What is Hammer Candlestick Pattern and their Types? | Espresso

All About Hammer Candlestick Pattern

Candlestick patterns are a reliable way to predict how prices will move. Even though it was developed in Japan, candlestick charts are now widely used worldwide as a technical trading tool. Candlesticks with hammer shapes are part of the same indicators for gauging market sentiment and trends.

Published on 19 October 2022

What is Hammer Candlestick?

The hammer candlestick pattern is often used in technical analysis, and for a good reason. Price action traders can use hammer candles to anticipate reversals following sustained bullish or bearish trends. Depending on the situation and the timing, these candle patterns can signal a bullish reversal at the end of a downturn or a bearish reversal after an upswing.

Whether used in conjunction with other technical indicators, hammer candles can help traders determine when it's an excellent time to enter long or short bets. After a decline, a bullish hammer candle, like the hammer or inverted hammer, may appear. Two types of bearish hammer candles appear at the end of an uptrend: the hanging man and the shooting star.

Explaining Hammer Candlestick Patterns

The unique hammer candlestick pattern may indicate a reversal in the prevailing trend. If the hammer forms a downtrend, it could signal the return of a bullish market trend. The market has rejected the lower price point, as shown by the short green candle with an extended bottom shadow. Although the Bullish Hammer is more common, the Inverted Hammer is also a well-known trading pattern.

When the hammer candlestick pattern appears during a decline, it portends a subsequent upswing. Its small, thick body and long, downward wick give it the appearance of a hammer.

Unlike the previous red ones, this one is green. As the closing price is higher than the opening price, the seller got in early, as evidenced by the long shadow. As a result, the market eventually rejects the cheap price, and the bull force drives the price higher.

Types of Hammer Candlesticks

Here are some different kinds of hammer candlesticks:

●      Bullish Hammer Candlestick Pattern

It is a bullish hammer candlestick pattern when the closing price is significantly higher than the beginning price, indicating that buyers were in command of the market near the end of the trading period.

●       Inverted hammer candlestick pattern

An inverted hammer is generated if the opening price is lower than the closing price. Some purchasing pressure was evident, as evidenced by the long wick above the body, but the price was eventually driven back down before the candle closed. Although not as bullish as a regular hammer candle, an inverted hammer candle is a reversal pattern that suggests the price will rise.

Why Hammer Candlestick Patterns Are Important?

  • It can signify a change in bullish/bearish momentum intraday.
  • The existence of a significant peak or trough can be confirmed or disproved by this sign. In the past tense
  • Price rises higher or lower as it nears open, forming a top or bottom.
  • Growing importance is placed on both the length of the shadow (ideally two to three times the size of the body) and its duration.

Limitations of the Hammer Candlestick Pattern

●       No Trend Indicator

Therefore, the hammer chart pattern disregards developing trends. Consequently, it may not represent the actual trend if considered in isolation.

●       The need for a helping tool

A hammer candlestick pattern alone will not guarantee successful trading. They'd need more data to determine the trend's trajectory and choose an appropriate course of action.

Traders rarely employ hammers on their own. They use several types of trend analysis to determine the market's direction.

Interpreting Hammer Candlesticks

Traders widely accept that a hammer signifies a reversal of the current trend. It occurs when the asset's price drops, indicating that the market is searching for a bottom and a change in momentum.

In a downward trend, a day with a hammer candlestick formation suggests that the market was quite active, with the price falling just after the opening before recovering to end the day higher than it opened. The orientation of the hammer can also tell you a lot.

Traders take it as a significant indicator if it follows three or more consecutive bearish candles.

Also, the confirmation candle after a hammer candlestick formation should close higher than the hammer candle's closing. When these conditions are met, traders may see this as a sign that the trend is about to change and enter a long position.

During the formation of the confirmation candle, traders take positions to join the market. There is no need to isolate Hammer candlestick patterns or other candle formations.

Conclusion

The hammer candlestick pattern stands well on its own as a tool for analyzing future supply and demand. If an investor spots a hammer at the bottom of a downtrend, it may be time to close any open short holdings. To make a severe purchase in the market, however, investors should draw on a broader range of resources.

Chandresh Khona
Team Espresso

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