All you wanted to know about the Hammer candlestick formation

The hammer is a reversal candlestick pattern with a long shadow and a small real body, which illustrates that the sellers failed to continue with the selling pressure through the day and the session ended with a recovery from the day’s low. Herein, the opening and close prices are significantly away from the low price. The lower shadow is bigger than the size of the real body (Open price and close price).

The hammer candlestick usually occurs during a downtrend having strong bearish sentiment. It indicates the formation of a bottom which could result in a sharp recovery. Although one should not rely entirely on Hammer for taking a call, it definitely provides reversal signals that highlight a change in sentiments.

How to interpret Hammer candlesticks

-- A trend showing a hammer formation clearly indicates a possible reversal signal. For confirmation, this scenario should receive support from other indicators, like volumes and the Relative Strength Index (RSI).

-- A positive close in the very next candle can also provide confirmation for the trend change.

-- Whenever the bigger time-frame charts like monthly, quarterly, or yearly establish a hammer reversal, the trend is widely recognised as a bullish signal.

-- Market participants closely watch hammer candles for exiting their positions and entering fresh trades.

-- The hammer candlestick is given low significance when the chart scenario indicates sideways/ consolidation phase.

-- One can use hammer formation to act as stop loss.

The two major factors that have relatively greater impact on the usage of Hammer are candlestick patterns and volumes. The immediate candle needs to have a green close and could resemble bullish engulfing, morning star, marubozu, gap-up candle, etc. Such formations assist in upside sentiment.

The second factor is Volume. The reversal needs the support of volumes -- having low volume may not provide a convincing turnaround and instead may turn into a shorting opportunity. A firm rise in volumes with an aggressive structure clearly indicates turnaround.

Intraday strategy with Hammer candlestick

For any trading strategy, the most significant factor is identifying the trend. The Hammer candlestick helps to ascertain the trading signal (reversal trend) from a broader perspective. 

Identifying major moves in day trading is relatively difficult. However, there are a few signals that can help establish a reversal outlook which help in identifying strong up moves. The hammer may not provide accurate results on 5,10, 15-minute charts, but delivers concrete signals on 30 and 60-minute charts. The formation of the hammer pattern on the said time frames indicates a possible upside in the coming sessions. Here, the candlestick patterns may not play a vital role, but the volume structure definitely needs to go hand-in-hand. The immediate candle needs to have follow-up buying, which can be ascertained with the rise/decline in volumes. One may see wild swings in volume, but that indicates a change in sentiment which helps to push prices to higher levels. CLICK HERE FOR THE CHART