The Hammer is a must-to-known candlestick pattern that usually appear after a protracted downside movement in the market. It was firstly introduced to traders outside Japan by Steve Nison in its book “Japanese Candlestick Charting Technique“.
This one candle formation, appear as follow:
As you can see is very simple: it is the opposite of the “Hanging Man” and It can be found not only when using the traditional Japanese Candlestick charting technique, but even in Heikin Ashi charts.
The characteristics of the Hammer Candlestick Pattern
Graphically, the Hammer shows a very narrow body, with a large lower shadow. The upper shadow is absent or very tiny, meaning that the maximum of the trading session it’s almost equal to the close of the candle itself.
The psychology behind this formation is very clear: the lower shadow shows strong repulsion in the market.
After a protracted downtrend, sellers try to push price even lower. Despite this, they are not able to reach this purpose, with buyers that re-acquire control moving price to an higher level. The close above the open signals that buying pressure is overwhelming selling one, creating a possible change in market behaviour.
How to Trade this Powerful Pattern
Don’t be foolish! If you think you can trade each Hammer showing itself in the market, well you are wrong. Always think about the context in which you are, and wait for additional confirmation of reversal before to actually enter in a new trade.
Look at the picture below:
The lower shadow of the hammer candlestick pattern spot a support zone in the market. Then, price bounce back after a repulsion in the market. This is what I mean with context. As you can see, a big red candle on the left wasn’t able to break below the support zone spotted by the hammer. This can corroborate our believes of a possible inversion in price action
A good entry could be at the open of the next candle or at its close (more conservative approach). In this particular case, the hammer helped us to spot a good trading opportunity in the forex market.