One of the most powerful tools in gauging shifts in market balances from bearish(down) to bullish(up). The hammer candlestick pattern is one of the patterns I personally find extremely useful in the process of determining trend reversals.
Candlestick Pattern: Hammer
Required Prior Trend: Down
Implications/Use: Bullish reversal, Bullish correction, good for scalping
Definition
There are plenty of candlestick patterns; however the hammer candlestick is of the most illustrative.
The Hammer is a single candle pattern, it forms when a security moves sharply lower after the open, but rebounds to close significantly above the low of the session.
The Shape
The Hammer candlestick forms when a security moves sharply lower after the open, but rebounds to close significantly above the low of the session. Accordingly, it has a long lower shadow with a small body, the lower shadow should at least be double the size of the body, and the body can be green(up) or red(down). However, the ones with green body tend to be more reliable. But both are good in indicating a potential shift in direction.
Some Hammer Candlestick Pattern Shape Variations:
Up day with small upper shadow
Down day with small upper shadow
Down day with no upper shadow( Open equals high)
Warning: For a hammer candlestick to be valid, a downtrend must precede it. See the examples below.
Hammer Candlestick Pattern Examples:
USJPY-Daily Hammer Candlestick Pattern
GBPUSD-Weekly Hammer Candlestick Pattern
Technician’s Tips & Tricks
Hammer Candlestick is one tool, use it in conjunction with other technical tools to increase your chances of success.
Using the hammer in the context of the overall trend will increase the chances of success. For example, a hammer that forms after a pullback within an uptrend is a good signal to go long.
Placing an entry after a hammer candle is tricky. As going long on the open of the next candle wouldn’t provide a good risk-reward. It is usually appropriate to wait for a minor downside pullback before initiating a long.
The low of the hammer candlestick is a potential support level.
A break below the low of the hammer candle would probably signal more bearish movement in the underlining security. (Note that a “breakout” has several interpretations depending on the trading style a trader follow. By a breakout I mean the “closing” method).
https://blog.thefxchannel.com/2017/03/03/the-hammer-candlestick-pattern/