TL;DR (SUMMARY)
Hammer candlestick patterns are the most used in technical analysis. Not only in the case of cryptocurrencies, but also in trading stocks, indices, bonds and forex. Hammer candles can help price action traders identify potential reversals following up or down trends. Depending on the context and time frame, these candle patterns can suggest a bullish reversal at the end of a downtrend, or a bearish reversal after an uptrend. In combination with other technical indicators, hammer candles can provide traders with good entry points for long and short positions.
Bullish hammer candles include the hammer and the inverted hammer, which appear after a downtrend. Bearish variations of hammer candles include the hanging man and the shooting star, which occur after an uptrend.
Introduction
The hammer candle is a pattern that works well in various financial markets. This is one of the most popular candlestick patterns that traders use to evaluate the probability of certain outcomes occurring by analyzing price movements.
In combination with other trading methods such as fundamental analysis and other market analysis tools, the hammer candlestick pattern can provide insights into trading opportunities. In this article we will explain what hammer candle patterns are and how they are interpreted.
How do candles work?
In a candlestick chart, each candle represents a range, according to the time frame you have selected. If you look at a daily chart, each candle represents one day of trading activity. If you look at a 4-hour chart, each candle represents 4 hours of trading.
Each candle has an opening price and a closing price that form the body of the candle. They also have a wick (or shadow) that indicates the high price and low price within the period in question.
If you are just getting started with candlestick charting, we recommend reading our Beginner's Guide to Candlestick Charting first.
What is a hammer candle pattern?
A hammer candle is formed when a candle displays a small body along with a long lower wick. The wick (or shadow) should be at least twice as large as the body of the candle. The long lower wick indicates that sellers pushed the price down before buyers pushed it up above the opening price.
Below, you can see the opening price (1), the closing price (2) and the highs and lows that form the wick or shadow of the candle (3).
Bullish Hammers
Hammer Candle Pattern
A bullish hammer candle forms when the closing price is above the opening price, suggesting that buyers controlled the market before the end of the trading period in question.
Inverted Hammer Candle Pattern
An inverted hammer is formed when the opening price is below the closing price. The long wick above the body suggests that there was buying pressure that tried to push the price higher, but it was eventually dragged back down before the candle closed. Although not as bullish as the common hammer candle, the inverted hammer is also a bullish reversal pattern that appears after a downtrend.
Bearish hammers
hanging man candle
The bearish hammer candle is known as a hanging man. It occurs when the opening price is above the closing price, resulting in a red candle. The wick of a bearish hammer indicates that the market experienced selling pressure, suggesting a potential reversal to the downside.
Shooting star candle
The bearish inverted hammer is known as a shooting star candle. It looks just like a regular inverted hammer, but indicates a potential bearish reversal rather than a bullish one. In other words, shooting star candles are like inverted hammers that occur after an uptrend. They form when the opening price is above the closing price, and the wick suggests that the market's upward movement may be coming to an end.
How to Use Hammer Candlestick Patterns to Identify Potential Trend Reversals
Bullish hammer candles appear during downtrends and indicate a potential price reversal, marking the bottom of a downtrend. In the example below, we have a bullish hammer candle (image from TradingView).
A bearish hammer candle can be either a hanging man or a shooting star. Both appear after bullish trends and indicate a potential downward reversal. In the example below, we have a shooting star (image from TradingView).
Therefore, to use hammer candles in trading, you must consider their position in relation to the previous and following candles. The reversal pattern will either be discarded or confirmed depending on the context. We will analyze each type of hammer below.
Strengths and Weaknesses of Hammer Candlestick Patterns
Each candlestick pattern has its pros and cons. After all, no technical analysis tool or indicator can guarantee you a 100% profit in any financial market. The hammer candlestick chart pattern tends to work best when combined with other trading strategies, such as moving averages, trend lines, RSI, MACD and Fibonacci.
Strengths
The hammer candlestick pattern can be used to identify trend changes in any financial market.
Traders can use hammer patterns on multiple time frames, making them useful for strategies such as swing trading and day trading.
Weaknesses
Hammer candlestick patterns depend on the context. There is no guarantee that trend changes will occur.
Hammer candlestick patterns are not very reliable on their own. Traders should always combine them with other strategies and tools to increase the odds of success.
Hammer Candle vs. Doji: how are they different?
Dojis are like hammers, but without a body. A Doji candle opens and closes at the same price. While a hammer candle indicates a potential price reversal, a Doji usually suggests consolidation, continuity or indecision on the part of the market. Doji candles are often neutral patterns, but they can anticipate bullish or bearish trends in some cases.
The Dragonfly Doji looks like a hammer or hanging man, but without the body.
The Tombstone Doji is similar to an inverted hammer or a shooting star.
Still, hammers and Dojis don't say much on their own. You should always take into account the context, such as the market trend, adjacent candles, trading volume and other metrics.
Conclusions
Although the hammer candlestick pattern is a useful tool that helps traders identify potential trend changes, such patterns alone are not necessarily indicators to buy or sell. As with other trading strategies, hammer candles are most useful in combination with other analysis tools and technical indicators.
You must also carry out adequate risk management, evaluating the reward ratio of your trades. Additionally, you should use stop-loss orders to avoid large losses during times of high volatility.