Among the various candlestick patterns, the Hammer Candlestick stands out as a powerful indicator of potential trend reversals. In this guide, we will explore what a Hammer Candlestick is and how you can use it to spot crypto trends reversals, ultimately improving your trading strategy and decision-making process.
What is the Hammer Candlestick?
As the name suggests, this candlestick pattern resembles a hammer. A hammer is a reversal pattern that forms during an uptrend or downtrend and has an unusually long upper shadow with no lower shadow (or very little). The body of the candlestick should be small in comparison to its shadow.
The bullish version of this pattern is formed when prices close near their opening price on high volume. This indicates buying pressure during the session and it shows investors believe there will be more gains to come in future trading sessions.
A Hammer Candlestick is a bullish reversal pattern that occurs at the end of a downtrend. It is characterized by a small body with a long lower shadow, which indicates that the market has rejected lower prices and is potentially reversing to the upside. The longer the lower shadow, the more significant the potential reversal. This pattern can be observed in various trading pairs such as ETH/USDT, including major cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC), as well as altcoins and stablecoins.
What Does a Hammer Candlestick Look Like?
Hammer candlesticks are characterized by a long lower shadow and a small body that gaps away from the open and closes near the high.
The price action on this candlestick looks like an inverted hammer, but with more exaggerated characteristics: it has an even longer lower shadow than normal, which means there was more selling pressure than buying pressure at some point during its lifespan; however, unlike its counterpart, this pattern does not have any upper shadows (which means there was no resistance).
The bullish hammer is a reversal pattern that occurs at the end of a downtrend. It’s characterized by a long lower shadow, which indicates buyers stepped in to stop the price from falling further, and a small body.
In this guide we will go over how to trade with this pattern and what it means if you’re trading cryptocurrency or an altcoin.
Bearish Hammer (Hanging Man)
A bearish hammer is a reversal candlestick pattern that is formed when a stock price drops sharply, but then rallies to close near its opening price. The body of the candle will be small and it’s lower shadow (downward spike) should be much longer than its real body.
The bearish hammer signals that many investors are selling their shares and expecting further declines in prices in coming sessions. When this happens, bulls usually step in and buy more shares causing prices to rebound from their lows set during the bearish hammer formation period which could lead to an upside breakout or continuation of downward trend depending on how strong this reversal move was compared against previous drops experienced during downtrends.
Inverted Hammer Candlestick
- What an inverted hammer candlestick looks like: The body of the candle is tall, with a long lower wick that should be at least twice as long as its upper wick. This means the price has dropped significantly during the period, but then recovered slightly before closing at or near its open price.
- When you should trade an inverted hammer candlestick: If you see one of these candles after an extended bear market (where prices have been falling), it could mean that buyers are starting to come back into play and could signal a reversal in trend direction soon after this pattern forms. You can place limit orders above your entry point if you believe there’s going to be a reversal within 48 hours; otherwise just wait until there’s confirmation from another indicator before making any trades based on this signal alone!
Inverted Hammer Bullish
The inverted hammer is a bullish candlestick pattern that forms after a decline in the price of an asset. It is similar to the hammer, but instead of the bottom being at the top, it is at the bottom.
The pattern consists of a short-term downtrend followed by a small upward move (a bounce) and then another sharp fall. The second drop should not exceed 25% percent from its high point for this pattern to be valid and confirmed as an inverted hammer formation.
Bearish Inverted Hammer (Shooting Star)
The bearish inverted hammer pattern is a bearish reversal pattern that forms after a downtrend. The candlestick does not have to be completely inverted, but it must touch or come very close to the lows of its previous day’s range. It also has a tall upper shadow and small body, which tells us that bulls were unable to maintain their momentum during this time period.
The shooting star looks very similar to the hammer except that its lower shadow is much longer than its body (which means there was more selling pressure than buying).
Hammer Candlestick Trading Strategies
By employing various trading strategies, including the use of a crypto bot, traders can enhance their ability to spot crypto trends reversals and improve their overall trading performance. Remember to always use proper risk management techniques and combine the Hammer Candlestick pattern with other technical analysis tools for more reliable trading signals.
Strategy 1: Top-Bottom Strategy with Hammer
Hammer candlestick pattern is one of the most popular reversal patterns in technical analysis. It is used to identify possible trend reversals and can be applied to different time frames, ranging from intraday trading strategies to long-term investments.
The main idea behind this strategy is that when a bullish market turns bearish, there will be a sharp decline followed by an upward movement that has approximately the same duration as the preceding downswing–this is what creates the “hammer” shape.
Strategy 2: Support-Resistance Trading
The hammer candlestick is also commonly used to identify support and resistance levels. The same method that we used to identify trends can be applied here, but instead of looking for upside breakouts, we’re looking for downside breakouts.
This strategy is called “support-resistance trading.” It’s simple: when the market finds support, become bullish; when it finds resistance and breaks down through it (which is known as breaking below), become bearish again.
Strategy 3: Intraday Trading with Moving Average
Moving average is a simple technical analysis tool that can be used to identify trends in the short term. It represents the average price of a cryptocurrency over a certain period of time.
The moving average has two main uses:
- Identify trend reversals and continuation (i.e., when the price is above or below its moving average)
- Identify support and resistance levels (i.e., where prices tend to stop before reversing direction)
The Pros and Cons of a Hammer Candlestick
The hammer candlestick is a bullish reversal signal that looks like a long wick with no body. This pattern is named after its resemblance to the hammer tool used in carpentry and woodworking.
- It’s easy to spot because it only has two candles, unlike many other reversal signals which may have more than three.
- The bullishness of this pattern is confirmed when price closes above the high of the first candle (the long wick). This gives traders confidence they’re not being misled by false signals or noise in their trading data sets.
- False signals: Hammer Candlestick patterns can sometimes generate false signals, leading traders to enter positions based on an anticipated trend reversal that doesn’t materialize. This can result in losses if the market continues to move against the trader’s position.
- Lack of context: Hammer Candlestick patterns should not be used in isolation, as they may not provide a complete picture of the market conditions. It is crucial to combine the Hammer Candlestick pattern with other technical analysis tools and indicators to obtain more reliable trading signals.
In conclusion, the Hammer Candlestick pattern is a valuable tool for traders seeking to identify potential trend reversals in the crypto market. By recognizing this pattern, traders can make more informed decisions and capitalize on potential opportunities. However, it is essential to remember that the Hammer Candlestick pattern should not be used in isolation.