The chart above of the Nasdaq 100 ETF shows a downtrend that is ended by a hammer with a long lower shadow. The long lower shadow illustrates the market seeking out an area of support which it finds when bulls begin https://www.bigshotrading.info/ buying and pushing prices up towards the open. A suggested confirmation candle closes higher than the hammer’s close and an uptrend commences. The first is the relation of the closing price to the opening price.

The best way to show how you can interpret hammer candlesticks in conjunction with price action is to look at some real trading examples. A different argument is necessary for the bearish hammer candlestick, also called “hanging man” for its shape. Usually, it’s red, so it’s bearish in its color and meaning. You’ll usually find it at the top of an uptrend, often representing a bearish reversal signal. For aggressive traders, Nison suggests going long right after the hammer candlestick appears. He suggests placing a stop loss under the low of the hammer.

Be Selective on Small Timeframes

As you can see in the image below after the hammer candlestick formed the price reversed upwards. It is Hammer Candlestick Patterns this information we gain from the hammer candlestick that allows us to take advantage of the reversal.

As an example, we are opting for the first option, although it is a tad riskier. The green horizontal line signals our entry point – where the hammer closed. The red line is the low, against which we place a stop-loss around pips beneath.

Characteristics Making the Hammer Candlestick a Strong Indicator

To qualify a candle as a paper umbrella, the lower shadow’s length should be at least twice the length of the real body. Just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger. Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. As a take-profit, you can determine the next resistance to which the bulls are likely to push the price action. In this case, we opted for the previous swing low, which is now the resistance. On the other hand, an inverted hammer is exactly what the name itself suggests i.e. a hammer turned upside down.

Some hammer candlesticks are stronger signals than others. Let’s look at which factors tend to affect their strength. When a hammer candlestick formation appears in an uptrend, to be brutally honest, I ignore them. You want to place your entry 1 or 2 pips higher above the hammer candlestick pattern’s high.