Hammer Candlestick Pattern: Complete Trading Guide

Hammer is a popular single candlestick pattern. It is a bullish candlestick pattern and it generally indicates a bullish reversal. Hammer candlestick is used by many traders as a part of an overall trading strategy. You will be surprised to know that this pattern actually works better in an uptrend! We will see about it in more detail later.

Here are some key takeaways for Hammer candlestick pattern

  1. It is a bullish candlestick pattern (bullish reversal to be precise)
  2. It occurs frequently
  3. It can occur in both uptrend and downtrend
  4. It is not used for trading on its own
  5. It has low to medium success rate of predicting the reversal

What is Hammer Candlestick Pattern

The Hammer candlestick is one which has small real body and a long bottom shadow or wick. Hammer candle generally has a small but nonzero real body . It has a lower shadow or wick which is two to three times the size of the real body and it has no or very small upper shadow.

Hammer Candlestick Pattern

The colour of the candle is not significant and can be green or red. It generally occurs at the end of a downtrend suggesting a possible reversal. It can also occur at the end of a retracement in an overall uptrend.

As per Encyclopaedia of Candlestick book,  Hammer candlestick pattern has a ranking of 26 in bull market as a bullish reversal and it is really good. The pattern is plentiful, but the overall performance rank is 65. That is disappointing since 1 is best out of 103 candles. It means the pattern is on the far side of “good” when compared to other candles for performance over 10 days.

What Does the Hammer Candlestick Look Like?

A hammer candlestick looks like what the name suggests !! , a Hammer. Below picture shows various versions of a hammer candlestick.

There are main 2 versions , both share the same core construction but differ in who won the battle at the end of the timeframe.

Though the hammer candlestick pattern is always considered as a sign of bullish reversal, the candle can be green or red in colour. The colour is not considered important for the interpretation.

The hammer should have very small or NO top / upper shadows.

What does hammer candlestick pattern mean?

For a daily candlestick chart , a hammer candlestick will indicate the battle between bulls and bears in following way.

  • The price opened at a particular point
  • During the trading day, the bears are dominant and force price much lower.
  • By the day’s end however , the bulls have managed a recovery by pushing price back up.
  • The bulls may manage to  recover the price completely and closing price may end up higher than the opening price. This makes the candle green.
  • In case , the bulls do not manage to close the price above the open then the candle will be red.

In both the above cases , the battle on that day was won by bulls and hence this pattern is always considered as bullish independent of the colour of the candle.

A green hammer candle, however, is slightly more bullish compared to a red hammer candle.

Hammer Candlestick in Uptrend : These are the once to trade.

Hammer candlestick in uptrend generally occurs at the end of a retracement and it can be an important clue of a possible continuation of the original uptrend.

Depending upon what happens immediately after the hammer , once can take a trade decision. A breakout candle closing above the high of the hammer can be a good entry point.

As per Encyclopaedia of Candlestick Charts: The best-performing hammers are those that occur during a downward retracement of the primary (longer-term) upward trend. Those that occur in a primary downtrend tend to have price rise for a few days but that’s it—price tumbles thereafter.

The below figure indicates a hammer in uptrend and in downtrend. As you can see hammer appears thrice in such a short span of time , once indicating an end to the downtrend and on two occasions indicating and end of retracement in a prevalent uptrend.

Hammer candlestick in uptrend and downtrend

Hammer Candlestick in Downtrend

Hammer candlestick in a downtrend generally occurs after a sharp fall. It can also occur after a gradual fall but chances of Hammer occurring after a sharp fall are more due to the nature of the market.

Hammer candlestick after a prevalent downtrend can mean two things, it can mean a reversal into an uptrend. This can only be confirmed if the price closes above the high of the hammer. This can take anywhere between 2 to 8 days (or timeframes you are looking at)

It can also mean a small retracement or profit booking (this is experienced more than the actual reversal). The price on following days will go down again and if it breaks down below the low of the hammer then one can take a trade on short side. This generally takes 2 to 9 trading days (or timeframes you are looking at) as price has to cover the entire candle first.

Frequency of Hammer candlestick pattern

Frequency of occurrence is medium to high. As per per Encyclopaedia of Candlestick Charts: frequency rank is 36th out of 103.  One being the most frequent ( which is spinning top).

Because it occurs so frequently , it is not generally used on its own to make a trading decision and only as an aid in an overall trading plan.

Trading Importance of Hammer candlestick pattern

This pattern has low to medium importance.

It has approximately 60% chance of success when it occurs at the end of a retracement in a prevalent uptrend.

