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The information below will help you identify this pattern on the charts and predict further price dynamics. You will improve your candlestick analysis skills and be able to apply Hammer Candlestick Patterns them in trading. Based on the analysis of over 4,000 markets, PatternsWizard has concluded the inverted hammer confirms a bullish reversal 36.5% of the time on average.
The Hammer Candlestick, like all trading patterns, is not foolproof, but it can offer valuable insights when used correctly. On bigger timeframes (such as weekly), the Hammer candlestick demonstrates a prolonged trend change. The picture above shows an example of placing a Buy Stop order with a Stop Loss and Take Profit after the Hammer Pattern appeared during the downtrend. Take Profit was set at a distance three times bigger than the one between the SL level and Buy Stop.
How to use hammer candlestick patterns to spot potential trend reversals
The picture shows that after the pattern appeared at each of the local tops, BTCUSD was very actively declining at some points. Each pattern that appeared on the chart warned traders that the trend was ending and bearish resistance was hindering growth. Therefore, in these cases, it is important to exit the purchase and wait for confirmation of the reversal.
What does a bearish hammer look like?
The bearish inverted hammer is a single candlestick pattern with a small body and a long upside wick. In this pattern, the opening price remains above the closing price, pointing out less buying pressure at the time of closing. However, the bearish inverted hammer also indicates a buying possibility.
If you think that the signal is not strong enough and the downtrend will continue, you can ‘sell’ (go short). Since Hammer Candlestick provides reversal points to traders, it is called a reversal strategy that aims to point to the level at which the market will reverse. As a trader, you can apply this strategy on several timeframes, from a 60-minute time frame to a four-hour time frame. If you have an open short position that’s profiting from a downtrend and you spot a hammer, it might be time to exit before an upward move eats into your profits. Don’t look at an individual candlestick pattern to tell you the direction of the trend.
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Whenever you spot a Hammer candlestick pattern, you should go long because the market is about to reverse higher. Take a look at this chart where a shooting star has been formed right at the top of an uptrend. Just because you see a hammer form in https://www.bigshotrading.info/blog/stop-loss-vs-stop-limit-orders/ a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger. As a result, the next candle exploded higher as the bulls felt that the bears were not so dominant anymore.
- It’s simple, the Hammer pattern is traded when the high of the candle is broken.
- The closing price may be slightly above or below the opening price, although the close should be near the open, meaning that the candlestick’s real body remains small.
- There is also an inverted candlestick pattern with a long upper shadow, which marks an uptrend’s start.
- Also, note that a hammer pattern with a very narrow body can look like a Dragonfly Doji.
- The wick (or shadow) should have at least twice the size of the candle body.
- Below is an analysis of the hanging man pattern on the BTCUSD H4 chart.
- E.g., a Forex hammer pattern on a 5-minute chart might only have a 10-pip range.