What is Hammer Candlestick Pattern

A hammer candlestick pattern is a bullish reversal pattern that is formed at the bottom of a downtrend.  A small real body and a lengthy lower shadow that is at least twice as long as the body, with little to no upper shadow, makes up the hammer pattern. Along with other technical indicators, hammer candles can offer traders favorable entry points for both long and short positions. Keep reading to know more about the hammer candlestick pattern, hammer candlestick pattern meaning, bearish hammer candlestick pattern, inverted hammer candlestick pattern, and more.

Types of Hammer Candlestick

The hammer pattern has two variations, as mentioned below. 

1. A hammer candle: A bullish price reversal is indicated by the typical hammer candle. The candle shows increasing buyer control in the market since the closing price is higher than the opening. 
2. Candlestick with an inverted hammer: The inverted hammer candlestick is a bullish reversal indication, just like the standard hammer candle. Nonetheless, in contrast to the standard hammer candlestick, it is less bullish.

Open Demat Account

Your first step to enter share market

Get Started

Importance of Hammer Candlestick Patterns

Let's understand the importance of hammer candlestick patterns for traders. Uses for the Hammer candlestick pattern include the following: 

• In intraday trading, a hammer candlestick may serve as a leading indication, indicating a reversal of a bearish trend. 
• It can be applied to confirm or deny important lows or highs in a trend.  
• The price forms a top or bottom and moves up or down before closing close to the initial price. 
• This ‘hammering’ action highlights the importance of hammer candlestick patterns in identifying key market reversals.
• The shadow's duration and length should be given particular consideration. The shadow is usually twice or three times the size of the body. 
• Additionally, hammer candlesticks are researched and used in the insights of other trustworthy price reversal indications. 
• You should be aware of when a hammer candlestick fails in addition to its many applications. Same when this following candle comes up and forms a new high, a hammer candlestick is broken. On the other hand, if the next candle forms a new low then the hammer bottom candle may be considered a failure

Trading Strategies Based on the Hammer Pattern

When it comes to responding to possible price reversals, a trader's overall strategy may include the hammer pattern to make trading decisions. The following are some tactics that traders frequently consider using: 

• Profit target: From the point of entry, the profit targets can be placed at the next resistance level or based on a risk-reward ratio. 
• Stop loss: To reduce possible losses if the market moves further against the trader, it would make sense to place a stop loss below the hammer's bottom. 
• Entry point: If the hammer pattern is confirmed, a trader can try to open a long position. Usually, the next candle's closure above the hammer's high would indicate confirmation.

How to Trade with Hammer Candlestick Pattern

Since a hammer candlestick indicates a positive price reversal, it can be a useful signal for traders to join the market. To understand the trend and make wise investing decisions, follow these steps.

1. Identify the Pattern

Many times to be in a position to make the right investment decision requires identifying the candlestick pattern as well as understanding the implications of such a formation. As a result, when trying to analyze and predict a further price movement, make sure you do not forget about all the main concerning the candle, including its color parameters.

2. Verify the Reading

The candles that come before and after a hammer candlestick should also validate its indication. Even in the case of a hammer candle appearing at the end of a downtrend, for instance, it is considered to be more effective. Also, the hammer candle is well backed by a bullish, engulfing candlestick formation. It is suggested that you check the support level of a particular stock before adopting it for your investment. 

3. Enter the Market

Once your assessment of the trend and your prediction are solid, choose the moment to enter the market. Usually, the stop loss level is set below the lowest level of the wick, while the entry point is above the high point of the hammer. In the unlikely event that the price reversal prediction is incorrect, this can assist in reducing losses.

4. Book Profits

You can finally earn when the stock price hits the take-profit threshold. Gaining basic knowledge of technical analysis will enable you to determine potential points of entrance into the market and generate rewards based on your risk and financial goals.

At this point, it should be made clear that while the hammer candlestick may be a necessary condition for determining market entry, it is not sufficient. It may serve as a useful signal for identifying short-term market patterns. It needs to be analyzed along with additional measurements and indicators for long-term trends. To make an informed choice, a lot of additional technical analysis aspects need to be examined as well. 

Let us now understand the hammer candle and its significance through a few of examples:

Example 1: 

Let’s examine the case of "A," who wants to invest in a company named "Y.”. The current share price of Y’s company is ₹. 15. So the trader waits for the downtrend movement and follows the five consecutive decreasing candles. Here the trader identifies a bullish hammer candlestick. So when the trader purchases 100 shares for ₹. 12 per share, it is believed here that the price reversal will take place. The stock will then reverse its course and rise to ₹. 18 per share, at this point, the trader leaves the market with a profit of ₹. 600.

Example 2:

Assume for the moment that the price of business "S"'s shares is ₹. 105. After going through a long period of price decrease, the stock has recently recovered. The stock's hammer candle suggests that there is a support level at ₹.100 and that there may be a price increase that pushes the price up to ₹.120.  At the same time, the stock can drop to ₹.90 if the support level falls.

Difference between Hammer Candlesticks and Doji

The table below shows the key differences between a Doji and a hammer candle.

Conclusion
Traders should pay close attention to the hammer candlestick pattern. In this case, it is useful to look for potential trend reversals of the share prices being offered in the market. One is advised to only use it with other technical analysis indicators and with much caution. To complement the given information, it will be pertinent to use a reliable share market app to add more depth to the decisions you have made. You will be able to make better decisions in the Indian stock market if you can apply the hammer pattern properly.