Hammer Candlestick

A Hammer is a candlestick pattern from Japan. It’s either black or white and has a small body near the high. It doesn’t have much or any upper shadow but has a long lower shadow or tail.

A Hammer candlestick is considered a bullish pattern when formed during a downtrend.

A Hammer candlestick pattern should meet the following criteria:

• The candle must have either a very short upper shadow or no upper shadow at all.
• The candle’s lower shadow must be quite tall (at least two times as height of the body).
• The candle must form after a clear downtrend.
• The candle’s body should be located at the upper end of the trading range.
• The body’s color is unimportant (though a white candle hints at a more bullish bias).
• The candle should be confirmed the following day, with the price trading above the Hammer’s body.

Don’t confuse the Hammer with the Hanging Man.

A Hanging Man looks identical but only forms at the end of an uptrend, while the Hammer forms after a downtrend.

The Difference Between a Hammer Candlestick and a Doji

A doji candlestick is a small one with a tiny real body. It shows indecision as it has both upper and lower shadows. Dojis can suggest either a price change or the continuation of a trend. It depends on what happens next to confirm. This is unlike the hammer candlestick, which happens after prices drop. It might mean prices could go up if confirmed, and it only has a long lower shadow.

Limitations of Using Hammer Candlesticks

After getting confirmation, there’s no guarantee that prices will keep going up. Sometimes, a long-shadowed hammer and a strong confirmation candle can quickly push prices up within two periods. But this might not be the best time to buy because the stop loss, which is used to limit losses, could be far from where you entered the trade. This means traders face a lot of risk compared to the potential reward.

Hammers also don’t tell you where prices might go next, so it’s hard to know how much you could gain from a hammer trade. Deciding when to exit the trade should rely on different candlestick patterns or analysis methods.

Psychology of the Hammer

When we talk about an actionable hammer pattern, it usually happens when a stock’s price is going down. You’ll notice it on the chart when the highs and lows keep getting lower. The appearance of the hammer shape indicates that more people who believe the stock will go up are starting to buy it. This could mean that the downward trend might stop soon.

The hammer candlestick has a long lower shadow, which means there was an attempt to push the price down further. But the fact that it closed higher than its lowest point shows that those trying to sell didn’t succeed in keeping the price down. The price going up from its lowest point to a higher close suggests that the buyers had the upper hand, hinting at a possible change in direction towards an upward trend.

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