A THREAD :BASICS OF HAMMER CANDLESTICK FORMATION (PATTERN).
What Is a Hammer Candlestick?
A hammer is a price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies within the period to close near the opening price. This pattern forms a hammer-shaped candlestick, in which the lower shadow is at least twice the size of the real body. The body of the candlestick represents the difference between the opening and closing prices, while the shadow shows the high and low prices for the period.
KEY TAKEWAYS:-
Hammer candlesticks typically occur after a price decline. They have a small real body and a long lower shadow.
The hammer candlestick occurs when sellers enter the market during a price decline. By the time of market close, buyers absorb selling pressure and push the market price near the opening price.
The close can be above or below the opening price, although the close should be near the open for the real body of the candlestick to remain small.
The lower shadow should be at least two times the height of the real body.
Hammer candlesticks indicate a potential price reversal to the upside. The price must start moving up following the hammer; this is called confirmation.
Understanding Hammer Candlesticks
A hammer occurs after the price of a security has been declining, suggesting that the market is attempting to determine a bottom.
Hammers signal a potential capitulation by sellers to form a bottom, accompanied by a price rise to indicate a potential reversal in price direction. This happens all during a single period, where the price falls after the opening but regroups to close near the opening price.
Hammer should look similar to a “T.” This indicates the potential for a hammer candle. A hammer candlestick does not indicate a price reversal to the upside until it is confirmed.
Confirmation occurs if the candle following the hammer closes above the closing price of the hammer. Ideally, this confirmation candle shows strong buying. Candlestick traders will typically look to enter long positions or exit short positions during or after the confirmation candle. For those taking new long positions, a stop loss can be placed below the low of the hammer’s shadow.
Hammers aren’t usually used in isolation, even with confirmation. Traders typically utilize price or trend analysis, or technical indicators to further confirm candlestick patterns.
Limitations of Using Hammer Candlesticks :-
There is no assurance that the price will continue to move to the upside following the confirmation candle. A long-shadowed hammer and a strong confirmation candle may push the price quite high within two periods. This may not be an ideal spot to buy, as the stop loss may be a great distance away from the entry point, exposing the trader to risk that doesn’t justify the potential reward.
Hammers also don’t provide a price target, so figuring what the reward potential for a hammer trade is can be difficult. Exits need to be based on other types of candlestick patterns or analysis.
Psychology of the Hammer :-
As we have seen, an actionable hammer pattern generally emerges in the context of a downtrend, or when the chart is showing a sequence of lower highs and lower lows. The appearance of the hammer suggests that more bullish investors are taking positions in the stock and that a reversal in the downward price movement may be imminent.
The long lower shadow on the hammer candlestick indicates an effort to continue the price’s downward trajectory, but the higher close represented by the real body indicates that the sellers were ultimately unsuccessful in holding the price at its intraday low. The price’s ascent from its session low to a higher close suggests that a more bullish outlook won the day, setting the stage for a potential reversal to the upside.
Hammer Candlestick Pattern:-📈
How should you trade with this pattern to take entry at lowest levels?
1.⛏The hammer candlestick is found at the bottom of a downtrend and signals a potential ( bullish ) reversal in the market.
⛏The hammer candle has a small body, little to no upper wick, and a long lower wick - resembling a ‘hammer’.
2. 🔨Hammer candle can be of any colour – It can be either of Green or Red colour.
🔨The lower shadow should be at least two times the height of the real body.
3. Psychology;
This candle pattern indicates that the price dropped to new lows, but subsequent buying pressure forced the price to close higher, hinting at a potential reversal. The extended lower wick is indicative of the rejection of lower prices.
4. Reversal signal :–
Entry for Bulls: It indicates the rejection of lower prices.
When found in a downtrend it could signal the end of selling pressure and begin to trade sideways or reverse, after confirmation such pattern can give the best entey to play reversal.
5. Exit signal:-For Bears:-
Traders that have an existing sell position, can view the hammer candle as an indication for reversal and they can take exit to existing sell position.
6. Confirmation is important :
Entry in any trade should be taken only after the confirmation.
Fomo of entering into a trade without any confirmation can trap you in a wrong trade.
7. Stoploss:
Once entered into any trade after the confirmation, stoploss can be placed below the low of hammer candle.
