, and/or close are approximately the same. Also, it is distinguished by its extended lower shadow indicating a bullish rejection from bulls and their intent to force the exchange higher. So, a hammer candle forms when the forex pair opens then moves much lower during a timeframe, and then rebounds back close to its opening. Moreover, the tiny open-close body looks like the head of the hammer while the long wick looks like its handle. To explain, the size of the lower shadow is often twice the body or even larger.
The most familiar candles are the bullish, bearish, and inverted hammer candlesticks. The first and the second possess a little body with an elongate lower shadow that demonstrates a strong rejection of low block prices levels. The third shapes in an inverted way compared to the first candlestick.
Example
The hammer candle looks like a single candlestick with a long lower tail and a small body. To clarify, the body of the hammer formation may be green and we talk about the bullish hammer here. That is to say, the closing of the candle is higher than its close. Alternatively, if the tiny body is red then we talk about a bearish hammer candlestick in this case. In other words, the closing of the candle is lower than its close. However, note that the color of the body is not so important. Because a hammer candlestick pattern often provides a buy signal regardless of the color of the body.
Bullish Hammer example
A bullish Hammer candlestick forms if the close price is above the open price and the high price of the candle and its close are almost equal. This strong formation indicates that bulls have controlled the commodity market before the candlestick completes. Because buyers were completely capable to reject sellers and boost the price even higher compared to the opening price. In other words, the stock market dropped low during a specific timeframe but closed higher than its opening next to an emerging buying pressure. To clarify, the length of the lower shadow affirms lower price rejection. Note that the success rate of the bullish hammer depends on the length of the wick and the close price. To explain, a long shadow, combined with a tiny green body is the most accurate buying signal.
Bearish Hammer example
A bearish hammer is a red candlestick pattern that happens after a long downtrend. The primary difference between the bullish version and the bearish hammer is the color of the body. To clarify, the closing price of the bearish hammer remains below its opening price. Yet, a red hammer candlestick often indicates a buy signal even if it is bearish. However, it stays a weaker buying signal than that of the bullish hammer candle. Let us discover what the bearish hammer would look like:
Is Red Hammer bullish?
Red Hammer candlestick is always a bullish pattern. Because the hammer formation is always bullish whether the color is red or green. In fact, buyers were capable to offset sellers. Yet, they were not capable to carry the price back up to the open one during the exchanging timeframe. In short, both green and red hammer candlestick structures provide CFD traders with bullish signs. However, they should not be utilized in isolation in the technical analysis framework.
How to trade with it?
As the hammer candlestick is a bullish reversal pattern that appears at the end of a downside move, the first necessity is to identify a strong downtrend. The following USDCHF D1 chart demonstrates that bears have probably lost their authority. First, the currency pair made several lower ups. Second, a red hammer appeared at the bottom of the downtrend. Consequently, bulls surprised sellers by pressing the price higher although the price has fallen considerably during the day. At this moment, it is obvious that the balance has changed in favor of bulls and there is a robust chance that the trend direction will reverse.
Here, there are two choices. Either the investor initiates a long trade just after the hammer occurrence and waits for the probable reverse. Or he seeks the second candlestick confirmation. In other words, if it is green ( bullish ), he enters the trade and seizes the reversal opportunity. Keep in mind that the first choice is riskier.
What is inverted hammer candle ?
The Inverted Hammer candlestick pattern materializes also at the base of downside moves. As the bullish hammer, it warns about a possible upside reverse. The candle has a small body with an extended upper shadow and a short or no lower one. When lower and opening prices are identical, a bullish Inverted Hammer candlestick forms. Besides, when lower and closing prices are nearly equal, a bearish Inverted Hammer pattern shapes. To clarify, both are strong bullish signs. Sometimes, the red inverted hammer can arise at the end of an upside move to highlight the ending upside movement and the beginning downward one.
Example
An inverted hammer candlestick pattern occurred after a long downtrend on this chart. This inverted hammer is a bullish version as prices hesitated to keep falling down by increasing significatively at the day end. However, bears came back to diminish prices back close to the opening. In other words, bulls succeeded to test the diminishing power of sellers by being able to push prices considerably during the trading day. Moreover, what happens after the formation of the Inverted Hammer candlestick pattern is the confirming signal. To clarify, prices going higher the next day have confirmed the uptrend reversal on the chart.
How do you trade the inverted hammer candlestick pattern?
Trading the inverted forex candlestick pattern is almost the same as the hammer candlestick. Because both are bullish reversal structures. Let us have a look at this USDJPY H4 chart. Just before the inverted hammer occurrence, bulls have not succeeded to make a perfect hammer formation. Just after, an inverted hammer candlestick was made as a confirmation of the intention of buyers to control the forex market. Besides, the following candle also exploded higher and confirmed that bears are no more dominant. Consequently, the inverted pattern of the hammer candlestick is a testing space. In short, buyers felt the sellers are getting weaker and reacted fast to push up the price activity. Concerning stops, they can be made near an indecision candle.
Conclusion
To conclude, hammer and inverted hammer patterns are both bullish reversal candlesticks that reside at downtrend ends. They signal that the force of sellers, which have been dominating, is weakening at their formation. Consequently, both hammer and inverted hammer candles indicate an upcoming reversal and a probable change in the trend direction in different markets as well in CFD trading.