In other words, the price target should be an area where the market is unwilling to move below (for long trades) or above (for short trades). The higher the volume, the more likely the rally will continue. A high volume also confirms the strength of the buying pressure and adds credence to the hammer pattern. Additionally, if the security has been in a downtrend for a while and forms multiple hammers, it is less likely to result in a significant rally.

After the Inverted Hammer forms, it is important to wait for confirmation before taking any action. Some signs of confirmation would be if the next candlestick closed higher than the Inverted Hammer candlestick or if there was heavy volume during the Inverted Hammer formation. When this happens, you can enter a long position with a stop https://www.bigshotrading.info/ loss below the low of the hammer candlestick. This setup provides a great risk-reward ratio and has a high probability of success. The signal is strongest after a sustained downtrend, and the security rallies significantly off its lows. The longer the security trades below its opening price, the more significant the reversal signal.

Learn more about Trading with Hammer Candles

The hammer has been confirmed if the next candle closes at a higher price than the hammer’s closing price. This confirmation candle should reflect robust buying activity. Hammer Candlestick Patterns You can develop your skills in a risk-free environment by opening an IG demo account, or if you feel confident enough to start trading, you can open a live account today.

• It shows that the price is ready to decline after a strong uptrend as the candlestick has a long lower shadow that depicts the force of bears.
• Hammers also don’t provide a price target, so figuring what the reward potential for a hammer trade is can be difficult.
• CFI International Ltd provides general information that does not take into account your objectives, financial situation or needs.
• The color of the hammer and inverted hammer candlesticks do not matter.
• We’d like to remind you that this way of identifying a Stop Loss level can be risky as the risk may exceed reward dramatically.
• A stop loss is placed below the low of the hammer, or even potentially just below the hammer’s real body if the price is moving aggressively higher during the confirmation candle.

It is advised by the experts to trade in the direction of the trend. Lastly, it is important for your success to identify an entry trigger to initiate your trading. The bullish hammer candles include the hammer and inverted hammer, which appear after a downtrend. The bearish variations of hammer candles include the hanging man and the shooting star, which occur after an uptrend. Again, you can either wait for the confirmation candle, or open the trade immediately after the inverted hammer is formed.

Is a Hammer Candlestick bullish?

So, you can either close the sell position or wait for a confirmation of the upward movement to open a buying one. Hammer and inverted hammer candlesticks are both bullish patterns. Both the hammer and inverted hammer occur at the end of the downtrend.

On the other hand, if the price does begin to rise, rewarding your recognition of the hammer signal, you will have to decide on an optimal level to exit the trade and take your profits. On its own, the hammer signal provides little guidance as to where you should set your take-profit order. As you strategize on a potential exit point, you may want to look for other resistance levels such as nearby swing lows. As with any trade, it is advisable to use stops to protect your position in case the hammer signal does not play out in the way that you expect. The level at which you set your stop will depend on your confidence in the trade and your risk tolerance. What is interesting is that the hammer candlestick came in around a previous resistance turned potential support zone.

Learn to trade

DailyFX Limited is not responsible for any trading decisions taken by persons not intended to view this material. Other indicators should be used in conjunction with the Hammer candlestick pattern to determine potential buy signals. There was so much support and subsequent buying pressure, that prices were able to close the day even higher than the open, a very bullish sign. The red arrow points to the hammer candlestick that has formed in an area of interest. While shooting stars may not always lead to a reversal, it’s important to keep them in mind as they are indicating selling pressure anywhere.

• After selecting it, you will get a list of stocks in which the “Hammer” pattern is formed.
• You can develop your skills in a risk-free environment by opening an IG demo account, or if you feel confident enough to start trading, you can open a live account today.
• Below, you’ll find information on how to confirm the hammer’s signals.
• The hammer candlestick is a bullish trading pattern that may indicate that a stock has reached its bottom and is positioned for trend reversal.
• The hammer has a long lower shadow, while the inverted hammer has a long upper shadow.
• The hammer and the inverted hammer candlestick patterns are among the most popular trading formations.

This is one of my favorite techniques using the Hammer candlestick and it goes against the common rules. The key is that we see the reversal set up while the price is near or at ann area of support. What matters, is context and we are going to discuss that after we learn what a Hammer candlestick is. In terms of taking profit, look for at 1.5x (Figure 12) your risk.