Price charts of assets like cryptocurrencies help traders to analyze past price action and attempt to use the data to predict future outcomes. Over time, more advanced ways of tracking price action have been invented, each offering a unique view of the market. Complex technical indicators have also been developed.
Aside from the common line chart, asset prices can be mapped out further using point and figure charts, renko, kagi, and Japanese candlesticks. Japanese candlesticks take a different shape based on the trading session open, high, low, and close. Depending on the shape, size, and other factors such as proximity to adjacent candles, the resulting candlestick can provide important information about the market conditions and can potentially predict what could come next.
Among those common shapes that provide a powerful signal, is the hammer candlestick pattern. In this guide, we will outline the various types of hammer candlestick patterns and explain what they are, how to identify them, and how to include them as part of a trading strategy once discovered.
What Is A Hammer Candlestick Pattern?
A hammer candlestick pattern is a type of Japanese candlestick pattern consisting of just a single candlestick. A hammer candle typically is a potential reversal pattern and suggests that a change in price direction could occur.
The hammer candle develops when the candle’s opening price, closing price, and candle high are roughly around the same price, while there is a long lower wick extending from the bottom of the candle, making the candlestick look like a hammer in shape. The wick or shadow acts as the handle of the hammer.
Like dojis, hammer candles appear at the top or bottom of a trend and signal indecision in the market ahead of a potential trend change.
Hammer Japanese Candlestick Example
A hammer chart pattern can be green or red, or open or closed. However, open, or green candles are commonly stronger due to a larger bullish presence during the candle session. Hammer candles can appear during any time period, with higher timeframe patterns providing stronger signals if valid and confirmed.
Types of Hammer Candlestick Patterns
The description above is the most common and fitting description of the hammer candlestick pattern. However, the pattern also appears both regular and inverted, and has several bearish counterparts. Here are some of the most common hammer candlestick patterns in markets like forex, cryptocurrencies, stocks, and commodities.
The hammer is predominantly considered a bullish reversal pattern. Its appearance will occur at the bottom of a downtrend and can be an important turning point ahead of a trend reversal. Because these signals appear at the bottom of a downtrend and lead to upside, they are considered bullish reversal patterns.
The bullish hammer candle describes the most common setup associated with the hammer pattern. The bullish hammer pattern must fit the specifications explained in the hammer candlestick example section. To review, the hammer candlestick must contain little to no upper shadow, an open, high, and close around the same price point creating a small body, and there must be a long lower shadow acting as the hammer handle.
A bull hammer candle is only confirmed by a strong follow through by bulls to the upside in the next three to five candles following the signal.
Inverted Hammer Candlestick
The inverted hammer candlestick looks just like the standard hammer candle pattern, except it has been flipped upside down. The inverted hammer pattern has a similar real body shape and size as the hammer. However, the inverted hammer candle open, low, and close must be around the same price proximity. Instead of a long lower wick, the upside down hammer has a long upper wick acting as the handle of the pattern.
A bullish inverted hammer is only confirmed by strong buying pressure and follow through by bulls to the upside within the next three to five candles following the appearance of the pattern.
When these hammer patterns appear at the top of an uptrend or particularly strong rally, they act as bearish reversal patterns instead.
Here are the most common types of bearish hammer patterns that could ultimately lead to a bearish price reversal and a correction to the downside.
Shooting Star Candlestick
The shooting star candlestick pattern is a candle hammer pattern that results in a bearish trend change and strong retracement when it appears at the top of a rally.
The pattern is essentially a long-shadowed inverted hammer pattern that appears at the top of a trend instead of at the bottom, and yields bearish results instead of bullish results.
The shooting star pattern has a similar open, low, and close. Instead of a long lower wick, the shooting star pattern leaves a long upper wick behind acting as the tail of the shooting star.
Hanging Man Candlestick Pattern
The hanging man candlestick pattern is another bearish reversal candlestick pattern, where the candlestick hammer appears at the top of a rally or uptrend, and suggests a correction is coming in the near-term.
The pattern should not be confused with the dragonfly doji, which leaves a similar long-shadowed wick behind. The difference is that the dragonfly doji has a much smaller real body and tighter open and close – often closing at the same price as open.
How To Identify A Hammer Candlestick: Hammer Technical Analysis
A hammer is a bullish Japanese candlestick pattern that takes place in one candle session. The hammer candle signals indecision and that an entire move was essentially erased.
Hammer Vs Inverted Hammer: Which Is The Better Reversal Signal?
