The financial market is a dynamic and unpredictable environment that depends on hundreds of factors. However, over the years, analysts and traders have learned to predict future price changes and make money on this.
One of the leading methods for making effective trading decisions has become technical analysis. It includes a huge number of indicators, oscillators, patterns, and other financial tools. Japanese candlestick patterns are among the most popular instruments because they provide straightforward signals without complex calculations.
One of the patterns worth paying attention to is the hammer. In fact, this is not even a pattern but one candle of a specific shape. It is easy to see on the chart and has a fairly unambiguous interpretation. In this article, we will discuss when the Forex hammer appears on the graph and how to use it to get maximum profit.
What Is a Hammer Candlestick?
Traders distinguish between one-, two-, three- and more-candlestick patterns. A hammer is a single Japanese candle that signals a possible reversal of the price curve. It consists of a long lower shadow and a small body. The upper shadow is very small or absent. Most often, the pattern appears at the end of a bull trend, after a significant price drop.
Why does it have this shape? When a trend loses strength, indecision arises in the market and excessive buying pressure appears. This causes a small candlestick body. A long wick indicates a significant drop in the asset price at the beginning of the calculation period.
Often, after a hammer candle, buyers become more active and continue to open long positions. This may be the beginning of a new trend, and the curve will turn up. Surely, the candle can give a false signal, so additional tools should be used for confirmation. For example, after the first hammer, a second one may appear, and the weakness of the bearish trend will become even more obvious.
How to Identify Hammer Candlestick Pattern
Above, we mentioned the shape of the hammer candlestick pattern. Usually, for the signal to be reliable, the lower shadow should be at least 3-4 times larger than the body. Actually, the shape is the main feature of the pattern.
In addition, the location of the candle is important. If you expect a trend reversal, the hammer will give a clear signal only if it is at the end of the downtrend. Its appearance indicates the exhaustion of sellers and the growing role of buyers.
What Is Inverted Hammer Candlestick?
Besides the straight pattern, you can also find the Forex inverted hammer on the chart. The meaning of this candle is similar to the meaning of the regular pattern. The attempt to move up (long upper wick) failed, and the price quickly returned down. The color of the candle is also important. A green inverted hammer at the end of a downtrend is considered a stronger bullish signal than a red hammer candlestick pattern. Overall, the hammer is usually considered a clearer reversal indicator than the inverted pattern.
Key Characteristics of Hammer Patterns
Let's look at the main characteristics of the hammer candle. This will help you find the pattern and understand their meanings:
- The body of the hammer reversal pattern is much smaller than the bodies of most other candles on the chart. However, it is not absent.
- The lower wick should be at least twice as long as the body, but it is better if the ratio is even greater.
- The shape of the hammer candle stick shows the confrontation between bulls and bears.
- A small or absent upper wick shows that buyers controlled the price in the calculation period.
- Red or white candle color (the color depends on your trading platform settings) is more desirable for bulls and gives a more confident signal.
- A long lower shadow demonstrates that sellers can no longer push the asset down.
- The longer the shadow, the more accurate the pattern is considered.
Beginner traders should pay attention and not rush to buy an asset until they analyze other indicators. The hammer is a strong signal, but it appears on the chart quite often and can sometimes give false signals.
Difference Between Hammer and Doji
Beginners may confuse the Forex hammer candle with the doji, but there is a difference between these two patterns both in appearance and in their meaning. So, the doji is also a single-candlestick pattern with a small or absent body. Also, in the doji, there is no significant difference between the lengths of the lower and upper shadows. Zero difference between the opening and closing prices shows the uncertainty of the market. However, unlike the hammer, the doji is not necessarily a bullish signal. It can form on any trend and be a potential precursor of a reversal. If we compare these candles by strength, the hammer is a stronger signal.
Hammer vs. Shooting Star
The shooting star pattern is similar to the inverted hammer, but it appears at the end of an uptrend, not a downtrend. The candle also has a high upper wick and a relatively small body. However, unlike the hammer indicator, the shooting star foreshadows a bearish trend.
