The “Hammer” candle is one of the basic and most important bullish reversal models of Japanese candles. The model works best in highly liquid and volatile markets, such as Forex. Pattern “Hammer” is formed at the end of the downtrend, on the market bottom. Visually, it represents a Japanese candle with a small body. The color of the candlestick can be any color. But note that if it does not play a special role in long-term trading, the “Hammer” with a white body will be stronger in short-term trading. Additionally, you can read about the shooting star candles fx.
As for the candlestick shadows, there should be no upper pattern. However, its presence is allowed provided that the length of the shadow does not exceed 5-10% of the distance from the minimum to the maximum of the candle. The lower shadow is obligatory, and it should be 2-3 times larger than the candle body. Doesn’t this candle look like a hammer with a long handle hanging from the wall of a garage or a workshop? Perhaps that explains the name of the pattern “hammer”. Before the Hammer, the market was falling, the bearish mood prevailed. So the new session opens with a sharp drop in the price. But then the price rises (the model body is formed) and it cools down the bears’ enthusiasm, especially if a white “Hammer” with a closing price higher than the opening price is formed.
Often after the “Hammer” appears on the chart, the price starts to rise, but after a short distance upwards, it goes down again and tests the pattern support level. The “Hammer” figure is simple, but there is an interesting trend in candlestick analysis – the simpler the model, the more it has different rules, features and nuances. The “Hammer” is not an exception, these are just the basic rules.
- As already mentioned, white “Hammer” is stronger than black. In this case, the signal from the pattern will be considered strong if white “Hammer” has a large body, and black “Hammer” – on the contrary, small, or it does not have a body at all. And to confuse you, let us finally mention that the “Hammer” with a small body and a long lower shadow is called the “Umbrella”.
- When analyzing the “Hammer”, the length of its shadows is of particular importance. The stronger the signal, the shorter the upper shadow (even better if it is not at all) and the longer the lower shadow. But note that an excessively long lower shadow can be a sign of panic in the market. In general, “Hammer” with a long lower shadow, it is not “Hammer” at all, and the candle “Takuri”! Its meaning is the same, and the figure is stronger, although the market growth in its case may not be smooth, but staggered.
- For the “Hammer” to work well, it must be preceded by a more or less strong and continuous descending trend. In this case, the market must be objectively resold, which can be determined by using an oscillator.
- For the “Hammer” model confirmation is obligatory. They can be both signals of technical indicators to buy, and the formation of a large white candle, another bullish model of candlestick analysis or the appearance of a gap.
- A good sign is a piercing of the lower shadow of the “Hammer” of the local support level. If the candlestick itself closed above this level, it is quite wonderful.
So, you and I have considered in detail the “Hammer” reversal model, analyzed its features. But the attentive reader must have noticed a certain understatement. There’s more to be said about this pattern. First, it has a bear pair called “Shooting Star”. And secondly, we haven’t said a word about trading involving the Hammer. But each pattern has a lot of nuances, so you can look for additional information and forex trading bonus on other sites.