What is the Hammer Candlestick Pattern?
Hammer Candlesticks enable traders to identify potential market reversal points, determine the ideal time to enter the market and place buy or sell orders accordingly. Our article will discuss everything you need to know about Hammer Candlesticks and how to use them for effective forex trading.
What is a Hammer Candlestick?
A Hammer Candlestick pattern that occurs whenever a currency pair trades at a much lower price than its opening price. The currency pair price spirals as soon as the close price of the pair comes near the open price. It signals bullish reversals in the market. 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.
- The open price is where the currency pair trades for the first time on a trading day
- The close price is where the currency pair trades for the last time on a trading day
- The low price is the lowest price the currency pair trades at on a trading day
- The high price is the highest price the currency pair trades at on a trading day
For example, if you are trading USD/EUR at 2, with the open price at 1.4, and the market starts declining thereafter, pushing the prices to 1.8, 1.6, and finally 1.5, you will witness a Hammer Candlestick with a long lower wick, depicting a market low for USD/EUR. Since the close price will come near to the open price, as a trader, you will want to enter the market and buy more USD/EUR positions with an expectation of a market reversal. The reversal will be confirmed on the next candlestick, which will be a bullish candlestick with a higher open price of 1.9. Hereon, the prices of USD/EUR will continue to increase and reach a level equal to or beyond 3, signaling profit-taking opportunities for you.
Types of Hammer Candlesticks
1. Bullish Candlestick
The Bullish Candlestick appears during a downtrend and signals buying opportunities as there is a potential bullish reversal. This candlestick has a tiny body with an extremely small or no upper wick and a significantly long lower wick. 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. However, as the prices dropped so much, traders entered the market by opening buy positions, increasing the buying pressure and enabling the currency pair price to close higher and indicate a bullish market reversal.
2. Bearish Candlestick
Bearish Candlestick or Hanging Man pattern occurs after an extremely long bullish trend in the market. The pattern indicates a bearish market trend reversal, with a sudden drop in the currency pair prices. The highest point of the bearish candlestick pattern indicates an overbought level in the market with buying pressures exceeding the selling prices. The high prices signal traders to exit the market and lock in profits, leading to the selling pressures climbing back up. As more and more traders exit the market, the supply of currency pairs increases, leading to a downtrend with continuous falls in the prices.
3. Bullish Inverted Candlestick
A Bullish Inverted Candlestick is an individual candlestick with a small body and long upper wick. The close price of the currency pair is always above the open price, indicating more significant buying pressures in the market. This candlestick is formed after a long downtrend and signals an uptrend market reversal. With this candlestick, traders can enter buy positions since the market is expected to witness a potential increase in the prices.
4. Bearish Inverted Hammer
A Bearish Inverted Hammer or Shooting Star pattern is an individual candlestick that has a small body and long upper wick. The open price of the currency pair is always more than the close price, indicating selling pressures exceeding the buying pressures. This candlestick occurs in the market after a long uptrend and signals a downtrend market reversal. With this candlestick, traders can enter a sell position since the market is expected to witness a drastic drop in prices.
4. Fix stop losses below the opening high price
The Hammer Candlestick pattern consists of four candlesticks in total, with the first two candlesticks being bearish, the third candlestick being a Hammer candle and the last one, a bullish candlestick. The fourth candlestick always opens above the closing price of the third candlestick, indicating a potential market uptrend. Here is how you can confirm the Hammer candlestick pattern –
- The upper wick should always be double the length of the candlestick’s body
- When the Hammer candlestick forms, trade volume should be at its peak, signifying high buying pressures that will lead to an increase in the price
- Currency pair will open at a higher price than the previous day’s open and close price
- The trend before the Hammer candlestick pattern should be a long-term downtrend, signifying strong reversal chances
Since Hammer Candlestick provides reversal points to traders, it is called a reversal strategy that aims to point to the level at which the market will reverse. As a trader, you can apply this strategy on several timeframes, from a 60-minute time frame to a four-hour time frame.
- When the fourth candlestick confirms the uptrend by indicating an increase in prices, you can take a long or buy position in the market at the immediate open price
- A stop-loss order can be placed at the low price of the Hammer candle
- The trade can be closed at any point after the fourth candlestick
Trade with the Hammer Candlestick pattern
The Hammer candlestick pattern is a strong market trend reversal indicator. Using it in your reversal strategy will help you identify buy and sell levels in the market. Trade with Blueberry Markets to get the most of the top candlestick patterns. Sign up for a live trading account or try a risk-free demo account on Blueberry Markets.
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