What is a hammer candlestick pattern?

Hammer Candlestick Patterns
An Explanation of a Pattern Reversal

Candlestick patterns are comfortable structures to indicate price movement. Although it originated in Japan, it is now used by traders all over the world as a technical trading tool that allows them to open, close and trade a day's price in long candle-shaped patterns with upper and lower shadows. Helps to visualize highest and lowest value of K. The Hammer candlestick is related to the same thing, which is a price pattern candlestick.

 

The hammer candlestick got its name because of its unique shape. Its actual size is relatively small and it has a shadow at the bottom which is twice its size. The shape of the candle represents the opening and closing, while the shadow shows the price movement of the asset. The movement of the price, along with the position of the hammer pattern, sheds light on the market when viewed along with the ongoing trend. Therefore, it is important for traders to not only be able to identify a Hammer candlestick pattern, but also to understand the meaning of the Hammer candlestick from a market perspective.

What is a Hammer Pattern?

A hammer candlestick is a specific candlestick pattern that indicates a potential trend reversal. This is a trend traders tend to associate with the hammer as a reversal of a bullish trend in the market. This is a small green candle with an elongated lower shadow, which marks the rejection of the low price by the market. The Bullish Hammer is more common, but traders also recognize another hammer-like formation they call the Inverted Hammer pattern.

 

The hammer candlestick appears in a downtrend suggesting a bullish reversal signal. It has a smaller actual size and a longer wick at the bottom, thus resembling a hammer. It is a green candle, unlike the other red candles that formed before it. The closing price is higher than the opening price and the long shadow indicates the presence of an early seller in the market. But in the end, the market rejects the low price, and the bull force pushes the price up.

 

Inverted Hammer

The inverted hammer also appears during a downtrend, it has a longer wick on the top, which separates it from the Bullish Hammer pattern. This also marks a possible trend reversal.

 

The inverted hammer is a small green candle. This implies that the price increased during the day, but eventually closed just above the start, forming a short formation.

 

Important Points

→ A hammer is a price candlestick that indicates a potential trend reversal

→ It forms around the fall

→ A smaller actual size and a downward or upward shadow is typical of a hammer pattern

→ This value signifies rejection

→ Lower shadow is twice the actual size

→ Bullish Hammer is more common, but Inverted Hammer patterns are also recognized by traders

→ When it is formed, traders are looking for confirmation, the candlestick is formed after the Hammer is formed.

 

Hammer candlestick pattern interpretation

Traders expect a trend reversal when they see the hammer. This occurs when the price of the asset is declining, indicating that the market is going down and trying to change momentum. The formation of a Hammer candlestick in the fall suggests an active day in the market – the price fell after the market opened but closed higher than the opening price – and this is all happening over a period of time. The position of the hammer also gives important signals. Traders consider this a strong signal if it is preceded by three or more bearish candles. In addition, the next candle formed after the Hammer candle should act as a confirmation and close above the close of the Hammer candle. When all these events occur on the same line, traders can consider this as a strong signal of a potential trend reversal and enter a long position. Traders take a position to enter the market when the candle is confirmed. But like other candle formations, the hammer candlestick pattern should not be treated alone.

 

Conclusion

The hammer candlestick signals a reversal of a bullish trend, but it should be considered with its limitations. Usually, the reversal is not confirmed until the next candle appears, which is closed at a higher price than the hammer. A hammer candle with a long shadow and a candle with a strong confirmation can push the price too high, making it difficult for traders to block their losses and increasing their risk.

 

Furthermore, a hammer pattern does not indicate a price target. Therefore, traders seek confirmation from other trading instruments to estimate the potential risk-reward from the situation.

Source - The Richest Man in Babylon