For a shooting star to form on the chart, there must be an uptrend before it. The previous candle is usually green (white) and indicates buyers' activity. Then, bulls try to raise the price higher, as evidenced by the long shadow, but they cannot withstand the pressure of sellers. As a result, the closing price is almost the same as the opening price. The color of the candle does not really matter.
How to Trade with the Hammer Candlestick Pattern
The entire trading strategy for the pattern cannot be declared as the advice “open a long position immediately after the candle appears.” There are several stages that every trader should understand:
- Make sure that the chart has a “correct” hammer. The pattern should be on a downtrend, and its lower shadow should be at least twice as long as the body. The absence of an upper wick will also be a favorable sign.
- Wait for confirmation. You should not open a position immediately after the candlestick. It is better to see 1-2 more candles that will confirm the bullish trend. Also, you can use various indicators, such as the Relative Strength Index or Parabolic SAR.
- Open a long position. Do this after the first or second candle after the hammer closes.
- Follow the trend and take profits. Be sure to set an automatic stop-loss order. Close the trade following your risk management strategy.
After this, it is important to analyze again what signals were on the chart and could have made you more profit. Constant iterations in creating a strategy are the basis of profitable trading.
Practical Application of Hammer Candlesticks
For a deeper understanding of hammer trading, you can focus on other factors. Below are some tips that will help in the practical application of the pattern:
- Set a 50-day moving average on the chart and see if subsequent candles break through its level. If so, then there is a high probability of a strong long-term trend.
- Use default oscillators in MT4/5 to confirm the trend. Popular tools such as RSI and MACD are great options.
- If the price drops below the hammer's minimum, the bullish signal may be false.
- Look at the duration of the downtrend. The longer it is, the more accurate the pattern signal.
In addition, you can use automatic programs, such as the best Forex robots. They can provide additional confirmation of a new trend and execute trades on their own. Expert advisors cannot compete with professional traders, but they are good assistants for beginners.
Hammer Candlesticks Trading Strategies
Each strategy is individual and has many details. However, it is obvious that trading with the hammer candle pattern is focused on finding reversals and opening long positions as close to the beginning of the trend as possible. For the strategy to be successful, it is important to determine the following parameters.
- Your level of risk tolerance. It determines how early you are ready to enter the market.
- Timeframes. The hammer stock pattern or FX pattern allows you to trade both on intraday periods and over several days.
- Additional indicators. You can choose several popular reversal indicators.
- The goal. Your objectives determine how actively you will trade.
The hammer candlesticks are relatively simple patterns and allow you to start trading fairly quickly and gain experience to improve your strategy.
Difference Between Hammer and Doji
Doji, like the daily hammer candle, indicates the uncertainty of market participants and a possible trend reversal. However, it also has some differences:
- Doji usually has a "zero body." That is, the closing price is equal to the opening price.
- Doji has two wicks, and the hammer has only one.
- The Doji pattern can be on both a bearish and bullish trend.
Doji is one of the most memorable patterns, and it is easy to find it on the chart.
Constraints and Difficulties of Hammer Candlestick Patterns in Trading
Above, we mentioned that when a hammer forex appears, you should not immediately enter the market. The pattern gives a fairly strong signal but also has several limitations:
- Sometimes, the pattern does not indicate buyer pressure but a correction of sellers at the end of the day. So, at the beginning of the next day, sellers can continue to push the price down. The hammer is not always at the end of a trend, and quite often, the bearish trend continues. It is better to use additional indicators to confirm the reversal.
- Overall, the pattern is a good ally of Forex traders, but like any other tool, it should not be perceived as a 100% call to action.
The Bottom Line
The hammer candlestick pattern has a memorable shape and often signals a trend reversal. Of course, traders love it and often integrate it into their strategies. It appears when sellers are unable to lower the price and resist the pressure of buyers. The candle is easy to see on the chart and is always unambiguous. At the same time, it is important to understand that this tool requires verification and confirmation.
