Traders must then check the candle that comes right after the hammer candlestick patterns. If there is a price increase after a normal hammer or an inverted hammer, traders can enter at a lower price and take profit at a higher price. If there is a price decrease after the Hanging Man or Shooting Star, traders can exit at the higher price and hammer candlestick meaning re-enter at a lower price. When traders spot a normal hammer or an inverted hammer, they should check if it is preceded by at least three red candles. In the case of the Hanging Man or Shooting Star, traders should check if it is preceded by at least three green candles. The hammer candlestick patterns are most effective in these scenarios.
What does a red hammer candlestick mean?
A red hammer signals a potential bullish trend reversal like a green hammer. It shows that buyers could overpower sellers but could not drive up the asset’s price beyond the opening price within the trading period.
The bigger the range, the more significant the pattern becomes. For example, if the hammer is formed under high volume, it shows us that there was fierce market action, where sellers and buyers fought to come out as winners. Having the buyers win such a fight, could be seen as a positive sign. When it comes to using volume with the hammer pattern, there are quite a few scenarios that can help us gauge the accuracy of the signal. Below we will share a couple of things that we often look at when trying to filter out bad trades and improve the accuracy of a pattern or strategy. When it comes to trading the hammer as it is, that’s seldom a good idea. Depending on the market and timeframe, you will have to add additional filters or conditions to enhance the signal.
Hammer Candlestick Explained
Let’s take the following example of the EUR/USD to see how to use the hammer candle in the technical analysis. I am only a new trader but l have learnt a lot from your strategies https://www.bigshotrading.info/ 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.
Understanding Hammer Candlesticks: Here is how to interpret the meaning of a Hammer Candlestick…
— Forex Chick (@forexchickblog) January 5, 2011
Both are reversal patterns, and they occur at the bottom of a downtrend. Determine significant support and resistance levels with the help of pivot points. Hammer candles can occur on any timeframe and are utilized by both short and long term traders. As you’ve heard now several times, a hammer forms in a downtrend, and as such we might want to ensure that the market has gone down enough before we take the signal. The more a market goes down the higher the chance that it will revert to it’s mean. For example, this could be defined by requiring that the market has gone down x-percent or more from the last peak.
Alternatively, you can use a detailed combination of candlesticks, channels, and volatility. It is difficult for a trader to make a decisive decision without critically evaluating relevant information about the market.
It can be bullish if it aligns with a support level or appears after a series of bearish candles. After a series of bullish candles, the price retraces down. However, enough buyers step in to bring the price back to near the open, creating a hammer candlestick. The selling before the price rebounded suggests the bullish momentum is now weak.
Identifying a Hammer Candlestick
In addition to that, candlesticks also form patterns, and one pattern, which is the topic for this article, is the hammer candlestick. Only a hammer candle is not a strong enough sign of a bullish reversal.
This becomes a sort of adaptive approach to measuring volatility, where we don’t care about the absolute levels, but whether the volatility right now is higher than that 10 bars ago. Another way of measuring the conviction with which the market formed a hammer, is with range.
What is and How to Trade on a Hammer Candlestick?
Having this first-principles approach to charts influences how I trade to this day. Hammers that appear at support levels or after several bearish candles are bullish. Inverted hammers at resistance levels or after several bullish candles are bearish. Longer hammer candles with longer wicks are stronger than short hammers with short wicks.
From the figure below, the Shooting Star is located after an uptrend where the price rose from around $237 to about $247. The appearance of a Shooting Star is a potential bearish reversal signal that means that the asset is forming a top, which may be followed by a price decrease.