Hammer Candlestick Pattern for Beginners – Meaning, Chart, and Trading Guide
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| Hammer candlestick pattern guide for beginners |
The hammer candlestick pattern indicates a market reversal or a reversal signal, especially when the market reaches a support level after a long downtrend. Candlestick patterns are very important for those trading or investing, and the Hammer pattern is considered to be the most basic and powerful signal among them. This pattern provides a reliable signal for price action traders that the market may turn higher.
It is also important for beginners to understand this pattern as it is visually simple and easily identified. Today in this blog, let us understand in detail about Hammer Candle Pattern. Today in this blog, we will study about hammer candle in depth.
What is Hammer Candle Pattern?
Hammer candle pattern is a single candlestick pattern that forms on the chart after a downtrend. Its shape looks exactly like a hand with a small body on top and a long wick (shadow) below. This pattern tells that the price has recovered after falling and buyers have pulled the price back. The real body of the candle is small but the lower wick can be 2-3 times or even longer than the body. The upper shadow is either absent or very small, which indicates that the high price of the candle was near the open and close.
The main purpose of a hammer candle is to signal that sellers first created pressure in the market, but buyers absorbed that pressure and pushed the price back, giving a signal of a reversal.
How does a hammer candlestick look?
Hammer candlestick is visually very distinct. Its real body is small and the lower wick is quite long – generally the wick is 2x or 3x the body. The colour of the candle can be green or red, but if the candle is green (bullish) then the signal is considered to be a little stronger. This candle is often formed near a support level, demand zone or psychological level (eg ₹100, ₹500).
To identify this pattern you have to observe any candlestick chart – such as on TradingView, Investing.com or any broker’s platform. When you see that the price is in a downtrend and a candle forms with a long lower shadow, a short body and almost no upper shadow, you can understand that this is a hammer pattern.
In which situation does the Hammer Pattern form?
Hammer candle is reliable only when it forms after a clearly defined downtrend. If the market is in a sideways or uptrend then this pattern is not as effective. This candle mostly forms when the market has fallen to a strong support zone and buying interest comes from there.
The importance of this pattern increases when it forms near the demand zone, Fibonacci retracement level or round number (like ₹1000). This pattern is also sometimes formed after a news-based fall, when buyers enter after panic selling. In such a scenario, the hammer candle becomes a strong reversal indicator
What is the meaning of Hammer Candle Pattern in the market?
From the point of view of market psychology, the hammer candle tells a lot. When a hammer is formed, it means that the sellers pushed the price down quite a bit, but the buyers came back to the market and brought the price into recovery mode. This tells that buyers are interested in the lower levels and now a reversal can be expected in the market.
This pattern is not just a visual signal, but also a sentiment indicator. When traders see that the market went down, but then the buyers recovered from it, they feel that the bottom has formed. This increases the chance of the next candle being bullish, which validates the signal of the hammer candle.
What is the difference between Bullish Hammer and Bearish Hammer?
Both hammer patterns are structure-wise same, but the color of the body is different. In bullish hammer the body of the candle is green, which shows that the price went below the open, but the close was slightly above the open. This means that buyers not only recovered the price but also closed it higher. This signal is considered to be stronger.
In bearish hammer the body is red, which shows that the price went below the open, then recovered, but the close was slightly below the open. This can also be a reversal indicator, but confirmation is necessary. In both patterns the lower shadow is long - this is their most important feature.
How reliable is the hammer pattern in trading?
Hammer pattern reliability is quite good – but only when you use it in the right context. Its success rate can be around 60-70% if you wait for the confirmation candle and trade it in the support zone. Volume also plays an important role here – if the hammer candle forms with high volume then the signal is strong.
Often beginner traders take entry without confirmation, which is a mistake. If you wait for a strong bullish candle to form after the hammer, then the reliability of your trade increases. The risk-reward ratio is also good as the stop loss is placed slightly below the low of the hammer and the upside potential is high.
What happens after the Hammer Candle Pattern?
If the hammer pattern is valid, then the next few candles signal a market reversal. Price shows short-term bullish momentum and traders can take advantage of that rally. But if the market appears flat or weak after the hammer, then understand that the reversal is not strong.
In some cases, false hammers are also formed in the market - hence one should always wait for a confirmation candle. Your stop loss may be hit without confirmation. If the confirmation candle is lit, the price target can be achieved by 1:2 or even 1:3.
How to Identify Hammer Pattern on Chart?
It is quite easy to identify a hammer on the chart. First you should see a downtrend. Then you should see a candle in which:
- The real body is small
- The lower shadow is quite long
- The upper shadow is either absent or very small
This pattern can be seen in the charts of TradingView, Chartink, Angel One or Zerodha. You mark the support zone with drawing tools and check whether a hammer is formed there or not.
How to Enter and Exit from Hammer Candlestick Pattern?
Entry Strategy: After the hammer, if the next candle is bullish and its close is above the hammer's high, you can buy. Entry should be just above the hammer's high.
Stop Loss: The stop should be placed slightly below the hammer candle's low - so that if the reversal fails, the loss is limited.
Target: You can set the target on the basis of the nearest resistance level or 1:2 risk-reward. If you want, you can also take more profit by using trailing stop loss.
How to use Hammer Pattern with other indicators?
The effectiveness of Hammer pattern increases if you use it with indicators:
Volume: Signal becomes stronger when there is high volume.
RSI: If RSI is in oversold zone (below 30), then the chance of hammer reversal increases.
Moving Average: If Hammer is formed near 200 EMA or 50 EMA, then extra confluence is obtained.
MACD: If Bullish crossover is taking place, then hammer signal gets further confirmed.
Conclusion:
Hammer candle pattern is a beginner-friendly and reliable candlestick signal that helps in identifying market reversal. But this should not be used blindly. If you trade in a disciplined way by analysing the confirmation candle, volume and support zone, then you can earn consistent profit from this pattern. This pattern is equally useful in short-term trading, intraday and swing trading.
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