price action

The white candlestick must open below the previous close and close above the midpoint of the black candlestick’s body. A close below the midpoint might qualify as a reversal, but would not be considered as bullish. To see why it’s seen as a bullish reversal pattern, we can take a closer look at the potential price action within the session. 71.6% of retail investor accounts lose money when trading CFDs with this provider.

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If the Hammer is green, it is considered a stronger formation than a red hammer because the bulls were able to reject the bears completely. Also, the bulls were able to push up the price past the opening price. Hello dear traders, Here are some educational chart patterns that you must know in 2022 and 2023.

Another difference between a shooting star and a hanging man is a long upper wick instead of a lower one, resembling a bright trail after a star has fallen. If the hammer is situated at the bottom, then the hanging man is formed at the top and signals that the price has reached the ceiling. This means a change from an uptrend to a downtrend and an increase in bearish sentiment in a bull market.

As we have seen, an actionable hammer pattern generally emerges in the context of a downtrend, or when the chart is showing a sequence of lower highs and lower lows. The appearance of the hammer suggests that more bullish investors are taking positions in the stock and that a reversal in the downward price movement may be imminent. The shape of both the inverted hammer and shooting star are quite similar to each other. They both have a long upper shadow with a very small or no lower shadow. In addition, both opening, closing, and low are very close to each other.

The hammer candlestick pattern is seen as a reversal pattern, which means it occurs at the end of a downtrend and signals a potential move higher. The key takeaway is the price closes nowhere near the low which indicates by the close of that specific candlestick, bulls were able to regain control. Although the hammer candlestick pattern can help traders spot potential trend reversals, it is not a buy or sell signal in and of itself. Like other trading strategies, Hammer candles are more useful when combined with other analysis tools and technical indicators. A hammer pattern is a candlestick that has a long lower wick and a short body.

A hammer candlestick is a candlestick formation that is used by technical analysts as an indicator of a potential impending bullish reversal in the trading of a financial security. The hammer pattern is a single-candle bullish reversal pattern that can be spotted at the end of a downtrend. The opening price, close, and top are approximately at the same price, while there is a long wick that extends lower, twice as big as the short body. Always include the context of price action with hammer trading.

This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price. Our gain and loss percentage calculator quickly tells you the percentage of your account balance that you have won or lost. Learn about crypto in a fun and easy-to-understand format. However, this trade was less successful as I opened it late, but there was a downside potential.

  • A hammer candlestick appeared on the chart of Exxon Mobil after six prior days of bearish candlesticks and reaching a historical support area.
  • To some traders, this confirmation candle, plus the fact that the downward trendline resistance was broken, gave them a potential signal to go long.
  • After correcting to support, the second bullish engulfing pattern formed in late January.
  • This means that it typically forms at the end of a downtrend and signals a potential move higher.

Bullish hammer candles appear during bearish trends and indicate a potential price reversal, marking the bottom of a downtrend. In the example below, we have a bullish hammer candlestick . Traders view a hammer candlestick pattern to be an extremely reliable indicator in candlestick charting, especially when it appears after a prolonged downtrend. Suppose a trader, Mike, is tracking the price movements of XYZ stock. After looking at the security’s candlestick chart, he identifies a bullish hammer in a downtrend after four declining candlesticks.

I guess the last two example patterns in ‘The shooting star’ candlestick are interchanged. The hanging man is a bearish pattern which appears at the top end of the trend, and one should look at selling opportunities when it appears. The high of the hanging man acts as the stop loss price for the trade. The hammer is a bullish pattern, and one should look at buying opportunities when it appears. The length of the upper shadow is at least twice the length of the real body.

What is the difference between a hammer candlestick and a shooting star?

