What is the Hammer Pattern?
The Hammer pattern is a bullish reversal candlestick pattern occurring at the end of a downtrend to signify the reversal of such a downtrend into an uptrend.
It comprises a single hammer-shaped candlestick with a short body, a long lower shadow at least twice the height of its body, and little or no upper shadow. The Hammer candlestick can either be bearish or bullish.
The long lower shadow or wick shows the rejection of further price drop by the buyers.
It is therefore a hint towards the increased buying pressure which is setting in and is further confirmed by a bullish candlestick closing higher than the hammer’s closing price.
A more effective Hammer needs to be preceded by at least three bearish candlesticks.
A bullish reversal is confirmed only after the candlestick proceeding the Hammer has closed higher than the close price of the hammer.
Candlestick pattern alone may not help to make conclusive trading decisions. Support levels, Commodity Channel Index (CCI), Relative Strength Index (RSI), and Stochastic Oscillator can be used in conjunction with the Hammer Candlestick pattern for confirmation.
Fixed Time traders should set the expiration time at least 3 times that of the candlestick time frame. Give the price time to move.
Trading the Hammer Pattern on Olymp Trade.
Convert your knowledge about the Hammer pattern into profits in the following simple steps;
- Identify a Downtrend.
- Identify the Hammer Pattern.
- Confirm downtrend reversal.
- Enter a Buy Position.
- Adjust your Stop Loss
- Adjust your Take Profit.
1. Identifying a Downtrend.
The price keeps moving down forming both lower highs and lows. The Hammer Pattern occurs at the end of a downtrend.
2. Identifying the Hammer Pattern.
Identify at the bottom of the downtrend a hammer-shaped candlestick with a short body, a long lower shadow, and little or no upper shadow. It can either be bearish or bullish.
3. Confirming downtrend reversal.
Wait for the candlestick immediately after the Hammer to close above the close price of the Hammer. You can use the CCI or RSI also, to identify an oversold condition. The presence of a Support zone at that level is also indicative of a bullish signal.
4. Entering a Buy Position.
After confirming that the signal is truly Bullish, then enter a Buy Position immediately.
5. Adjusting your Stop Loss.
The ideal position for your Stop Loss is just below the low of the Hammer candlestick.
6. Adjusting your Take Profit.
In matters profit, you really do not know how long the uptrend is bound to take. You therefore can establish major resistance areas where to take profit, actively move your stop loss up until the trend is exhausted, or employ an objective risk to reward ratio. That way, you can comfortably determine where you want to make a profit.
The Hammer pattern, as simple as it is, can change your experience and earnings on Olymp Trade. Go ahead and try it on a demo account.