Introduction to Hammer Candlestick
In the stock market, intraday trading is a skill to buy or sell stock at the correct time by using technical analysis and candlestick patterns. However, candlestick patterns are an essential component of intraday trading that helps traders to make informed decisions based on historical price movements. Candlestick patterns are made by a combination of several types of individual candles and among countless candles, the hammer candle stands out for its reliability and simplicity indicating a potential market reversal situation.
In this financial blog, we will understand the hammer candlestick pattern in simple terms.
What is Hammer Candlestick?
A hammer candlestick pattern is a type of bullish candlestick pattern represented in a single candle that forms at the end of a downtrend of a stock. if a hammer candlestick is formed after a downtrend of stock it indicates that stock might be reversed from that level. Visually this candle looks like a hammer, with a small body and long lower shadow and no upper shadow. The key feature of this candle is its long lower shadow which is at least twice as long as its body
Anatomy of a Hammer Candlestick
1. Body
The body of the hammer candle is small. It indicates an open price and a close price are near to each other. The color of the body can be either green or red but a green body is generally considered for bullish reversal signal from that level.
2. Lower Shadow
The lower shadow or wick of a hammer candle is always long (at least twice the length of its body) This long shadow indicates that buyers were able to push it back up and take control of the movement of stock before the close of the session.
3. Upper shadow
Sometimes in hammer candle has a little shadow or no shadow at the top and that indicates that the market did not test higher prices before closing near the opening price.
What Is The Interpretation of Hammer Candlestick?
In the live market session, candles are created during a particular timeframe and a hammer candle is formed when the price of stock drops after opening but after the price rises from lower and closes above the opening price. When the price drops it indicates initially seller was creating pressure in the market however when the price rises and closes above the opening price that indicates buyers are entering the market and creating buying pressure. This suggests that a bullish reversal might be possible from this level.
Confirmation of the Hammer Candlestick
To increase the accuracy in intraday trading, traders often look for the confirmation of trend reversal of the market. Confirmation occurs when the next candlestick forms and closes above the hammer candle hinting the market is in a reversal trend. This additional confirmation helps traders to filter out false signals and enhance the pattern’s predictive power
Hammer Candlestick on Different Time Frames
From minute charts to weeklies, the hammer candlestick pattern is visible in various timeframes. Nonetheless, the dependability and implications of this pattern may differ depending on its period.
Intraday Charts: For instance, on smaller time periods hammers may mean short-term reversals and be good for day trading. However, there may be more noise in the market resulting to poor reliability of this pattern.
Daily Charts: On daily charts, the hammer pattern is more reliable and can indicate potential trend reversals that may last for several days to weeks.
Weekly Charts: The usefulness of hammer candles can also be seen from their application at much longer intervals such as weekly charts where they denote major trend reversals which could lead to changes in market direction over weeks or months.
Hammer Candlesticks in Trading Strategies
Several trading strategies can be used with hammer candlesticks to improve their efficiency. Below is a list of the most common ones:
Hammer Candlestick Patterns at Support Levels: When hammer patterns occur at important levels, it can act as strong reversal signals. When hammers appear in major support areas, they may show high chances for reversal giving traders good entry points.
Hammer Pattern and Trendlines: There can also be some effectiveness when using trendlines and hammer patterns together. If pullback happens near an upward-sloping trendline alongside the formation of a hammer, it suggests that the support in the form of a trendline still holds hence continuation of the up-trend is likely.
Hammers At Moving Averages: Forex traders often use moving averages to establish market direction. However, if a hammer forms close to major moving averages like 50- or 200-day moving averages then it implies the moving average served as a support hence increasing the possibility of reverse.
Volume Confirmation: In addition, volume becomes vital in the verification of this pattern especially when hammers are involved since they indicate stronger buying interest such that the pattern becomes more authentic.
FAQ on Hammer Candlestick
1. What does “hammer hanging” mean?
“Hammer Hanging” shows a hammer candlestick pattern in the stock chart during the session. It shows the potential reversal signals at a particular level. A Hammer candle indicates a bullish reversal signal at the bottom of a downtrend of a stock while a hanging man suggests signals of bearish reversal at the top of an uptrend of a stock.