The response by one side of the market typically has bullish implications, regardless of if the pattern is regular or inverted. A bullish hammer suggests that bulls have taken more control, while an inverted hammer shows that bears were able to maintain relative equilibrium, therefore the regular bullish hammer can yield greater results.
Hammer Vs Dojis: What Is The Difference Between The Candle Types?
Both a hammer and a doji will feature a small and tight real body for the candle, with the open and close of the candle in close proximity to one another. The difference between a doji and a hammer is that a hammer shows that buyers had a stronger presence, whereas a doji shows that bears and bulls were about equal in strength. A doji is more of a neutral pattern, while the hammer is bullish.
How To Use The Hammer Candlestick Pattern In Crypto Trading
In the below example ETH daily chart, intraday price action has resulted in a bullish hammer at the bottom of the trend. After the next bullish confirmation candle, a new 15,000% uptrend was born. Traders would want to then place a stop loss below the hammer candle to prevent extensive losses should the signal fail and price continues to fall.
A bullish hammer pattern is more significant if there are other accompanying signals. For example, if price is at important support, if there is a clear price pattern, or if a technical indicator supports a reversal with a bullish divergence or confirmation.
Advantages of Using Hammer Candlestick Patterns
Because hammer candlestick patterns are typically a bullish reversal pattern, they tip off bullish traders that a potential trend change is underway, and can tell a trader when to take a position.
Bullish hammer candles often lead to a large upward move within the next three to five candlesticks following the signal. Further bullish price action is necessary for confirmation of a valid hammer pattern.
Disadvantages of Using Hammer Candlestick Patterns
The disadvantages come from a trader potentially preparing for a failed signal. Not all hammers result in the bullish reversal traders are expecting. This is why stop loss placement is critical for proper risk management and to prevent large drawdowns. A failed hammer pattern can often lead to a strong move down because so many new bullish positions were taken due to the candle’s emergence. Thus, a large number of stop loss orders could be in this zone also.
How To Trade The Hammer Candlestick Pattern on Margex: Trading Hammers
Margex offers built-in technical analysis tools that allow traders to find reversal patterns and get into position accordingly. Here is how to trade the hammer candlestick pattern using Margex.
Step 1 - Scan the price chart of your favorite asset using Margex and highlight any hammer candles.
Step 2 - Place a buy order after identifying the hammer candle, or wait for candle confirmation during the next session.
Step 3 - Place a stop loss order below the hammer to prevent significant losses in case the market turns against your position.
Step 4 - Plan to take profit at key levels. By mapping out potential profit target levels early, traders can remove emotion and stick to a plan.
The hammer candlestick pattern is clearly defined, but because it can appear at the top or bottom of trends, and both as a regular and inverted pattern, many questions remain. This FAQ is designed to clear up any remaining questions regarding hammer Japanese candle patterns.
What is the hammer candlestick meaning?
The hammer candle meaning describes the appearance of the candle and how it mimics the look of a hammer with a long handle attached. When the hammer candlestick appears, bulls and bears swing the tool with mighty force behind it, causing a powerful trend reversal.
Is a hammer candlestick bullish?
The hammer candlestick is almost always a bullish reversal pattern. In addition to bullish hammers, there are also inverted hammers (also bullish) and bearish hammer-like patterns.
Is a hammer candlestick bearish?
No, the hammer candlestick is bullish. However, the shooting star and hanging man both look and form the same as bullish hammers and inverted hammers, except they appear at the top of a trend rather than at the bottom of a move.
What does a hammer candle mean in trading?
A hammer candle in trading suggests that bears were stopped by bulls who essentially erased the entire move before the close of the session. This gives bulls confidence to follow through in the next sessions, confirming the pattern.
Is hammer candle always bullish?
A hammer candle by definition is always bullish. However, the hammer has several bearish counterparts that appear at the top of a trend. A confirmed hammer will always appear at the bottom of a trend ahead of a reversal.
Is the hammer candlestick good?
The hammer candlestick is a very good signal to trade on, resulting in a bullish reversal at least 60% of the time according to Thomas Bulkowksi of ThePatternSite. It meets the full price target as much as 88% of the time.
How do you trade hammer candlesticks?
To trade a hammer candlestick, once identified, a trader can either choose a risky position or a less risky position. Taking the trade immediately after the hammer candle has closed is a riskier bet. Otherwise, wait for confirmation of a strong move during the next candle and take a position upon breakout with volume. Place a stop-loss order below the hammer candle to prevent a bad trade.
Can a hammer candle be green?
A hammer candle can be green or red. It doesn’t matter, so long as other conditions are met. Both are bullish signals, but because bulls are more dominant in the green version, they can yield better performance overall.