It has a random i.e 50 % chance of success when it occurs at the end of a prevalent downtrend.

Examples of How to Trade Hammer candlestick pattern

The hammer candlestick pattern is generally used to identify reversal  from a prevailing downtrend. However, hammers actually work better with retracements rather than reversals.

Trading hammer pattern in uptrend :

The best-performing hammers are those that occur during a downward retracement of the primary (longer-term) upward trend. Once a hammer is formed during a retracement in a primary long-term , one should wait for the high of the hammer to be broken before entering a trade.

Hammer candlestick pattern cannot be traded on its own and it needs additional information and confluence of other resistance regions such as previous support and resistance , moving average or Fibonacci levels.

A hammer candle especially a green hammer at the end of 38.2% or 50 % Fibonacci retracement works better than others. Stop loss can be placed at the base of the hammer or a previous low.

A hammer candle wick rejecting a significant moving average is probably the best place to trade using a hammer candlestick pattern.

Trading hammer pattern in downtrend :

In case of a hammer occurring in a prevalent downtrend, then one should look for a long green ( White ) candle after a hammer ( also known as engulfing ), this indicates that the buyers were able to outperform sellers on two consecutive timeframes, this has a very good chance of reversal.

Trading hammer pattern in downtrend is very difficult as you are trying to pick the market bottom which happens very rarely and 9 out of 10 times you will be wrong.

One must use other reversal signals such as momentum reversal , long-term trendline break , oscillators coming back from oversold regions and other suitable price action etc.

Using hammer as support level :

A long wick hammer which successfully resulted into a trend reversal is also considered as a very good support level. Price coming back to this level in future is likely to be rejected again.

Hammer occurring along with a spinning top or even multiple hammers together also increases the chance of hammer to work.

While using hammer candle as support level, one should be using the bottom of the wick and not the real body of the candle.

Limitations of Hammer Candlestick Pattern

There are 3 main limitations of using Hammer candlestick pattern.

  1. Depending on the length of the bottom shadow , if one takes a trade after a breakout of the high of the hammer , the stop loss distance is very high. Sometimes the bottom wick of the hammer is very long, and it makes practically impossible to take a trade with such a large stop loss.
  2. Second main disadvantage of the hammer is that, it does not indicate anything about a possible price target if the trade goes in your direction. One generally has to go with a 1 : 1 or 1 : 2 risk to reward ratio depending upon the length of bottom wick.
  3. Last but not the least is that the pattern just occurs too often and knowing when to use it to make a trading decision can be a little confusing for most beginners.

Let’s now see comparison of Hammer candlestick pattern with other similar patterns.

Hammer  vs Hanging Man Candlestick Pattern

The basic nature of the candle in both hammer and Hanging man is almost identical. Both consist of a small real body and a long bottom shadow or wick. Both of them also indicate a reversal.

The main difference is the market precedence when these patterns occur. Hammer occurs during a downtrend or a retracement during a prevalent uptrend indicating a bullish reversal , whereas a hanging man occurs at the end of an uptrend indicating a bearish reversal.

Though the nature or look of the candle is same , the meaning is completely different, and one must be careful in using it in their trading plan.

You can learn more about Hanging man candlestick pattern here.

Hammer vs Inverted Hammer Candlestick Pattern

Hammer and inverted hammer both are bullish reversal patterns.

The inverted hammer is as the name suggest exactly opposite to the hammer. A hammer has no real body and long bottom shadow or wick whereas an inverted hammer has no real body and along upper shadow.

Both hammer and inverted hammer occur at the end of a downtrend or during a downward retracement in an uptrend and both indicate bullish reversal tendency. The visual appearance of the candle though is opposite.

You can read about inverted candlestick pattern and its use in trading in this article here.

Hammer vs Doji Candlestick Pattern

Both hammer and Doji have long wicks. The main difference between a Doji and hammer is that the real body in case of hammer is small but non-zero and in case of Doji it is almost zero.

A doji indicates indecision in the market . It may appear in an uptrend or downtrend and the price may continue in the same direction or may reverse depending upon the price action that follows.

A hammer on the other hand always occurs at the end of a downtrend or during a downward retracement in an uptrend and indicates bullish reversal tendency.

A Doji has different variations such as Doji dragonfly , Doji dragonfly , Doji star etc. , however Hammer has no such versions.

You can read about Doji candlestick pattern and how to use it in trading in detail in this article.

Associated Candlestick patterns

Doji , Spinning top , Harami , Shooting star , Evening star , Hammer , Inverted Hammer

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