What Is a Hammer Candlestick?
A hammer candlestick is a bullish reversal pattern that forms during a downtrend, signaling potential exhaustion of selling pressure. It's characterized by:
- Small real body (difference between open and close)
- Long lower shadow (at least twice the body length)
- Little or no upper shadow
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Key Characteristics of Hammer Candlesticks
Formation Requirements:
- Occurs after a price decline
- Lower shadow ≥ 2x body height
- Close near the open (can be slightly above/below)
Market Psychology:
- Sellers push prices lower initially
- Buyers regain control by session end
- Shows rejection of lower prices
Confirmation Rules:
- Requires follow-up bullish candle
- Best confirmation: higher close with strong volume
- Entry point typically after confirmation
Interpreting Hammer Candlesticks
What Hammers Reveal About Market Sentiment
Hammer candlesticks indicate:
- Potential trend reversal
- Strong support at lows
- Buyer dominance after initial sell-off
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Trading Hammer Candlesticks: Step-by-Step
Identify the Pattern:
- Look during downtrends
- Verify shadow-to-body ratio
Wait for Confirmation:
- Next candle must close higher
- Strong volume increases validity
Entry Strategies:
- Buy after confirmation candle closes
- Consider partial entries to test waters
Risk Management:
- Stop loss below hammer's low
- Position size based on stop distance
Hammer vs. Similar Patterns
| Pattern | Shadow | Trend | Signal |
|---|---|---|---|
| Hammer | Long lower | Downtrend | Bullish reversal |
| Doji | Both sides | Any | Indecision |
| Hanging Man | Long lower | Uptrend | Bearish reversal |
Practical Trading Example
Scenario: EUR/USD 4-hour chart
- Three red candles show strong downtrend
- Hammer forms with long lower shadow
- Next candle gaps up and closes higher
- Entry at 1.0750 with stop at 1.0720
- Price rises 150 pips over next sessions
Limitations and Considerations
- False Signals: Not all hammers lead to reversals
Context Matters: More reliable with:
- Strong prior trend
- Volume confirmation
- Support/resistance alignment
- Risk/Reward: Stop losses may be wide
FAQ: Hammer Candlesticks Explained
Q1: How reliable are hammer candlesticks?
A: About 65-70% accuracy when properly confirmed with volume and trend context.
Q2: Can hammers appear in uptrends?
A: No - similar-looking candles in uptrends are called "hanging men" and signal potential tops.
Q3: What timeframes work best for hammers?
A: All timeframes can work, but daily/weekly charts tend to produce more reliable signals.
Q4: Should I always trade hammer patterns?
A: No - only trade when risk/reward justifies it and other indicators confirm.
Q5: How do I set price targets with hammers?
A: Use measured moves from prior swings or nearby resistance levels.
Q6: What's the difference between green and red hammers?
A: Color matters less than the structure - both can be valid if they meet the criteria.