In this article, you will learn what is the meaning of hammer candlestick. Traders in the financial markets often make use of candlesticks as a great visual aid to analyze and monitor what a particular price has done within a certain time period. Candlestick patterns are the most flexible technical indicators to understand the market movements. The patterns can help traders gauge market sentiment for a certain financial asset.
What is the Meaning of Hammer Candlestick?
Hammer candlestick refers to a candlestick pattern with the appearance of a hammer or the English alphabet's 'T.' It helps traders identify potential bullish trend reversals. One may find it at the end of a downtrend.
The lower wick or shadow of the candle is at least twice the size of a very short body with little or no upper shadow. It shows that the buyers overpowered the sellers in a particular trading period. In other words, the buying pressure controlled the asset's final price action during a specific duration. The longer a hammer's lower wick, the more the activity concerning an asset.
Hammer candles serve as effective indicators when they appear after a minimum of three declining candles. However, one must note that this candlestick pattern does not give a strong trend reversal signal until there is a confirmation on the chart. Traders get confirmation when the candle After the hammer closes higher than the latter's closing price. Once the confirmation candle appears, traders exit their short position or take a long position. Individuals entering a long position can place a stop loss order below the hammer's low price.
What are the Types of Hammer Candlestick?
Let us look at the different types of hammer candles.
– Bullish Hammer
A bullish or green hammer candlestick is a stronger formation than bearish or red hammer candles as it shows that the buyers or bulls were able to overpower sellers or bears completely. Moreover, this candlestick shows that the bulls were able to drive up the security ab's the opening price.
–Bearish Hammer
Similar to the green hammer candlestick, the red or bearish hammer candlestick serves as a bullish signal. It shows that the buyers could absorb the selling pressure but could not drive up the asset's price past the opening price.
Limitations of Hammer Candlestick
There is no assurance 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 which 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 candlesticks patterns or analysis.
Bottom Line
Traders view a hammer candlestick pattern to be an extremely reliable indicator in candlestick charting, especially when it appears after a prolonged downtrend. This article is about what is the meaning of hammer candlestick.
