Hammer Candlestick Pattern
The hammer candlestick pattern represents a possible reversal to the upside – a bullish reversal. The hammer candlestick pattern is composed of a relatively small bullish body, either no, or, a small upper shadow and a significantly longer lower shadow.
Hammer Candlestick Pattern Analysis
The hammer candlestick pattern is significant when it occurs in an established downtrend. It signifies a failed attempt for the rate to move lower, while also closing above the open for that time period.
The hammer candlestick pattern becomes increasingly relevant when the following occur:
- It is composed of a small bullish body with no, or a very small upper shadow and a lower shadow of significant length.
- It is preceded by a strong down trend.
- Confirmation candles are used to confirm the reversal.
- Oversold indicators confirm a change in market direction.
Forex Trading Ideas
The hammer candlestick pattern may be traded alone, or with a combination of signals and/or indicators. For example:
- Step 1 – Wait for a hammer candlestick pattern to appear during an established down trend.
- Step 2 - Confirm the trend reversal with at least one confirmation candle.
- Step 3 – Further confirm oversold conditions using the RSI – Relative Strength Index*
- Once conditions 1 – 3 are met place an entry order.
*Additional confirmation ideas – confirm the hammer candlestick pattern formation when it appears outside of the lower Bollinger Band or when the Stochastic Oscillator signals oversold conditions.
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