candlestick formation

For those taking new long positions, a stop loss can be placed below the low of the hammer’s shadow. 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. In contrast, for less aggressive traders, Nison suggests that traders wait until prices retest the hammer's support area and then buy (p. 57). A trade can be initiated after the formation of a hammer candlestick.


Like any other, the hammer has both advantages and disadvantages. While hammers still show you some clear intention – buyers and sellers are fighting, but you can still foresee who will win, Dojis show extreme uncertainty. Since the sellers weren’t able to close the price any lower, this is a good indication that everybody who wants to sell has already sold.

price reversal

One of these reactions can be a quick move up to induce traders to go long and then reverse. This particular trade was placed at the hammer candle close. The ETH intraday chart above shows $2,332.97 as support and resistance to the price. The price approaches the resistance level and breaks through it under intense buying pressure. Later, the price falls to the support level, where investors should wait for confirmation before entering a buy order. Trading candlesticks like the hammer needs strict discipline and emotion-free trading.

Yes, the candlestick is a classic pattern that effectively determines a trend reversal. Below is an analysis of the hanging man pattern on the BTCUSD H4 chart. The picture shows that after the pattern appeared at each of the local tops, BTCUSD was very actively declining at some points. Each pattern that appeared on the chart warned traders that the trend was ending and bearish resistance was hindering growth. Therefore, in these cases, it is important to exit the purchase and wait for confirmation of the reversal.

Bullish Engulfing Candlestick Pattern: What Is and How to Trade

The paper umbrella is a single candlestick pattern which helps traders in setting up directional trades. The interpretation of the paper umbrella changes based on where it appears on the chart. A bullish hammer, positioned for example, at a support level or after bearish candles, has a small body at the top of the candle and a long wick beneath the body. Hammer candlesticks indicate a potential price reversal to the upside. The price must start moving up following the hammer; this is called confirmation. The real body should be at the top of the candlestick trading range.

It often appears at the bottom of a downtrend, signalling potential bullish reversal. Although the hammer candlestick pattern is a useful tool that helps traders spot potential trend reversals, these patterns alone aren't necessarily a buy or sell signal. Similar to other trading strategies, hammer candles are more useful when combined with other analysis tools and technical indicators.

The Bollinger bands can help identify overbought and oversold market conditions, protecting you against placing any orders that could lead to losses. As a trader, you can apply this strategy on several timeframes, from a 60-minute time frame to a four-hour time frame. The hammer should have a small body with a long lower wick. This website is using a security service to protect itself from online attacks.

Most traders will tend to use nearby areas of support and resistance to place their stops and take profits. The hammer candlestick is used to determine a trend reversal in the market. Before analyzing, find the “hammer” candle on the chart and determine the market sentiment using indicators.

Example of Hammer Candlestick

The hammer and hanging man candlesticks are similar in appearance, and both patterns signal trend reversals. That said, one can find these two candles in different trends. A dragonfly doji is a candlestick pattern that signals a possible price reversal.

Prices moved higher until resistance and supply were found at the high of the day. The bulls’ excursion upward was halted and prices ended the day below the open. Many offer free demo accounts, so you can give their technical analysis tools a try. Traders can use the hammer as a trend continuation and a reversal pattern.

Bearish harami cross

However, the bulls surprise them with a press higher to secure the bullish close. At this point, it is clear that the balance has changed in favour of the buyers, and there is a strong likelihood that the trend direction will change. Similar to a hammer, the green version is more bullish given that there is a higher close.

As with the hammer, you can find an inverted hammer in an uptrend too. But here, it’s called a shooting star and signals an impending bearish reversal. You can learn more about how shooting stars work in ourguide to candlestick patterns. During a downtrend, the sellers are leading the race and pushing the stock prices down. After few such red-colored candles, the hammer appears which has a small body formed of open and close prices, but a very long lower wick. It indicates that the price went to pretty low value, but rebounded from there to near around the open price.


It’s how individuals, businesses, central banks and governments pay for goods and services in other economies. Whenever you buy a product in another currency, or exchange cash to go on holiday, you’re trading forex. As usual, the hammer should represent a reversal signal – in this case, the beginning of a new uptrend. This means that buyers attempted to push the price up, but sellers came in and overpowered them. This is a definite bearish sign since there are no more buyers left because they’ve all been overpowered. The picture below shows that the bulls tried to push the price higher, but then the bears stepped in and lowered the price back into the candle's opening range.

How to trade using the inverted hammer candlestick pattern

The close can be above or below the opening price, although the close should be near the open for the real body of the candlestick to remain small. It has a small real body with both lower and upper shadows. The hammer may not always be created at the end of a downtrend. Sometimes, it can be observed during a sideways or an uptrend. Therefore, it can give false signals when it is considered in isolation. First, it should be created at the end of a downtrend, and there should be at least 2-3 bearish candles before the formation of a hammer.

Existing Downtrend

If you trade cryptocurrencies, always use strict money management rules and other indicators in addition to the hammer. You must first understand the market context to develop an optimal trading strategy. Develop a trading strategy that incorporates multiple trading tools with proven track records. Of course, there are numerous candlestick patterns; always choose the one that best suits you. After a decline, a black/black or black/white combination can still be regarded as a bullish harami. The first long black candlestick signals that significant selling pressure remains, which could indicate capitulation.

The fourth always opens above the closing price of the third candlestick, indicating a potential market uptrend. A Bullish Inverted Candlestick is an individual candlestick with a small body and long upper wick. The close price of the currency pair is always above the open price, indicating more significant buying pressures in the market. The high prices signal traders to exit the market and lock in profits, leading to the selling pressures climbing back up. As more and more traders exit the market, the supply of currency pairs increases, leading to a downtrend with continuous falls in the prices. The hammer has a small body with a long lower shadow, while the doji has a small body with generally equal upper and lower wicks.