Hammer candlestick patterns – how to trade?

Candlestick patterns are one of the most popular tools for detecting the asset’s price direction. These charts are combined with other analytical tools and strategies to determine the best investment possibilities. This article discusses hammer candlestick patterns – the most widely known type of candlestick chart. Read on to find out how a candlestick pattern works and how to use it for trading.

How do candlesticks work?

This is a financial chart that usually reminds a candle – its thicker part is called the body and the thin one is called a wick or a shadow. Candlesticks depict how the asset’s price was changing during different time slots. The first candlestick patterns were created back in the 17th century in Japan to track the price movements of rice. Nowadays, a candlestick pattern is a tool that works in numerous financial markets: cryptocurrency, stocks, forex trading, etc.

Read also: How to read crypto charts?

Let’s now have a look at the most important elements of the candlestick pattern:

• Open – the first price recorded within a given timeframe
• Close – the last price recorded within a given timeframe
• Low – the lowest price within a given timeframe
• High – the highest price within a given timeframe

The body of a candlestick pattern is the interval between close and open. The shadow, in its turn, is the interval between low and high positions. The difference and relationship between all these values define the look of the candlestick pattern.

What is a hammer candlestick pattern?

A hammer candlestick chart is a candlestick pattern with a wick at least two times longer than a body. The wick is located below the body, which indicates that the sellers decreased the value before the buyers recovered it above the open price.

Hammer candles can be bullish and bearish. We will now explain the difference between them.

Bearish hammers

The bearish hammer candlestick pattern is red and has a small body but a short wick. There are two types of them:

• Hanging man candle

This typical bearish hammer happens after a long bullish trend. It does not indicate the start of a bearish market but only a bearish reversal pattern. A hanging man hammer candle forms after a downtrend, with the close price being lower than the open price.

A reversal candlestick in a bearish market shows that the market is about to change from an uptrend to a downtrend. In most cases, a reversal pattern includes a few hammer candlestick charts. Now, we will only discuss the most common type here which consists only of one candlestick.

• Shooting star candlestick

This inverted hammer shows the opposite trend to a hanging man candlestick. The open position is above the close one which may be a signal that a market can stop going up soon.

Read also: 5 bear market trading strategies

Bullish candlestick patterns

For a profound understanding of a hammer candlestick chart and how it works, it’s crucial to examine the bullish hammer. These hammer candles appear when bearish trends dominate the market. A bullish hammer is green and indicates potential price reversal. This hammer candlestick pattern is characterized by a higher closing price if compared to the opening price.

• Inverted hammer candlestick

Just like a shooting star, a bullish reversal pattern consists only of one hammer candlestick. The closing price is still higher than the opening price which implies a buying possibility. A bullish inverted hammer forms after a continuing buying pressure.

Hammer candlestick patterns – pros and cons

Even though understanding a hammer candlestick pattern might seem like a challenge, especially for crypto newbies, each hammer candle demonstrates essential data that can be used to improve and adjust one’s trading strategies. We’ve prepared a short overview of both pros and cons of these analysis tools.

• Advantages:

  • Any hammer candlestick pattern is a reflection of a potential price reversal. Thus, with the help of a hammer candle, one can try to predict a potential reversal in any financial market.
  • A hammer pattern can cover different timeframes which allow traders to observe different time periods on the market. Consequently, the data received can be used both for long-term and short-term trade.
  • A hammer candlestick is fully compatible with other price action tools (trend, support/resistance levels, bear or bull ratios, and so on).
  • A bullish or bearish hammer candlestick helps to cover more reversals, which increases one’s investment possibilities.

• Disadvantages:

  • No hammer candlestick or an inverted hammer candle can guarantee that the trend reversal will happen soon. Without a doubt, they are important indicators but not defining ones. Apart from relying solely on a hammer pattern when making investment decisions, one should always consider the technical analysis and other analysis tools.

How to use hammer candlestick patterns in trading strategies?

So, how do you actually use the data received from hammers in trading? Here’s a brief overview of how to add a hammer candlestick to the most common crypto trading strategies:

• Support-resistance trading

  Coupled with price action, candlesticks serve as an additional trend confirmation when making a trade.

• Top-bottom

  Financial markets, including cryptocurrencies, depend on numerous factors, including world politics, economy, etc. No wonder a potential price reversal is often connected to some out-of-the-market changes. If you’re following a top-bottom strategy, a hammer candlestick helps to determine the limits for buy stop order and stop loss.

To conclude:

A hammer candlestick has built a reputation of a fundamental trading tool for a reason. Its representation of the price action throughout different time slots allows to better understand and predict the potential price reversal in any financial market. However, any trader should remember that hammers cannot be the foundation of one’s investment strategy. One should not forget about technical analysis and the context of the market as a whole. Trading assets always requires a complex approach and analytical thinking to eliminate risk and maximize profit.