Every candlestick pattern tells you a story.
Some are more reliable than others, but the hammer candlestick pattern is a very popular and accurate formation.
With over 21+ candlestick patterns to learn from, you certainly need to be made aware of it, because without it you could miss out on huge opportunities.
In this guide, I’ll share what I know about the hammer candlestick pattern with over 11 years of experience behind the trading terminal.
What Is A Hammer Candlestick Pattern?
A hammer candlestick pattern is a type of candlestick pattern that forms when the price falls and then rises sharply.
This is one of the most common candlestick patterns and it is often seen in bearish trends.
The pattern also tends to form when a market is overbought and the price falls.
This is a great way to identify whether a trend is about to change and what the next trend might be.
In the case of a hammer pattern, the way it’s formed tells us that there was a strong move downwards through the sellers but then hit a level where a surge of buyers entered the markets.
This could be because of taking profits being hit from short-sellers, or any other possible reason why buy orders would flood the market at that time.
With this in mind, you can understand the new flow of market orders from the buy-side and it would suggest that the buyers are looking to take control.
Thus with a surge in demand for the asset, would lead to a potential price reversal and change the trend.
It is this information we gain from the hammer candlestick that allows us to take advantage of the reversal.
How accurate is it?
According to Thomas Bulkowski, it’s around 60% accurate at predicting reversals.
This could be true based on testing, but if it was tested upon every appearance of the candlestick pattern, then naturally it would be lower because there are other variables that enhance the validity of a signal generated by this pattern.
How many candles make the pattern?
This is a single candlestick pattern.
However, it is commonly part of a swing formation that also enhances its strength of trade.
What is the best time frame to trade them on?
It’s entirely your choice.
A rule of thumb is this:
The higher the time frame, the less frequent they appear but the more accurate they become.
Likewise, if you traded them on a lower time frame, they appear more frequently but there is a higher chance of invalid signals.
Let’s breakdown what it looks like:
How To Identify A Hammer Candlestick Pattern
These are so easy to identify, you’ll be able to see them all over your charts after reading this article.
Plus they generally only appear in two places, but trust me, you only want to focus on them at the bottom of a trend.
(forget what people tell you about watching out for them during a bull trend, these aren’t that great during bull trends!).
This pattern can be identified by three characteristics.
The first characteristic is a long lower wick or the distance between the opening and closing prices on the chart.
The second characteristic is a short upper wick or the distance between the opening and closing prices on the chart.
The third characteristic is a small body or the height of the candlestick from the bottom of its body to the top of its wick.
A hammer candlestick has all three of these characteristics.
Here is what they look like:
Note: It doesn’t matter if it’s a buy or sell candle, it’s the price action that matters.
Also, the size of the body doesn’t directly matter, as long as the lower wick is significantly lower.
A good general rule to follow is that the lower wick formed is at least 2 to 3 times the size of a hammer pattern’s body.
This means it is a very strong signal that the price of the security you are trading is going to make a big reversal.
As you can see in the image below after the hammer candlestick formed the price reversed upwards.
In other words, the security is going to move in one direction, and then suddenly change direction.
The reason these two things are important is that they tell you whether the price of the security is going to reverse direction or not.
If you see a short upper wick, then you know that the price has a higher chance of the market going upward.
If you see a long lower wick, then you know that the price has made a big downward move during the trading session.
If you do see both of these things, then it is a strong signal that the price is going to make a reversal.
But nothing is certain.
As we can see from this example:
One key thing to note:
Hammer patterns tend to form as part of a swing trading pattern too, which is also very encouraging.
Pin Bar vs Hammer Candlestick: What’s the difference?
Here’s the deal:
There is NO difference between them.
The “Pin Bar” is something used to explain a hammer candlestick and a shooting star candlestick in a lazy way.
I mean that with the greatest respect too, as lots of beginners talk about pin bars but have no idea what their true names are.
The pin bar is the exact same formation as the hammer candlestick pattern and appears at the bottom of trends.
They are also thrown in with buzz words like price action trading…
So don’t worry if you read about the pin bar, it’s the exact same thing.
