Hammer candlesticks are a popular reversal pattern formation found at the bottom of downtrends. They consist of small to medium-sized lower shadows, a real body, and little to no upper wick. This shows a hammering out of a base and a reversal setup. These candles are typically green or white on stock charts. Look for a break above the candle to confirm the reversal. Traders would place their stop-loss below the hammer’s low if the price were to reverse.
What Is a Hammer Candlestick?
A hammer candlestick is typically found at the base of a downtrend or near support levels. Hammer candlesticks comprise a smaller real body with no upper wick and a long lower shadow. They are typically represented by green or white lines on stock charts. Hammer candlesticks are bullish reversal signs. See a lot of the hammer candlesticks in downtrends. Hammers do not always stop a downtrend. Consider the news surrounding that stock, as emotions can significantly impact price movement.
This pattern forms when a base is being hammered out. The stock trades significantly lower than the opening price but rallies later in the day to close at or above its opening price.
You tend to see a hammer candle in a downturn. This is because it is finding its base. However, just because it has found its base does not mean the bulls are returning. They are gaining strength, though. Whereas doji candlesticks show indecision, hammer candlesticks are reversal candles. Getting confirmation is always good.
Hammer Candlestick Basics
The meaning of a hammer candlestick can be defined as finding support through panic selling. The wick shows that sellers drove prices low on that day. However, it had a strong finish, indicating buyers returned at the end of the day.
A hammer candle pattern is most effective when at least three declining candles are in a row. A declining candle shows panic selling. Each day has a lower low, illustrating the fear and panic selling continuing.
Shorts can also be a part of this. They see these declining prices and decide to sell short. But, again, the bears are in control. Now, the bulls may notice how inexpensive a stock has become, and suddenly, it looks attractive to them.
A high-wave candlestick or a long-legged doji candlestick could be forming instead of a hammer candle. That’s why you should wait for confirmation. You can look at the pattern instead of getting hung up on what each candle is.
Hammer Candlestick Trading Strategy
- Traders take a long position when the price breaks above the candlestick’s high.
- They use a candlestick close below the low as a stop level.
- Take a short at the break of the low and use a candlestick close above as a stop.
Hammer Candlesticks Examples
This is an example of $GLD on a daily chart. You’ll notice two hammers that are highlighted. The large green one formed a solid base. Then, the price increased in the short term and fell again, creating another hammer. This is close to a double-bottom pattern.
The pattern continued to consolidate and made a run, but not a total breakout. It formed a rising wedge pattern that ultimately broke into a large megaphone pattern. Hammers can also form in uptrends, which are considered hanging man candles. An upside-down hammer is also known as an inverted hammer. Inverted hammers can also occur near support levels, indicating a potential bullish reversal is about to take place.
Trading the Charts
This is an example of a large hammer candlestick on the $SPY. The gray-shaded area was the premarket. Notice the horizontal lines going across. Those were the premarket support and resistance levels. Do you notice how the price traded in a channel near the lows during the premarket, and then the hammer formed?
This is key to be aware of because it signifies that premarket lows were holding during the open. After the hammer formed, a bull flag ended up forming. The price formed a large rising wedge pattern and broke above the premarket high.
Double Bottom Hammers
This is an example of multiple hammers on a 5-minute chart of TSLA. You’ll notice that the hammers weren’t as clearly defined as a typical hammer candlestick. This happens frequently, and that’s why it’s essential to examine the other patterns that are emerging. Although these didn’t appear typical, they formed within a double bottom pattern and, ultimately, a triple bottom.
Traders would take a long entry as price action broke out of the double bottom pattern. At the top of the bullish candlestick, a brief pullback formed a cup pattern that broke out into a rising wedge pattern. So, these hammers formed part of larger patterns.
Long Legged Doji Hammer
This chart example shows a long-legged doji. Many times, they can look or act like hammers. They signal the same story that the price might be trying to reverse after a brief drop. As the bears attempt to push the price down, the bulls counter by pushing it up, forming long shadows that also appear on hammers.
This example illustrates a failure of the hammer/doji pattern when the price makes a brief recovery but ultimately fails to break resistance. The pattern formed a head and shoulders failure and, ultimately, a falling wedge pattern. The hammer pattern formed the neckline of the head and shoulders, and when the price failed to break through, the neckline support was breached, allowing the price to continue the bearish trend.
Final Thoughts on Hammer Candlesticks
A hammer candlestick chart pattern can be confirmed when the candlestick after the hammer candle has higher lows. The price rise could be caused by short sellers covering their positions. That is why it is important to wait for a bullish confirmation.
The wick on a hammer chart pattern shows there are still plenty of sellers. It would be best if it had more buying pressure and volume. Because hammers are still prevalent, there are still many sellers, and a significant volume can go a long way in reinforcing how good the reversal is. Please ensure that you use proper risk management techniques when trading hammer candlesticks.
Frequently Asked Questions
What Does a Hammer Signify?
A hammer is typically a bullish pattern that’s found at support levels or the base of a downtrend. If you see a hammer at the top of an uptrend, then that’s considered a hanging man candle and shows signs of a potential reversal to the downside.
Is a Red Hammer Bullish?
A red hammer found at the bottom of a downtrend is still a bullish reversal pattern. The bulls overtook the bears, but the price didn’t get back above the opening price of the candle.
What to Do When You See a Hammer Candlestick?
Hammers found near the base of downtrends are signaling a bullish reversal. Traders would look to enter into a long position once the price breaks above the hammer. If someone is in a short trade and they see a hammer form, this is where they look to cover their position.
What Is the Difference Between Green and Red Hammer Candles?
A green hammer formed near support levels signifies that the bulls are in control and looking to increase the price. A red hammer signifies that the bears were attempting to take control, but the bulls intervened. They both can signify reversals to the upside. A red hammer found near resistance is considered a hanging man candle.
Are Hammer Candlesticks Reliable?
Hammer candlesticks are one of the most reliable reversal patterns. They are the strongest when they are near the base of a downtrend or previous support level.