A hammer candlestick is a type of bullish reversal candlestick pattern and it is made up of just a single candle, the candle will normally look like a hammer, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. Just because a signal is composed of only one candlestick, that doesn’t mean it can’t pack a big punch.
The Hammer candlestick is mostly viewed as a bullish reversal candlestick pattern that occurs at the bottom of downtrends. The Hammer pattern is created when the open, high, and close prices are about the same price and there will be a long lower shadow, twice the length as the real body.
Hammer candlesticks form when shares fall from their opening prices due to selling pressure, but then they manage to recover most or all of the losses within the trading period.
Just because the Hammer pattern is just a single candle, you will also need to observe the other candles surrounding it to confirm that the candle you are looking at is indeed a hammer candlestick pattern, it will need to meet the requirements shown below for a downward trend.
If the Hammer candlestick pattern forms in a downtrend as shown in the image above. It’s considered a market bottom or support, we offer both a Hammer candlestick detector indicator and support & resistance indicator so you can take advantage of this trade setup.
Following on from the image above with a downtrend and a Hammer pattern candle, the bears are winning and have pushed the trend even lower, but now the bulls take control and start to push the price back up, in this case, the bears are losing the battle, this causes a long shadow beneath a small body (hammer pattern).
A few other signals you need to look out for when the candle forms.
The Hammer pattern has a brother in the form of an inverted Hammer, this is a candlestick pattern that is usually found after a downtrend and signals a trend reversal. The inverted hammer looks like a reverse version of the hammer candlestick pattern, and when it appears in an uptrend is called a shooting star.
If there is a long downtrend and a bullish Inverted Hammer is formed, this will mean that the prices hesitated their move downward by increasing significantly during the day. The sellers then came back and pushed prices back near the open. The fact that the prices were able to increase shows that bulls are testing the power of the bears. Observe what happens on the next day as this is what gives traders an idea as to whether or not prices will go higher or lower.
Take a quick look at the cTrader Hammer Candlestick Detector Indicator, this indicator will automatically identify Hammer trade setups and send alerts.