Hammer candlestick pattern is a signal of reversal after a downtrend to indicate that the control might shift from seller to buyer. Perfect hammer is one which has a shadow twice the height of the body. This means, the real body of the candle is to be relatively small and the tail of the candle is to be much longer. The longer the tail the better.
The term hammer refers to the candle’s shape and what the appearance of this pattern infers.
Remember, a hammer is created in a down trend. If a similar pattern is created in an uptrend, it’s referred to as Hanging Man.
The hammer is considered to be bullish, and the hanging man is considered to be bearish, based on where they appear on the chart.
In place of a hammer pattern, if you get a doji, it indicates similar trend reversal. Such a pattern is known as a bullish doji star pattern. When a bearish doji star appears in a downtrend, it means that the bulls are about to seize control.
A hammer, regardless of its color, is a potentially bullish signal. A hanging man, regardless of its color, is a potentially bearish signal.
In general, traders look for confirmation after this type of pattern emerges.
Underlying psychology behind Hammer candlestick pattern
Trading in the financial market involves buying a security at a specific price and then selling that security at a higher price, or selling a security at a specific price and then buying it back at a lower price. Therefore, buyers and sellers keep fighting throughout the session to make money. Intelligent traders try to understand the psychology behind each and every pattern formation.
In a downtrend, when a bearish candle is formed, buyers stepped in immediately to take control of the market and pushed the price up aggressively. When price reaches the top of the wick, a market reversal occurs. This means a hammer candlestick pattern represents a sharp reversal and rejection of price.
Longer tail on a hammer candlestick pattern indicates a more significant reversal and rejection of price. Thus a long tailed hammer indicates higher probability of reversal than a short-tailed counterpart.
Rules of recognition
Here are the most important characteristics of a hammer;
- The market is in a downtrend, where the sellers are in absolute control of the market.
- During this downtrend, candles are closing lower compare to the previous close.
- After a previous bearish candle, market makes a new low, however at the low point, buying interest emerges which pushes the price higher to the extent that the price closes near the high point. The real body is at the upper end of the trading range; the color (red/green) is not important. The lower part, or the “wick,” should be at least twice the length of the real body. It should have little or no upper wick.
On the other hand the hanging man occurs when following main criteria are present;
- The financial security or stock is in an uptrend, where the bullls are in absolute control of the market.
- During the uptrend, candles are making new highs and higher lows.
- After a bullish candle, next candle made a new high but bears stepped in to fight with bulls for a lowrer high. As a result, at the top, the candle formed has a small real body and long lower shadow. There is little or no upper shadow. Hanging Man at the top signifies that the entry of bears are breaking the strong hold of bulls for a possible correction.
Handing man in an uptrend indicates that buyers have lost their strength. Even Though due to high demand, buyers managed to bring the price back to the near open, the initial selloff is an indication that a growing number of market participants think the price has peaked.
After a long decline if a hammer is formed at the bottom with higher volume, this adds to the certainty that a capitulation low has occurred.
We have one similar candlestick pattern known as “shooting star” that can lead to some confusion. Here are the rules of recognition for better understanding of these candlestick patterns;
| Hammer | Hanging Man | Shooting Star | |
| Trend required to be in progress | Downtrend | Uptrend | Uptrend |
| Open and Close have a very tight range (small read body) | Yes | Yes | Yes |
| Shadow | The lower shadow must be at least twice the size of the body. Have very small or no upper shadow. | The lower shadow must be at least twice the size of the body. Have no or very short upper shadow. | The upper shadow must be at least twice the size of the body. |
| Color of the body | Unimportant, but if it’s green, it shows more bullishness | Unimportant, but if it’s green, it shows more bearishness | Unimportant, but if it’s red it shows more bearishness |
| Probability of reversal (Always take confirmation before taking any decision) | High but depends how sharp the downtrend is. | High but depends how sharp the uptrend is. | High but depends how sharp the uptrend is. |
The major difference between a handing man and a shooting star is the formation of candle’s real body. The small real body of a handing man is formed near the top of the entire candlestick and it has a long lower shadow. A shooting star has a small real body near the bottom of the candlestick, with a long upper shadow. Basically a shooting star is a hanging man flipped upside down.
If the bottom wick of a Doji is longer in comparison to the top wick, it means the sellers failed to push the price lower. This type of Dojis are called Hammer Dojis. It indicates that sellers are losing control and that the buyers may take over.
If a hammer doji is formed in a bearish downtrend, it suggests that bears are exhausted and the bulls are fighting back to take control.
Should you trade based on Hammer or Hanging Man candlestick patterns?
After learning candlestick patterns, don’t get tempted to take a trade simply based on these pattern formation.
Let me tell you, candles are not perfect. It depends on so many other factors, especially experience to take confirmation before taking a trade purely based on candlestick pattern formation.
For instance a Doji indicates indecision and not a definite reversal of the trend, trend may reverse right after the formation of Doji or after a few more candles. Experienced traders consider these pattern formation along with other indicators such as support and resistance levels.
Many traders instead of saying Hammer or Hanging Man candlestick patterns, they refer to it as “Pin Bar”. Hammer, Hanging man, inverted hammer and shooting star patterns can be called “Pin Bar” as they look like a pin.
A bullish Pin bar at the end of a bearish trend is called Hammer. A bearish Pin bar at the end of a bullish trend is called Inverted Hammer.
Pin bar at the top or at the bottom of a trend is considered as a reversal pattern signaling that the previous trend has weakened. The best pin bar traders look for to trade is when a bearish pin bar forms at the top of an extended move up, and bullish pin bar forms at the bottom of an extended move down.
Remember, that these are general trading concepts traders use to trade based on their collective experience on the market. Even though a lot of traders believe it’s a key piece of evidence that market sentiment is beginning to turn and the strength in the trend is no longer there, there is no guarantee in trading, the trend may or maynot reverse. Be sure you practice identifying and trading these candlestick patterns on a demo account before trading them with real money.
Here is a list of candlestick patterns for your reference;
- Evening Star
- Morning Star
- Bearish Abandoned baby candlestick pattern
- Bullish Abandoned baby candlestick pattern
- Three Inside up/down
- Three outside up/down
- Inside Bar
- Bullish Piercing
- Dark Cloud Cover
- Spinning Top
- Shooting Star and Inverted Hammer
- Gravestone, Dragonfly and long-legged Doji
- Engulfing Candlestick Pattern
- Spinning Top
- Marubozu
Be sure you practice identifying and trading these candlestick patterns on a demo account before trading them with real money.
In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
