I guess any individual trader be an expert or a beginner uses candlestick chart to analyze market conditions. If you observe a candlestick chart you will notice that each candle has a story behind its formation. They communicate a lot about market conditions.
So, how can you take help from these candlesticks?
You need to understand how each candle formation takes place and how future trend is going to get affected from present scenario.
Learn to read Candlestick HERE.
This is not interpreted from a single type of candle rather different types of candle formation takes place to give signals of market direction.
You can find the other candlestick patterns HERE.
A trend as earlier said in my previous article is something that trader needs to follow in the market. Many candlestick patterns help you to identify trend reversal like Spinning Top candlestick pattern, Doji candlestick pattern and here, I am going to help you learn another candlestick pattern that is the Hammer style candlestick pattern.
Physical appearance of Hammer candlestick
As the name suggests, Hammer candlestick looks similar to a physical hammer. The image below describes the same.
You need to observe here that the body is small and the shadow is sufficiently long. To be specific I would say that the shadow is 2 to 3 times the width of the body. Any candle which does not satisfy this condition isn’t a hammer candlestick.
So the 2 important things to identify physically for the formation of Hammer are
- Short body, close price is very near to open price
- The shadow of a candle is 2 to 3 times the width of the body.
What does it convey
What after identifying a hammer candlestick? You need to understand what it wants to convey.
The prime importance of hammer is when it forms after a bearish trend.
So definitely you got what you can interpret from that.
Yes, a bullish trend reversal.
Hammer candlestick is a bullish trend reversal indicator. It signifies that the bottom of the ongoing bearish trend is hammered out and it won’t go further rather change the direction and bullish mode will get activated.
But it is very important to note that you cannot completely depend on hammer candlestick. You need to reconfirm from the system that you are using.
To know the technical indicators that can help you confirm hammer candlestick pattern. CLICK HERE
Key elements to remember
- Represents the bullish trend reversal signal
- Small body close price is near the open price.
- The shadow is 2 to 3 times the width of body
- Hammer candlestick of bullish or bearish have the same significance
- Do not completely rely on hammer completely, get confirmation from technical indicators.
- It is helpful when comes after bearish trend, signifying trend reversal.
So what does that interpret about the market condition and where do you stand in the market?
A hammer very well communicates about the market.
It represents that buyers are now optimistic and whatever the sell order is given by sellers the buyers don’t let them drive the market.
There is active participation of buyers and now the market has found a resistance level in the trend.
So the market is going to go in a bullish direction.
I have shown below few examples which may help you identify in real case scenarios.
If you observe the formation of hammer candlestick, it showed its significance after a downtrend.
The bullish trend starts after the hammer candlestick.
So, how was it? Doesn’t it feel good to know how the market is going to behave and invest accordingly? This cannot be done in one go. You need to train your eyes to look into the charts and analyze quickly the significance of each candle.
It is very important to understand that though hammer candlestick can help you identify the bullish trend reversal signal you need to confirm this from other systems that you are using that may be technical indicators or any other strategy. If you get bullish trend reversal signal from other system and find a hammer as well then you can proceed otherwise it may lead to false signal and loss of your principal amount.