Some traders prefer to call them pin bars because of how they learned how to trade, which makes sense.
But don’t let it distract you from it being the same thing.
Also, note that a hammer pattern with a very narrow body can look like a Dragonfly Doji. Either way, they are both bullish reversal patterns.
How To Trade A Hammer Candlestick
In this section I’m going to share with you how I trade hammer candlestick patterns at a very basic level – there are more ways to add confirmation to the trades through technical indicators, but that’s for another time.
It’s a very easy price pattern to trade and remember, it’s a bullish reversal pattern, so we only want to take a trade agreeing to go upwards.
Do remember, you can figure out your own ways to enhance these trades.
Firstly I’m going to go through the very basic concepts of where you’ll find these price patterns.
1. Identify the bearish trend
These hammer candlestick formations tend to form after a price decline.
I’m not going to go over how to identify trends or other price action.
But once identified, it’s time to look for a hammer candlestick formation.
2. Identify the hammer candlestick formation
Now you can see a trend coming to a potential end, it’s time to identify a hammer candlestick.
To do this, you must wait for the candlestick to CLOSE before it’s a confirmation.
To highlight a hammer candlestick we look for a small body and a long lower shadows wick.
The bias of the candlestick doesn’t matter, it can be either red or green, what is important is that there is a small body and a lower shadow as you can see below:
3. Set the stop loss
Once the hammer candlestick has formed and the signal is validated you want to set your stop loss 1 or 2 pips below the lower wick of the candlestick as you can see below:
4. Execute the trade
You want to place your entry 1 or 2 pips higher above the hammer candlestick pattern’s high.
This gives a confirmation that the markets are looking to go higher.
Then we wait for the market to hit our buy order.
Note: if the price is already opened higher than the previous high, then this is a valid entry too.
Or you could wait for there to be a slight pullback to the close price of the hammer candlestick formation.
5. Set the take profit
This will be pre-defined before you enter the trade but you want to target the next forex market structure or the next resistance level.
That is it.
The outcome of this trade is below:
Over to you
Most people trade differently and I always encourage traders to adapt to their own trade style.
The above process is a simple foundation on how to trade the hammer candlestick formation, go give it a try on a demo account and hunt down those hammer candlestick formations.
Bonus: Find these pattern around strong price action areas
Although looking for a trend is a big part of the analysis process, there are other areas of confluence that can also give an added advantage for this bottom strategy.
Support and resistance levels play a big role in most financial markets, so they are important to learn about.
You can look out for support levels.
If the trend has moved down and stalled at a support level, then you can be confident that the market will reverse.
As long as the lower wick pierces the support level, and the body of the wick closes above the support level – you got a good signal there.
The stronger the support level, the better too.
Here is an example of a support level giving a boost to a hammer pattern.
Hammer pattern’s aren’t just to enter markets
Like with all price action trading, these past price action indicators are not guaranteed and doesn’t mean you should jump on everything that appears.
But here’s an extra tip.
If you are short-selling an asset and in a long downtrend has formed, but things look like they are stalling, then when a hammer pattern is formed, you should take note.
Then use this intel to either move your stop loss to lock in profit and reduce your exposure, leaving you still in the trade to continue profiting from the downtrend if it fails.
Use it as a warning to get out due to an imminent price reversal.
This is all up to you though, but it’s a good point to raise that these candlestick charting indicators can help you get out of trades too.
Hammer Candlestick In An Uptrend
When a hammer candlestick formation appears in an uptrend, to be brutally honest, I ignore them.
Yes, they tell us that sellers have tried to enter the market aggressively – but it wasn’t enough to close the price lower.
They are a continuation pattern and could be a good time to re-enter a trend or scale your position in.
To me, I just ignore them or at least have the view that it re-affirms the trend.
Conclusion: Hammer Candlestick Pattern
A simple, easy-to-learn yet incredibly powerful trading technique that can help you make profitable trades by making it possible for you to enter trades at exactly the right time… even when the financial markets have gone haywire!
So, what do you think of the hammer candlestick pattern now? Has this guide helped you? I hope so, I enjoyed writing it.
Let me know how you get on by reaching me on our socials.