HAMMER CANDLESTICK CHARTS PATTERN
The real body of the Hammer can be white or black (Red). this is because even if the real body of the Hammer is black, we can see in figure 1 that it still close near the session highs. we can say it is slightly more bullish if the real body of the Hammer is white (because it closed at the high). The Japanese nickname for white hammer is a “power line.” in my experience, the success of the hammer is not dependent on the color of its real body.
The Hammer’s long lower shadow and close at, or near, the high of the session graphically relays that the market sold off sharply during the session and then bounced back to close at or near, the session’s high. this could have bullish ramifications. this aspect of closing at or near the highs is why the Hammer should have no, or a minuscule, upper shadow. if there was a long upper shadow, this would mean the market closed well of its highs, which is an important criterion for the hammer.
Since the Hammer is a bottom reversal signal, we need a falling trend to reverse.
What Is a Hammer Candlestick?
A hammer Candlestick is a technical trading pattern that resembles a “T” whereby the price trend of a security will fall below its opening price, illustrating a long lower shadow, and then consequently reverse and close near its opening. Hammer candlestick patterns occur after a security has fallen in price, typically over three trading days. They are often considered signals for a reversal pattern.
The Difference Between a Hammer Candlestick and a Doji
A doji is another type of candlestick with a small real body. A doji signifies indecision because it is has both an upper and lower shadow. Dojis may signal a price reversal or trend continuation, depending on the confirmation that follows This differs from the hammer which occurs after a price decline, signals a potential upside reversal (if followed by confirmation), and only has a long lower shadow.
What Is the Difference Between a Hammer Candlestick and a Shooting Star?
While a hammer candlestick pattern signals a bullish reversal, a shooting star pattern indicates a bearish price trend. Shooting star patterns occur after a stock uptrend, illustrating an upper shadow. Essentially the opposite of a hammer candlestick, the shooting star rises after opening but closes roughly at the same level of the trading period. A shooting star pattern signals the top of a price trend.
Limitations of Using Hammer Candlesticks
There is no assurance the price will continue to move to the upside following the confirmation candle. A long-shadowed hammer and a strong confirmation candle may push the price quite high within two periods. This may not be an ideal spot to buy as the stop loss may be a great distance away from the entry point, exposing the trader to risk which doesn’t justify the potential reward.
Hammers also don’t provide a price target, so figuring what the reward potential for a hammer trade is can be difficult. Exits need to be based on other types of candlesticks patterns or analysis.
Is a Hammer Candlestick Pattern Bullish?
The hammer candlestick is a bullish trading pattern that may indicate that a stock has reached its bottom, and is positioned for trend reversal. Specifically, it indicates that sellers entered the market, pushing the price down, but were later outnumbered by buyers who drove the asset price up. Importantly, the upside price reversal must be confirmed, which means that the next candle must close above the hammer’s previous closing price.