Hammer Candlestick Pattern — Explained

In this blog post, we are going to explore the Hammer Candlestick Pattern, a bullish reversal candlestick.

Learn what it is, how to identify it, and how to use it for intraday trading.

What is the Hammer Candlestick Pattern?

The Hammer Candle is another Japanese candlestick pattern among these 35 powerful candlestick patterns.

It’s a bullish reversal candlestick pattern, which indicates the end of a downtrend and the start of a new uptrend.

We can most likely spot this candlestick on support levels where prices decline and show rejection from lower levels.

It’s a bullish pattern because when this pattern appears at the bottom of a downtrend, the price starts to move in an uptrend.

And that’s also why it’s a bullish reversal pattern, which indicates a reversal of the downtrend.

We refer to this particular candle as a ‘hammer candle’ due to its place of formation. Although two candles may appear identical, one is a ‘hammer candle’ while the other is a ‘hanging man’ candle.

The ‘Hammer Candle’ typically forms at the support levels, which are at the bottom, while the ‘Hanging Man’ candle is usually seen at the resistance levels, located at the top.

Identify The Hammer Candlestick Pattern

Identifying the hammer candlestick is easy. It is a single bullish reversal candlestick pattern.

To identify the hammer Candlestick Pattern, consider the following points:

Small Body:- The hammer has a very small body at the top.
Long Lower Wick:- The lower wick of a hammer is at least twice as long compared to its body.
No or Small Upper Wick:- The hammer candle has a very small or sometimes no upper wick.
Color:- The color of the hammer candle’s body doesn’t matter, but the green color shows more power.

The hammer candlestick pattern looks like this:

Types of Hammer Candlestick Patterns

It’s not necessary that you can find a hammer candlestick as shown in the books or as you have seen online. The candlestick pattern changes every time and has differences.

The main two major differences are color; sometimes it can be red and sometimes it can be green, depending on its open and closed price.

Also, sometimes it may have a small upper wick, or sometimes it may not have an upper wick.

Here are some different types of Hammer candlesticks that I have seen:

How To Trade The Hammer Candlestick Pattern

Identifying the hammer candlestick pattern is just the first step. To trade with this candlestick successfully, you must understand how to trade this pattern correctly.

This candlestick might be confusing sometimes for newbies because it looks the same as the hanging man candlestick pattern, which is a bearish reversal candlestick.

Let me explain.

Certain things make this pattern valid, and one such thing is its location. The location of the candlestick pattern where it appears or forms is very important.

This means that if you find the same-shaped candle in the middle of a trend or at the top of an uptrend, it is obvious that your stop loss will be hit and you will lose the trade.

When trading the Hammer candlestick pattern, we should always trade it at the bottom of an ongoing downtrend.

A hammer candlestick pattern forming at the bottom of the downtrend means trend reversal to the uptrend.

It looks like this:

At the right location, every candlestick works perfectly. It’s all about the right location and trend, but now you must be thinking. “When do we enter into the trade?” after spotting the hammer candle.

Taking trades with a hammer candlestick pattern is simple and easy. We trade with the hammer when the next candle starts to trade above the high of the hammer candle.

But sometimes, if I trade in options, I prefer entering trades within the last 20 seconds before a candlestick closes.

We take a buying position when we spot a hammer candle.

It looks like this:

Taking trades with a hammer candlestick pattern

After taking entry successfully with a hammer candle, it’s time to add a stop loss to our open long position so we can protect our precious capital.

There are many ways to add a stop loss in hammer candle trading, but the most common is to use a stop loss a few points below the hammer candle’s low.

Now that we have learned how to identify, how to trade, and how to add stop losses, you must be ready to take trades with the hammer candlestick pattern, but wait, don’t try to take trades with hammer candles yet.

There are a few more things we should know.

You may have heard the advice not to rely solely on a pattern for trading. It’s important to complement patterns with other tools like support and resistance levels, trendlines, indicators, etc.

