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Hammer Candlestick: What It Is and How Investors Use It

When the market is falling and stocks are crashing everyday – like it happened in March 2020 – a good strategy is to wait till markets stabilize. A strict stop loss is set at the bottom price of the ‘inverted hammer’ – as clearly illustrated in the above image. Price Data sourced from NSE feed, price updates are near real-time, unless indicated. Technical/Fundamental Analysis Charts & Tools provided for research purpose. Please be aware of the risk’s involved in trading & seek independent advice, if necessary. Prices moved higher until resistance and supply were found at the high of the day.

hammer reversal

Do note, a stop loss is very important and absolute must for every trade you take. If the price goes below the ‘inverted hammer’ candle – it means the reason we took the trade has failed. On the chart, since the candle looks like a hammer turned upside down – it’s called a ‘inverted hammer’. The below chart of Emmbi Industries Ltd shows a Hammer reversal pattern after downtrend.

An Inverted Hammer candlestick looks like what the name suggests !! Below picture shows various versions of an Inverted Hammer candlestick. Focuses on trading flows, central bank activity, FX options and cross-asset flows. He is the most followed trader in Singapore with more than 100,000 traders reading his blog every month… It’s only AFTER the conditions of your trading setup are met, then you look for an entry trigger. If you trade in the direction of the trend, you increase the odds of your trade working out.

The Hammer Signal

If you want to understand this through video, visit our YouTube channel. Another similar candlestick pattern to the Hammer is the Dragonfly Doji. Certain other factors also contribute to better speculation in the trading space.

hammer reversal

The close can be above or below the opening price, although the close should be near the open for the real body of the candlestick to remain small. Cory is an expert on stock, forex and futures price action trading strategies. If the next candle is green and the price goes higher – the trader waits till the price goes above the high of the ‘inverted hammer’. If the next candle is red and the price falls below the ‘inverted hammer’, the pattern has failed. To explain this more clearly, we have taken only the three candles from the above chart and marked the inverted hammer trading strategy.

The Inverted Hammer candlestick formation typically occurs at the bottom of a downtrend. The Hammer candlestick formation is viewed as a bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends. A spinning top is a candlestick pattern with a short real body that’s vertically centered between long upper and lower shadows. With neither buyers or sellers able to gain the upper hand, a spinning top shows indecision. Confirmation of a hammer signal occurs when subsequent price action corroborates the expectation of a trend reversal.

The misrepresentation is logical because both candles look identical. The difference between these two candles lies in their placement in a trending market. The hanging man has a small body and long wick but is found hanging at the end of an uptrend. Bullish hammers have small bodies and long wicks also but are only seen at the end of a downtrend. And Performing a candlestick pattern in the market name is a hammer.

The ‘Inverted Hammer’ gets formed when the price opens at a certain level and then goes much higher.. Sellers pushed prices back to where they were at the open, but increasing prices shows that bulls are testing the power of the bears. Typically we want the lower wick to represent at least two thirds the length of the entire candle formation. A consolidation bar tells me that buyers are not easily overpowering sellers, and that the hammer may just be a temporary pause before a new round of sellers come in. There has to be an “aggressive” downtrend preceding the hammer; in fact the more violent and bloody the better. I have found one of the more reliable intra-day setups is to buy off of a reversal hammer, however there are a few rules I follow in order to raise the percentages is my favor.

Hammer Candlestick Formation in Technical Analysis: A Definition With Chart Example

A well-defined downtrend should be in place prior to the formation of the hammer candle. When observed in a downtrend it indicates the end of selling demand and begins to trade sideways or reverse towards the upside. Both have the same candle construction of a small body and a long top wick or shadow.

  • If this pattern is found at the end of a downtrend, it is generally known as a “hammer“.
  • Although it may initially look like the trend is continuing, one cannot deny that it appears near a support area and signifies bullishness of the stock.
  • Long term investors can wait for ‘trend reversal’ candlestick patterns to buy quality stocks close to the bottom.
  • The hammer formation is one of the most reliable reversal patterns within the entire library of candlestick patterns.

She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans. Even the best of traders only get 6-7 out of 10 trades right. Observe the chart below and notice how the price of a company called ‘United Spirits’ had been falling continuously for several days. The colour of the candle does not matter – it could be either red or green.

The pattern indicates a potential price reversal to the upside. Hammer is a bullish reversal pattern, which occurs at the bottom of a trend. The only difference is doji has same opening and closing while Hammer has a small real body at the upper end. However, it is considered as more potent, if its colour is white. The inverted hammer candlestick pattern is suggestive of a potential bullish reversal in the market, indicating the onset of an uptrend.

Example of How to Use a Hammer Candlestick

Actionable insight on monetary policy, balance sheet and inflation with focus on global issuance. I am only a new trader but l have learnt a lot from your strategies especially the candle stick patterns have been so beneficial in my trading since l started subscribing your videos. You don’t want to trade any candlestick pattern in isolation. Whenever you spot a Hammer candlestick pattern, you should go long because the market is about to reverse higher. Hammer gives a signal the bears have lost control over the movement of the market. Most traders will wait until the day after a Hammer pattern forms to see if a rally continues or if there are other indications like a break of a downward trendline.

As such, it’s best to focus on the hammer pattern because it will provide us a better probability of success compared to the inverted variation. If you’re familiar with different candlestick patterns, you will recognize the above formation as being similar in appearance to the shooting star formation. The primary difference between the inverted hammer and the shooting star is the location in which it appears. A shooting star formation typically occurs near the top of a trading range, or at the top of an uptrend. Hammer and inverted hammer both are traditionally used as bullish reversal patterns at the end of a downtrend.

When the high and the close are the same, a bullish Hammer candlestick is formed. The length of the upper shadow is directly proportional to the chance of a reversal. Another significant hint is a gap down with respect to the close of the previous day, which prepares the ground for a strong reversal. Once the uptrend is out of the picture and the sellers are running the show, then the pattern is in for a trend reversal.

Inverted Hammer Infographic

And as for target, it will be set at a level that is equivalent to the length of the hammer candle itself. That measurement is shown using the orange vertical brackets. The price action following the entry signal traded in a sideways manner for about two weeks before breaking to the upside and reaching our measured target level. As such, we can confirm that this candle is a valid hammer formation. We’ve also seen that the hammer candlestick occurs in a downtrend which fulfills another condition for entering into this trade setup. Now that we understand the essential structure of the hammer chart pattern, what can we gauge from this particular formation?

This emphasizes institutional activity for this period due to the large volume – retail traders will not be able to affect such large volumes. For delivering mission-critical information has been built over three decades. The quality and experience of MNI’s team of analysts and reporters across America, Asia and Europe truly sets us apart.

If you are an aggressive trader, you could take a position based upon 50-75% of the hammer’s length instead of the total length, and also take a partial at the 9 EMA. The overall market direction should properties of arithmetic mean be up, flat, or slightly down. Trying to catch a reversal hammer when the broad market is down big on the day is a losing game. I am looking for a retest of 20,555 area of this hammer candle.

The main use of inverted hammer is actually bearish continuation and we will see it in detail later. A green Inverted Hammer candle, however, is slightly more bullish compared to a red Inverted Hammer candle. In case , the bears do not manage to close the price below the open then the candle will be green.