Hammer Candlestick Pattern
Hammer candlestick patterns are a type of bullish reversal candlestick patterns. When a Hammer candlestick pattern develops at the end of a long, protracted downtrend, I get excited. This candlestick is on my short-list of favorite candlestick patterns and set-ups to find on a stock chart.
When a Hammer candlestick pattern meets all the requirements and characteristics listed below, it typically represents an excellent buying opportunity.
Remember to always use a scale-in strategy and never purchase all your shares at once. Look under the “Trading Strategies” title below for specific trading strategies and high probability set-ups that I see develop for candlestick patterns below.
In general though, Hammer candlestick patterns present opportunities to purchase shares and go long on a stock. As with any candlestick pattern, it is important to know the support or resistance area for that particular candlestick.
The term “Hammer” indicates that the share price is trying to “hammer” out a bottom. From a visual perspective, the candlestick has the appearance of a “hammer” with a long handle. The longer the handle, the better.
The long lower shadow of a Hammer candlestick pattern is usually caused by a day of capitulation. Capitulation is defined as selling pressure that occurs on extremely heavy volume. After the share prices has been driven down by all the selling pressure, buyers step in and start purchasing shares faster than the sellers are selling.
This wave of buying then takes the share price all the way back towards the opening share price from the beginning of the trading session. This trading activity creates the long lower shadow and small real body for the Hammer candlestick pattern.
Requirements
Following are the requirements for a Hammer candlestick pattern.
- A Hammer candlestick pattern is a bullish reversal candlestick pattern
- The real body can be either green or red colored, but the opening and closing share prices must be near each other creating a very small real body
- The length of the lower shadow must be at least twice the length of the real body
- The candlestick must develop at the end of an easily identifiable downtrend
Hammer candlestick patterns with smaller real bodies tend to perform better than Hammer candlestick patterns with larger real bodies.
The minimum ratio of the lower shadow length to real body length is[s2If !current_user_can(access_s2member_level1)]…….
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- requirements
- characteristics and my personal observations about the candlestick
- the support areas for the candlestick
- how to effectively trade a Hammer candlestick pattern
- live chart examples
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No more excuses. Give it a try![/s2If][s2If current_user_can(access_s2member_level1)] a 2:1 ratio as mentioned above. But when the ratio of the lower shadow to the length of the real body starts to increase, such as a 3:1 or a 4:1 ratio, there is a greater chance that the Hammer candlestick could be signaling a major trend reversal.
Characteristics & Observations
Listed below are some of the characteristics for Hammer candlesticks, as well as some of my personal observations that I have seen over that last several years.
- Hammer candlesticks that develop at the end of long, well-defined downtrends offer very strong support areas
- The longer and steeper the downtrend before the Hammer candlestick pattern, the better the chances are for a quick trend reversal after the Hammer candlestick pattern develops
- When the candlestick develops on volume that is heavier than the preceding candlestick’s volume, the likelihood of a trend reversal is increased significantly
- The longer the lower shadow and the smaller the real body is for a Hammer candlestick, the stronger the support area tends to be
Bearish Counter-Part
The bearish counter-part to the Hammer candlestick pattern is the Hanging Man candlestick pattern.
The main difference between a Hammer candlestick and a Hanging Man candlestick is that a Hammer candlestick develops at the end of a downtrend while the Hanging Man candlestick develops at the end of an uptrend. Appearance wise, they can look identical.
Even though these two candlesticks can appear identical, their outcomes vary differently. Because of this, it is extremely important to notice where the candlestick developed in its trend.
Did the candlestick develop at the bottom of a downtrend? Then it is considered a Hammer candlestick pattern. However, if it developed at the top of an uptrend, then it is a Hanging Man candlestick pattern. Make sure you know the difference between the two.
Support Area
Most publications talk about the Hammer candlestick pattern’s support area as the real body of the candlestick. Since the real bodies on Hammer candlestick tends to be small, this narrows the support area down to a very small price range.
With the Hammer candlesticks I have seen develop on several different stock charts, I’ve noticed that the lower shadow of a Hammer candlestick pattern tends to act as a secondary support area. Therefore, I typically include the lower shadow area in my consideration of the overall support from a Hammer candlestick pattern.
As with any support area, the price and volume action leading up to the support area should be analyzed before just buying shares at a support area because a close below any support area is a sell signal and usually indicates lower share prices are ahead.
Trading Strategies
If the Hammer candlestick pattern develops on buying volume that is significantly above average, make an immediate scale-in purchase. This initial purchase can be used for trading or holding, whatever your preference is.
Make a second scale-in purchase on any successful re-test of the low from the Hammer candlestick pattern. If that re-test starts to rebound and start heading higher again on increased buying, that is confirmation to make the second scale-in purchase.
Real Chart Examples
The next chart is a 5 year monthly candlestick chart for Apple (AAPL), which illustrates a textbook Hammer candlestick pattern. Notice as you look at the chart how Apple’s Hammer candlestick pattern meets each and every one of the requirements and characteristics I list above. That is why I mentioned this was a “textbook” looking Hammer candlestick pattern. This sort of setup usually leads to very nice profits.
Apple’s (AAPL) downtrend leading up to its Hammer candlestick pattern sure was ugly – it amounted to almost a 50% drop from its peak before forming the candlestick
What kind of profits can a Hammer candlestick pattern lead to? Well, Apple’s share price saw a significant run over the next two years after developing its Hammer candlestick pattern.
Now, if you were to stick to only the main support area for a Hammer candlestick pattern, you would have ended up selling Apple’s shares at exactly the wrong time. However by also using the secondary support area for the Hammer candlestick, you did not get shaken out of your position during a re-test of the Hammer candlestick’s low.
While not all Hammer candlesticks will end up resulting in uptrends like Apple’s uptrend, when all the requirements and characteristics for Hammer candlesticks are met, the patterns represent very strong bullish reversal signals that should not be ignored.
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