How To Trade with Hammer Candlestick Pattern

Online trading is something more than just reading the news and buying assets at lower prices. Foremost, as an active day trader, you have to gain skills in technical analyses and master certain tools. Today, we will speak on how you should use candlestick charting patterns to benefit from the long-term perspective.

Let’s review a Hammer candlestick pattern. From most trading guides, you will learn that this indicator signalizes that the reversal to the upward trend is about to happen. That is why traders prefer going long. However, things turn out differently and instead of surging up, the price drops down.

When such moments happen, you will feel that something is wrong. You will be wondering why your strategy doesn’t work if this hammer candlestick is considered a bullish indicator. So, in this guide, we’ll try to help you prevent these. We will provide the key features of this signal and explain the most common misconceptions regarding this tool. To ensure our guide is efficient for all categories of traders, regardless of their skills, experiences, and capital, we’ll start with the basics.

Getting Started

A Hammer candlestick pattern refers to only one candle. It is defined as a signal that occurs when the downward price trend is about to come to an end. It’s not difficult to differentiate this pattern from the other candlestick bullish signals. Here are the visual characteristics you will notice:

  • Little to no upper shadow.
  • The price closes at the top ¼ of the range. 
  • The lower shadow is 2+ times longer than the body. 

This is all good but to use it efficiently, a trader needs to know what stands behind this signal. There are 3 patterns of situations that lead to the occurrence of the hammer candlestick:

  1. Sellers are prevailing during the opening of the market, which pushes the value of the asset down.
  2. Buyers put huge buying pressure during the selling climax and push the value higher.
  3. The buying pressure is very powerful, which results in closing higher than the opening.

To cut the long story short, this signal means that the lower price of the asset is rejected. Nevertheless, its occurrence doesn’t necessarily mean that it’s beneficial for a trader to go long. We need to get deeper into this matter and understand several important things about the hammer candlestick bullish pattern.

3 Things to Consider

1. This is a signal that spots the trend retracement

What does it mean? In short, a hammer candlestick indicates that a specific trend is about to come to an end. If you don’t know what the trend exactly is, you aren’t recommended to go long randomly just because you see the pattern. You will simply start trading against the trend and this will cause nothing but losses.

2. A single pattern tells you nothing

A chart contains a lot of information. Obviously, such an important event as the trend reversal cannot be indicated by only one candle. It becomes obvious when a long series of candles shows this. As a rule, this series shouldn’t be smaller than 100 candles. Therefore, you shouldn’t rely only on a single hammer candlestick pattern whenever you spot one. It won’t answer whether the price direction is about to become upward or downward.

3. Never neglect the context

This rule is relevant to all trading guides, not only the ones that explain the use of different candlestick patterns. The market context refers to all the conditions, news, trends, and movements. 

4. Conjunct the use of the hammer candlestick pattern with other tools

And again, a single signal means nothing to you. Its use can be efficient only if you consider the general context and apply other useful instruments. For example, we suggest that when spotting a hammer candlestick pattern, you should use the Moving Average indicator. This simple tool will help you detect the current trend and start trading it in its direction.

Final word

To summarize, there are a lot of helpful techniques that tell you what to do and what instruments to apply when you spot a hammer candlestick pattern. We just outlined the key points and displayed some basic principles of trading with this signal. We hope that this guide will help you to devise your ideal trading strategy.