It warns that there could be a price reversal following a bearish trend. Lastly, consult your trading plan before acting on the inverted hammer. An inverted hammer candlestick is formed when bullish traders start to gain confidence. However, the bullish trend is too strong, and the market settles at a higher price. Following the formation of a hammer candlestick, many bullish traders may enter the market, whereas traders holding short-sell positions may look to close out their positions. The inverted hammer candlestick pattern is a candlestick that appears on a chart when there is pressure from buyers to push an asset’s price up.

When combined with other technical indicators, Hammer candles can provide traders with good entry points for long and short positions. The hammer is made up of one candlestick, white or black, with a small body, long lower shadow and small or nonexistent upper shadow. The size of the lower shadow should be at least twice the length of the body and the high/low range should be large relative to range over the last days.

Dojis may signal a price reversal or a trend continuation, depending on the confirmation that follows. This differs from the hammer, which occurs after a price decline, signals a potential upside reversal , and only has a long lower shadow. Confirmation occurs if the candle following the hammer closes above the closing price of the hammer. Candlestick traders will typically look to enter long positions or exit short positions during or after the confirmation candle.

What is an Inverted Hammer Candlestick?

The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and can act as a warning of a potential bullish reversal pattern. A hammer candlestick’s main event occurs in the lower shadow. As a result, the candlestick’s success rate is determined by how long the wick is compared to the candle’s body. A good hammer pattern should have a wick double the body’s size. The color of the candlestick has little significance because the hammer candlestick pattern always indicates a bullish signal regardless of the candle’s body color.


With neither or sellers able to gain the upper hand, a spinning top shows indecision. Confirmation of a hammer signal occurs when subsequent price action corroborates the expectation of a trend reversal. In other words, the candlestick following the hammer signal should confirm the upward price move. Traders who are hoping to profit from a hammer signal often buy during the formation of this upward confirmation candle. The first step is to ensure that what you’re seeing on the candlestick chart does in fact correspond with a hammer pattern.

Why do Hammer Candlesticks Form?

Still, the mere fact that the buyers were able to press the price higher shows that they are testing the bears’ resolve. Irrespective of the colour of the body, both examples in the photo above are hammers. Still, the left candle is considered to be stronger since the close occurs at the top of the candle, signaling strong momentum. In case of shooting star you are talking about shorting the trade. As the stock is turning into bearish we are coming out of the trade. For practical purposes, I treat hammers and dojis the same way in my trading.


Of course, we still haven’t discussed trailing stoploss yet. The trade would have been profitable for both the risk types. The entry of bears signifies that they are trying to break the stronghold of the bulls. Do notice how the trade has evolved, yielding a desirable intraday profit. In this case, we see a short entry near an all-time high made by the S&P 500 Index.

The highest point of the candlestick pattern indicates an overbought level in the market with buying pressures exceeding the selling prices. One of the key advantages of the hammer candlestick pattern is that it can be used in any timeframe, similar to the bullish engulfing pattern. This makes it a versatile tool for both day traders and swing traders alike.

Bullish reversal patterns appear at the end of a downtrend and signal the price reversal to the upside. All ranks are out of 103 candlestick patterns with the top performer ranking 1. “Best” means the highest rated of the four combinations of bull/bear market, up/down breakouts. When the low and the open are the same, a bullish, green Inverted Hammer candlestick is formed and it is considered a stronger bullish sign than when the low and close are the same . The bulls were still able to counteract the bears, but they were just not able to bring the price back up to the opening price.

The bullish hammer highlights the increase in the number of purchases and the appearance of the uptrend in the market. Fibonacci retracement is one of the most effective methods to determine support and resistance levels. Levels can be set independently in asset accumulation zones with increased liquidity. Western traders and investors call the hanging man pattern a bearish hammer. There is no difference between the red and green hanging man since only the candle’s structure is important. However, the red color emphasizes the distinctive bearish sentiment.

The black candlestick confirms that the decline remains in force and selling dominates. When the second candlestick gaps down, it provides further evidence of selling pressure. However, the decline ceases or slows significantly after the gap and a small candlestick forms.