There are some candlestick patterns that are more well-known than others. Hammer patterns are among those. They have many distinguishing features that have made them to be quite commonplace and also popular among forex traders.
There are two main types of a hammer candlestick pattern. One of them is simply referred to as a hammer pattern and the other one is the inverted version, which is known as an inverted hammer or inverse hammer.
In this article, we are going to bring these patterns under full examination and see how you can benefit from them in your forex trading.
What Is a Candlestick Pattern?
It might be better to start with the basics. If you are a bit rusty on your knowledge about technical analysis, it’s okay. Let’s see what a candlestick is.
A candlestick, also referred to as a candlestick pattern, is an approach to charting and visualization of market data on a chart with the help of candlestick shapes. When these candlesticks are put together to form the candlestick chart, there can be patterns detected. Patterns that are made from these candlesticks. They can be made from several candles or even one single candlestick.
Each pattern will provide forex traders with a different set of data and information about the market, and they will help traders with their own unique form of signals. Of course as you know, our focus in this article will be hammer patterns.
How Is a Hammer Candlestick Formed?
As we saw, each candlestick pattern can be made from any number of candles. This number can be up to several and down to even one. A hammer candlestick pattern is made from only one candle.
The hammer pattern is the sign of a reversal toward the bullish area. Precisely because it is a reversal toward bullish, it means this pattern can be seen when a previous downtrend is in its final stages.
As you know each candlestick pattern has four main factors. The opening price, the closing price, the highest price recorded and also the lowest price recorded during the period of candle formation.
For the hammer pattern the opening price and the closing price are rather close to each other. This means that the body of the candle is small. Additionally, the closing price stands a little bit higher than the opening price. This means this candle is a green candle.
On the other hand, the closing price can also be a little lower than the opening price, which would make the candle red. In either case, the two prices are close to each and so the body is really small.
There are two other factors left, the high and low, which are represented in any candle as the two shadows or wicks of the candle at the top and bottom.
The upper wick of a hammer candlestick pattern is pretty much nonexistent. This means during this candle, prices do not record a new high that stands higher than the opening or the closing price.
On the other hand, a hammer pattern would have a very long lower wick. This means during the candle formation, a lower low price was registered.
So as a whole, a hammer pattern has a short body, no upper wick, and a very long lower wick or shadow. But what do they all mean?
What Does a Hammer Candlestick Tell You?
As we mentioned above, a hammer candlestick is the signal for a bullish reversal after a bearish trend in the market. So let’s analyze the candle and see what it means.
First of all, there is virtually no upper shadow or wick, which means that the market is not strong enough to register a new high that stands higher than the opening or closing price of the candle.
Secondly, the really long lower shadow or wick means that of course the market is still in the bearish trend, although near its end. But there is still powerful selling pressure in the market. Therefore, a lower low price is registered, which stands much lower than both the opening and closing price.
Thirdly, the reason a hammer pattern is a bullish reversal is that even though a really low price is registered, the closing price stands much higher than that. This means the market is exhibiting a tendency to go into a buying mode, which would initiate a bullish trend.
How Can You Implement a Candlestick Pattern?
Precisely because a hammer pattern is a bullish reversal, then forex traders need to know that it might be in their best interest to change their overall approach to trading and start opening new positions.
So, if you had caught the bearish trend earlier, chances are you were already shorting the market. Now that you get a peek into the bullish reversal, then you know that it is time to start taking a long position.
Because the pattern is indicative that price will begin picking up pretty soon.
What Is an Inverted Hammer?
As we can understand from the name of this pattern, an inverse hammer is the exact opposite of the hammer candlestick pattern. The inverse hammer is also sometimes referred to as an inverted hammer pattern.
So how is an inverted hammer formed?
Even though they have the opposite names and the exact opposite shapes and patterns, both the hammer and inverted hammer patterns are signals of an upcoming bullish trend.
So an inverted hammer will also form in the final stages of a bearish trend. Similarly, it also has a short body, which means the opening and closing prices of the inverted hammer candlestick pattern are pretty close to one another.
Another similarity is that the small body can be either green (close price higher than open price) or red (close price lower than open price). However, since the hammer and inverted hammer patterns are bullish reversal signals, if the body is green the signal is much more powerful.
The inverted hammer pattern does not have a lower shadow or wick, or at least it is very short. The significance of an inverted hammer pattern is the very long upper shadow or wick. This means during the formation of the candle, a really higher high was recorded, but then prices went back low to close.
How Can You Trade with an Inverted Hammer Pattern?
So the really long upper shadow of the inverted hammer pattern means there is a push toward the buying zone in the market. And that the trend, or rather the existing bearish trend, is exhibiting a tendency to come to an end and traders in the market are showing interest to buy instead of sell.
This is why even though the closing price comes down again, a really high price is registered between the opening and closing prices during the formation of this candle.
Forex traders can, similar to a hammer pattern, use the inverted hammer as a rather strong signal, especially if the body is green, that there is going to be a bullish reversal in the market and adjust their position accordingly.
The hammer patterns are among the most popular and widely used candlestick patterns in forex trading. There are two types of these patterns, one called a hammer and the other called an inverted hammer. Both of these patterns are signals for a bullish reversal after a downtrend in the market.