GroundStoneHoldings

Education post 14/100 – How to trade hammer candlestick pattern?

FX:GBPAUD   British Pound / Australian Dollar
What Is a Hammer?

Considered a reversal formation and forms when price moves well below open, but then rallies to close near open if not higher. ( inverted hammer is the mirror opposite)
Forms a candlestick with a long lower shadow (tail), and a small body with little or no wick–looks like a hammer , or mallet. ( inverted hammer is the mirror opposite)
Depending on the previous trend, a hammer may be referred to as a hanging man or shooting start, but the same concept applies. Bullish or bearish bias depends on previous price swing, or trend.
A hammer after an uptrend is called a hanging man .
An inverted hammer after an uptrend is called a shooting star .

Why are Hammers important?

May act as a leading indicator suggesting a shift in bullish/bearish momentum
Completed hammers may help to either confirm, or negate, a potential significant high or low has occurred. –price drives higher or lower “hammering” out a top or bottom before closing back towards open
Significance increases with length of shadow (ideally 2-3 times the size of the body) as well as timeframe
Hammers may also help confirm, or strengthen, other reversal indicators (i.e. may occur as part of tweezer formation, or next to doji , etc.)
A hammer “fails” when new high is achieved immediately after completion (candle), and a hammer bottom “fails” if next candle achieves new low.
A hammer “fails” when new high is achieved immediately after completion (candle), and a hammer bottom “fails” if next candle achieves new low.
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