Hammer Candlestick

HAMMER CANDLESTICK: WHAT IT IS AND HOW INVESTORS USE IT
By
CORY MITCHELL

Updated September 30, 2022
Reviewed by SAMANTHA SILBERSTEIN
What Is a Hammer Candlestick?

A hammer is a price pattern in candlestick charting that occurs when a security trades
significantly lower than its opening, but rallies within the period to close near the opening
price. This pattern forms a hammer-shaped candlestick, in which the lower shadow is at least
twice the size of the real body. The body of the candlestick represents the difference
between the opening and closing prices, while the shadow shows the high and low prices for
the period.
KEY TAKEAWAYS
 Hammer candlesticks typically occur after a price decline. They have a small real
body and a long lower shadow.
 The hammer candlestick occurs when sellers enter the market during a price decline.
By the time of market close, buyers absorb selling pressure and push the market price
near the opening price.
 The close can be above or below the opening price, although the close should be near
the open for the real body of the candlestick to remain small.
 The lower shadow should be at least two times the height of the real body.
 Hammer candlesticks indicate a potential price reversal to the upside. The price must
start moving up following the hammer; this is called confirmation.
Understanding Hammer Candlesticks

A hammer occurs after the price of a security has been declining, suggesting that the market
is attempting to determine a bottom.
Hammers signal a potential capitulation by sellers to form a bottom, accompanied by a price

rise to indicate a potential reversal in price direction. This happens all during a single period,
where the price falls after the opening but regroups to close near the opening price.
A hammer should look similar to a “T.” This indicates the potential for a hammer candle. A
hammer candlestick does not indicate a price reversal to the upside until it is confirmed.
Confirmation occurs if the candle following the hammer closes above the closing price of
the hammer. Ideally, this confirmation candle shows strong buying. Candlestick traders will
typically look to enter long positions or exit short positions during or after the confirmation
candle. For those taking new long positions, a stop loss can be placed below the low of the
hammer’s shadow.
Hammers aren’t usually used in isolation, even with confirmation. Traders typically utilize
price or trend analysis, or technical indicators to further confirm candlestick patterns.
Hammers occur on all time frames, including one-minute charts, daily charts, and weekly
charts.
Example of How to Use a Hammer Candlestick

Hammer Candlestick Example. Investopedia
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By
CORY MITCHELL

The chart shows a price decline followed by a hammer pattern. This pattern had a long lower
shadow, several times longer than the real body. The hammer signaled a possible price
reversal to the upside.
Confirmation came on the next candle, which gapped higher and then saw the price get bid
up to a close well above the closing price of the hammer.
Traders usually step in to buy during the confirmation candle. 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.
The Difference Between a Hammer Candlestick and a Doji

A doji is another type of candlestick with a small real body. A doji signifies indecision
because it is has both an upper and a lower shadow. 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 (if followed
by confirmation), and only has a long lower shadow.
Limitations of Using Hammer Candlesticks

There is no assurance that the price will continue to move to the upside following the
confirmation candle. A long-shadowed hammer and a strong confirmation candle may push
the price quite high within two periods. This may not be an ideal spot to buy, as the stop loss
may be a great distance away from the entry point, exposing the trader to risk that doesn’t
justify the potential reward.
Hammers also don’t provide a price target, so figuring what the reward potential for a
hammer trade is can be difficult. Exits need to be based on other types of candlestick
patterns or analysis.
Psychology of the Hammer

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 long lower shadow on the hammer candlestick indicates an effort to continue the price’s
downward trajectory, but the higher close represented by the real body indicates that the
sellers were ultimately unsuccessful in holding the price at its intraday low. The price’s
ascent from its session low to a higher close suggests that a more bullish outlook won the
day, setting the stage for a potential reversal to the upside.
Practical Application
If you’ve spotted a hammer candlestick on a price chart, you may be eager to make a trade
and profit from the potential upcoming price movement. Before you place your order, let’s
take a look at a few practical considerations that can help you make the most of a trade
based on the hammer pattern.
The Hammer Signal
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By
CORY MITCHELL

The first step is to ensure that what you’re seeing on the candlestick chart does in fact
correspond with a hammer pattern. If you’re looking for hammer signal that implies a
potential upside reversal, it should occur in the context of a downtrend, or declining price
action marked by a series of lower highs and lower lows.
Under these circumstances, the signal you’re keeping an eye out for is a hammer-shaped
candlestick with a lower shadow that is at least twice the size of the real body. The closing
price may be slightly above or below the opening price, although the close should be near
the open, meaning that the candlestick’s real body remains small.
Looking for Confirmation

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.
Placing Stops and Taking Profits

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. However, it may be useful to
set a stop loss below the low of the hammer pattern, providing protection in case the
downward pressure reemerges and the upward move that you were anticipating never
materializes.
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.
What is a hammer candlestick?

A hammer candlestick is a technical trading pattern that resembles a “T” whereby the price
trend of a security will fall below its opening price, illustrating a long lower shadow, and
then consequently reverse and close near its opening. Hammer candlestick patterns occur
after a downtrend. They are often considered signals for a reversal pattern.
Is a hammer candlestick pattern bullish?

The hammer candlestick is a bullish trading pattern that may indicate that a stock has
reached its bottom and is positioned for trend reversal. Specifically, it indicates that sellers
entered the market, pushing the price down, but were later outnumbered by buyers who
drove the asset price up. Importantly, the upside price reversal must be confirmed, which
means that the next candle must close above the hammer’s previous closing price.
What is the difference between a hammer candlestick and a shooting star?

While a hammer candlestick pattern signals a bullish reversal, a shooting star pattern
indicates a bearish price trend. Shooting star patterns occur after a stock uptrend, illustrating
an upper shadow. Essentially the opposite of a hammer candlestick, the shooting star rises
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CORY MITCHELL

after opening but closes roughly at the same level of the trading period. A shooting star
pattern signals the top of a price trend.
The Bottom Line

A hammer candlestick pattern occurs when a security trades significantly lower than its
opening but then rallies to close near its opening price. The hammer-shaped candlestick that
appears on the chart has a lower shadow at least twice the size of the real body. The pattern
suggests that sellers have attempted to push the price lower, but buyers have eventually
regained control and returned the price near its opening level. The pattern indicates a
potential price reversal to the upside.
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HAMMER CANDLESTICK: WHAT IT IS AND HOW INVESTORS USE IT

What Is a Hammer Candlestick?

Understanding Hammer Candlesticks

Hammers signal a potential capitulation by sellers to form a bottom, accompanied by a price

Example of How to Use a Hammer Candlestick

The Difference Between a Hammer Candlestick and a Doji

Limitations of Using Hammer Candlesticks

Psychology of the Hammer

The Hammer Signal

Looking for Confirmation

Placing Stops and Taking Profits

What is a hammer candlestick?

Is a hammer candlestick pattern bullish?

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

The Bottom Line

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