Dear traders,
We all desire to achieve high profits
while trading in the Forex market. Successful trading depends on our ability to
predict price movements in advance. To improve this skill, we use technical and
fundamental analysis. In technical analysis, one of the most effective tools is
candlestick analysis. Japanese candlesticks help us predict prices by forming
single and multiple patterns. In today's article, I will discuss the
"Hammer" candlestick pattern, one of the candlestick patterns. We will
cover what the Hammer candlestick pattern is, its meaning, how it forms, and
how trading can be done using this pattern.
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| The Hammer Candlesticks |
- Topic: Hammer
- Type: bullish
- Trend direction: reversal
- Opposite pattern: Shooting Star
What is the Hammer candlestick pattern?
The Hammer is a candlestick pattern that forms at the end of
a downtrend and indicates a trend reversal. In financial markets, there are
many single and double candlestick patterns used to predict price movements.
The Hammer is one of the single candlestick patterns. Another specific feature
of this candlestick pattern is its bullish nature. It appears at the end of a
bearish trend and provides a reversal signal. Therefore, this pattern is known
as a bullish candlestick pattern.
Why is the name of this pattern "Hammer"?
The name of the Hammer candlestick pattern is based on its
appearance. This pattern has a small body and a long lower shadow. The long
lower shadow resembles the handle of a hammer, while the small body resembles
the head of the hammer. Due to its visual resemblance, it is named "Hammer". Another possibility is that the
long lower shadow indicates that the price was "struck down" and then
"bounced back up". This is similar to being struck with a hammer.
Therefore, it is possible that this pattern is named "hammer".
How is the Hammer pattern formed?
The Hammer pattern appears as a candlestick with a small
body and a long lower shadow. It has either no upper shadow or a very short
one. At the time of the candlestick's opening, sellers exert pressure, causing
the price to move downwards. However, at a point where the price has fallen,
buyers begin to push the price upwards. This results in a long lower shadow.
Due to the opening and closing prices being close to each other, a small body
is formed. The lower shadow extends at least twice the length of the body.
Thus, the Hammer candlestick pattern is completed.
How can we use the Hammer pattern in trading?
The Hammer pattern indicates that a downtrend is starting to
weaken and that the price may start moving upwards. When the pattern is seen,
it is normally accepted that the downtrend is over and that buyers are pushing
the price upwards. The Hammer pattern is considered a reversal signal in a
downtrend. To increase the reliability of the Hammer pattern, we should wait
for a bullish candle or other positive price movements to occur after the
formation of this pattern. Afterward, we can consider opening a long position.
Long (Buy): After the price closes above the body of
the Hammer candlestick, a buying position can be entered at the opening of the
next candlestick.
Stop Loss: The stop loss order can be placed below the lower
shadow of the Hammer or below support levels.
Target: Profit targets can be determined using resistance
levels, Fibonacci retracement levels, or other technical analysis indicators.
The "Hammer" pattern on the Spot Gold/US Dollar
chart appears during a downtrend, leading to the beginning of a price rise. You
can analyze an example trade in the image below:
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| Hammer Signal on Gold/USD |
It should be noted: Market conditions in the Forex market can change constantly, and every trade carries risks. No candlestick pattern is 100% reliable, including the Hammer pattern, which can give false signals. Therefore, the Hammer pattern can be made reliable not only by itself but also by using it in conjunction with other technical indicators and analyses.