Hammer Candlestick Pattern – Finding stock market reversals.
The hammer candlestick pattern is just one of many in the field of technical analysis.
This pattern falls into the market reversal category.
In this article I will teach you what this is and how to apply it successfully to your trading.
If you want to learn more about candlestick patterns first, click here to read this article.
Hammer Candlestick Pattern
First, this pattern occurs in the process of a down market.
It is very important to understand that candlestick patterns are like real estate, it is all about the location.
Before you qualify this pattern as a true hammer, you need to see this occurring around a current support level.
If you want to learn more about support and resistance click here to read this article.
Now that you know how to verify the pattern, let’s take a look at what it looks like.
The green candle below is what you refer to a “hammer candlestick”. It is called that because it looks like, well, a hammer.
Hammer Candlestick Psychology
At this point, it is important to remind you that candlestick patterns are a representation of market psychology.
The final visual representation is not as important as the market sentiment it represents.
Let’s walk through the psychological pattern of the hammer candlestick.
As price opens, sellers immediately press prices lower to the low of the candle.
By this point you have a very bearish looking candle, indicating sellers are in firm control.
However, the market sentiment is about to turn as you will soon see.
Suddenly, buyers show up to absorb all the selling momentum, and reverse the price all the way back up to the open.
The higher the buyers take price above the open, the stronger the candlestick pattern validity.
Ultimately, market sentiment reversed completely in this example.
Assuming that this is occurring near a support level, the hammer pattern is complete and you can expect more buying momentum.
Hammer Candlestick – Bearish Market Reversal Trading Strategy
Now let’s expand this pattern into a usable trading strategy for your trading.
Looking at the daily chart of Netflix below, you can see that prices are in an uptrend.
On the right side (circled in green) a hammer candlestick is formed right at trendline support.
This qualifies a good buying opportunity for a trader and investors alike.
Consequently, Netflix stock jumped 39% in just two months and formed a steeper trend line.
Volume increased consistently on every move higher, indicating institutional traders were buying into the trend.
Learn more about applying volume spread analysis like a professional trader by clicking here.
Hammer Candlestick Pattern – Conclusion
Candlestick patterns are a very accurate tool to include in your trading strategy.
The most important factor to remember is that this pattern is strong at a support location.
Furthermore, this pattern is a great addition to an existing trading strategy as an entry qualifier.
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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.