Here are a few strategies that you can consider to trade with the hammer candlestick pattern.

Strategies To Trade The Hammer Candlestick Pattern

Strategy 1: Trading the Hammer Pattern with Support

In price action trading, support and resistance levels are great places to find reversals.

As we know, it’s a bullish reversal pattern, so we need a move from down to up, and that’s why we are going to trade the hammer candle using the support level.

How does it work:

First of all, look for a downward trend.
Then draw support levels on your charts.
After drawing levels, wait for the price to reach those levels.
Next, observe what the price is doing on that support level; we want a hammer candle on that level.
After the price forms a hammer candlestick pattern on the support level, take a buying position, when the price breaks the high of the hammer.
Add your stop loss below the candlestick’s low level, and wait for either target or stop loss.

Strategy 2: Trading the Hammer Pattern With Pivot Points

In this strategy, we use pivot points with a hammer candlestick.

Pivot points are just automatic support and resistance indicators that calculate levels using math formulas.

For intraday traders, using standard pivot points on a daily time frame can be effective. These levels, calculated based on the previous day’s high, low, and close, can serve as potential support and resistance zones, aiding in entry and exit decisions.

Here’s how to trade the hammer candle with pivot points:

Turn on the Pivot Points indicator on your charts.
Look for pivot points below the current price, as they often act as support.
It’s best if the price is rising, but it’s not essential.
Wait for the price to drop to a pivot point.
Look for a hammer pattern at that point, indicating rejection of that level.
Start buying when the price breaks the high of the hammer.
Set your stop-loss and profit targets, and anticipate an upward movement.

Strategy 3: Trading the Hammer Candle with Fibonacci

Another common method to trade with the Hammer candlestick involves the Fibonacci retracement tool.

The Fibonacci tool identifies levels where prices often reverse.

Different levels might work better with the Hammer pattern, depending on the trend’s strength. You can find more information about various Fibonacci levels.

Here’s the strategy:

Look for the price to rise.
Wait for a price drop, which is inevitable.
Use the Fibonacci tool to mark levels from the lowest to the highest point of the move.
When the price reaches a Fibonacci level and forms a hammer, that’s your cue.
Start buying when the price breaks the high of the hammer.
Set your stop-loss and profit targets, anticipating an upward trend.

Strategy 4: Trading the Hammer with Moving Averages

Moving averages are effective indicators for trading trends.

The strategy here is to trade pullbacks towards the moving average during an uptrend.

This means that when the price is moving in an uptrend and starts to take a pullback, the moving average works as support.

Here’s how to do it:

Identify an uptrend where the price is above a moving average.
Wait for the price to fall back toward the moving average.
Look for a hammer candlestick forming at the moving average.
Start buying when the price breaks the high of the hammer.
Set your stop-loss and take profit targets, anticipating a further upward move.

Strategy 5: Trading the Hammer with RSI Divergences

Trading the hammer candlestick with RSI divergences differs from other strategies.

To spot a bullish RSI divergence, look for the price to be in a downtrend, showing lower lows and lower highs.

Here’s the process:

Identify a downtrend first.
Note the lowest points the price reaches after each downward move.
Simultaneously, compare these price lows with the RSI indicator.
When the RSI shows higher lows while the price is making lower lows, you’ve identified your divergence.
Wait for a hammer to form at a new price low, coinciding with a higher low on the RSI.
Start buying when the price breaks the high of the hammer.
Set your stop-loss, take profit levels, and anticipate an upward movement.

Conclusion

In this post, you have learned what it is hammer, How to identify it, and How to trade it. Here is a pointwise summary of it:

The hammer is a single bullish reversal candlestick pattern.
We can most likely spot this candlestick at support levels.
It’s a bullish reversal pattern, which indicates a reversal of the downtrend.
To increase your winning chances, consider using the hammer in combination with support, pullbacks, moving averages, and various other trading indicators.