What Is the Hammer Candlestick Pattern and How to Use It in Forex?

As a technical trader looking to succeed in the forex market, one of your primary goals should be learning about different analytical tools to help you make informed investment decisions. Candlesticks are one of these tools and are vital in chart analysis and interpretation. Among various types of candlesticks, the hammer candlestick pattern has proven to be a great tool for traders, indicating potential reversals.

But what is the hammer candlestick pattern? What types of hammer candlesticks are there? How should you interpret these candles to increase your chances of successful forex trading?

To find answers to these questions and learn even more about the hammer candlestick pattern, keep reading this blog.

What Is the Hammer Candlestick Pattern?

A hammer candlestick pattern is characterized by a long bottom shadow and a small real body. As the name suggests, the candlestick looks like a hammer, with a lower shadow at least twice the size of the body. This candlestick is usually observed after a long downtrend, where the market continuously declines.

During a hammer candlestick formation, the market initially opens at a higher price level. However, the asset will drop in value with a price decrease. Then, the asset’s price starts to increase again, resulting in the candle closing near the open price. Ultimately, depending on the type of the hammer candlestick, the market closes above or below the open price.

Types of Hammer Candlesticks

Knowing different types of hammer candlesticks is critical in providing valuable insights into forex trading and other financial markets. This section will look at the four types of hammer candlesticks we see in charts.

1- Bullish Hammer Candlestick

A bullish hammer candlestick typically occurs at the end of a prolonged downtrend. This candlestick opens at a higher price level. Still, with the increasing selling pressure from the bears, the asset’s price falls, creating the candle low. After that, the bulls enter the market, increasing the buying pressure and pushing the price levels up again.

Ultimately, the bulls exceed the open price before the candle closes, creating a bullish (green) hammer candlestick, which signals a potential upward reversal shortly.

2- Bearish Hammer Candlestick

A bearish hammer candlestick, also known as a hanging man, typically occurs at the end of a prolonged uptrend. The intense buying pressure from the bulls creates an uptrend until the price hits resistance.

Then, the bearish hammer candle begins forming by opening at a higher price. As the selling pressure begins to increase, the price starts to fall but rallies back to close the candle below the open price.

This forms a bearish (red) hammer candlestick with a long lower shadow and a small real body, indicating a possible downward reversal shortly.

3- Bullish Inverted Hammer Candlestick

The inverted hammer candlestick pattern is the same as a regular hammer candlestick but upside down. For a bullish (green) inverted hammer candlestick to form, you would usually be at the end of a prolonged downtrend.

The candle opens at a lower price, indicating the high selling pressure from traders. Then, the bulls return to the market, increasing the buying pressure and, subsequently, the asset’s price before it falls back down and closes above the open price.

The bullish inverted hammer has a small natural body and a long upper shadow, signaling a potential reversal shortly.

4- Bearish Inverted Hammer Candlestick

A bearish inverted hammer candlestick, or a shooting star, can usually be seen at the end of a prolonged uptrend. A potential signal of a downward price reversal, the red inverted hammer candlestick opens at a lower price. Following the uptrend, the prices continue to increase until they meet resistance and sellers enter the market.

With the market’s newfound selling pressure, the price drops, and the candle closes below the open price. At the end, the bearish inverted hammer, or the shooting star, forms, indicating a possible price reversal in the future.

Trading With Hammer Candlesticks in Forex

The forex market is one of the world’s largest, most volatile financial markets, accounting for a big chunk of global trades every day. With an extremely high trading volume and common fluctuations, FX traders shouldn’t miss out on candlestick patterns for their analysis, including the hammer.

Although hammers usually signal price reversals regardless of the type of market (bullish or bearish) they take place in, they are not indisputable evidence. As a result, many traders wait for the hammer candlestick to be confirmed by its following candle before entering trades. For a bullish hammer candlestick, they look for a candle that opens above the close price of the hammer, creating a gap and beginning the upward trend.

Aside from the hammer candlestick confirmation, traders are encouraged to use other analytical tools, such as indicators, other price action patterns, support and resistance levels, and trend analysis.

For example, if you’re entering a long position following a bullish hammer candlestick, it might be a good idea to place your stop-loss level below the low of the hammer. You can also determine your take-profit level based on your risk management strategy and a thorough analysis of other resistance levels.

Hammer Candlestick Pattern Pros and Cons

Just like any other analytical tool, hammers have their benefits and limitations. It’s crucial for traders to be aware of these benefits and limitations for a successful trading experience.

Here are the pros of hammer candlesticks:

• Hammer candlesticks are usually considered a strong bullish signal.
• These candlesticks are easy to identify.
• You can use hammers to predict price changes in different time frames.
• Setting a stop-loss level with hammer candlesticks is a straightforward process.

As mentioned before, hammers also have limitations, which are stated below:

• Just like any other analytical object, hammers do not guarantee reversals or other certain changes in the price of assets.
• Hammer candlesticks require confirmation to be considered adequate. They are prone to providing false signals.
• It’s not easy to use hammer candlesticks during high market volatility.

Conclusion

The hammer candlestick pattern is usually a reversal signal with a long lower shadow and a small real body. It can be seen at the end of long trends, both upwards and downwards.

There are four types of hammer candlesticks out there: the bullish and bearish hammer candlesticks and the bullish and bearish upside down hammer candlesticks, also called inverted hammers.

This article covered the basics of hammer candlesticks and how to use them in your trades. Now it’s time for you to get to work. Find a good broker and open your demo account in it to practice trading with the hammer candlestick pattern. You can choose ITBFX Forex broker, which offers excellent trading services for novice traders and professionals. You can visit our website or click here to open an account!

What is a hammer candlestick?

A hammer candlestick is a Japanese candlestick characterized by a long lower shadow and a small real body. The length of the lower shadow of a hammer should be at least twice the length of its body.

What does a hammer candlestick indicate?

Hammer candlestick patterns usually indicate a reversal signal, ending a long downtrend or uptrend. Traders should wait for hammer candles to be confirmed before making decisions and use other analytical tools as well.

What’s the difference between a hammer and a doji candlestick?

A hammer candlestick has a small body and a long lower shadow, indicating possible trend reversals. A Doji candle has a miniature body (usually a straight line), indicating uncertainty and market consolidation.