Traders, if you liked this thread , write in the comments. I will be glad.
A hammer is a price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies within the period to close near the opening price. This pattern forms a hammer-shaped candlestick, in which the lower shadow is at least twice the size of the real body. The body of the candlestick represents the difference between the opening and closing prices, while the shadow shows the high and low prices for the period.
KEY TAKEWAYS:-
Hammer candlesticks typically occur after a price decline. They have a small real body and a long lower shadow.
The hammer candlestick occurs when sellers enter the market during a price decline. By the time of market close, buyers absorb selling pressure and push the market price near the opening price.
The close can be above or below the opening price, although the close should be near the open for the real body of the candlestick to remain small.
The lower shadow should be at least two times the height of the real body.
Hammer candlesticks indicate a potential price reversal to the upside. The price must start moving up following the hammer; this is called confirmation.
Understanding Hammer Candlesticks
A hammer occurs after the price of a security has been declining, suggesting that the market is attempting to determine a bottom.
Hammers signal a potential capitulation by sellers to form a bottom, accompanied by a price rise to indicate a potential reversal in price direction. This happens all during a single period, where the price falls after the opening but regroups to close near the opening price.
Hammer should look similar to a “T.” This indicates the potential for a hammer candle. A hammer candlestick does not indicate a price reversal to the upside until it is confirmed.
Confirmation occurs if the candle following the hammer closes above the closing price of the hammer. Ideally, this confirmation candle shows strong buying. Candlestick traders will typically look to enter long positions or exit short positions during or after the confirmation candle. For those taking new long positions, a stop loss can be placed below the low of the hammer’s shadow.
Hammers aren’t usually used in isolation, even with confirmation. Traders typically utilize price or trend analysis, or technical indicators to further confirm candlestick patterns.
Limitations of Using Hammer Candlesticks :-
There is no assurance that the price will continue to move to the upside following the confirmation candle. A long-shadowed hammer and a strong confirmation candle may push the price quite high within two periods. This may not be an ideal spot to buy, as the stop loss may be a great distance away from the entry point, exposing the trader to risk that doesn’t justify the potential reward.
Hammers also don’t provide a price target, so figuring what the reward potential for a hammer trade is can be difficult. Exits need to be based on other types of candlestick patterns or analysis.
Psychology of the Hammer :-
As we have seen, an actionable hammer pattern generally emerges in the context of a downtrend, or when the chart is showing a sequence of lower highs and lower lows. The appearance of the hammer suggests that more bullish investors are taking positions in the stock and that a reversal in the downward price movement may be imminent.
The long lower shadow on the hammer candlestick indicates an effort to continue the price’s downward trajectory, but the higher close represented by the real body indicates that the sellers were ultimately unsuccessful in holding the price at its intraday low. The price’s ascent from its session low to a higher close suggests that a more bullish outlook won the day, setting the stage for a potential reversal to the upside.
Hammer Candlestick Pattern:-📈
How should you trade with this pattern to take entry at lowest levels?
1.⛏The hammer candlestick is found at the bottom of a downtrend and signals a potential ( bullish ) reversal in the market.
⛏The hammer candle has a small body, little to no upper wick, and a long lower wick - resembling a ‘hammer’.
2. 🔨Hammer candle can be of any colour – It can be either of Green or Red colour.
🔨The lower shadow should be at least two times the height of the real body.
3. Psychology;
This candle pattern indicates that the price dropped to new lows, but subsequent buying pressure forced the price to close higher, hinting at a potential reversal. The extended lower wick is indicative of the rejection of lower prices.
4. Reversal signal :–
Entry for Bulls: It indicates the rejection of lower prices.
When found in a downtrend it could signal the end of selling pressure and begin to trade sideways or reverse, after confirmation such pattern can give the best entey to play reversal.
5. Exit signal:-For Bears:-
Traders that have an existing sell position, can view the hammer candle as an indication for reversal and they can take exit to existing sell position.
6. Confirmation is important :
Entry in any trade should be taken only after the confirmation.
Fomo of entering into a trade without any confirmation can trap you in a wrong trade.
7. Stoploss:
Once entered into any trade after the confirmation, stoploss can be placed below the low of hammer candle.
Traders, if you liked this thread , write in the comments. I will be glad.