Hammer Candlestick Pattern Definition
If there was a large drop in price in the middle of the day, but before the day ended it increased to what it was at the beginning of the day and even more, a significant upward return occurred. The candlestick of this change (move) will be a "Hammer" in a daily time frame. A Hammer formation on the daily time frame is a very strong indication for a high probability of increasing price in the next few days.
Example: The picture shows USD/CAD currency pair in a 30-minute time frame. On November 07, 2012 the price significantly decreased from 0.9923 to 0.9873 or even lower. But after that, it increased rapidly at the end of the day, it was closed at 0.9964.
Also in this picture - for better understanding - the Hammer Candlestick in the daily time frame - in the result of this intraday price change - is drawn.
Conditions of a Perfect Hammer:
- Body height must be short.
- The total height of the candle must be tall and more than the Daily ATR-264. The taller the candle is, the stronger the Hammer is.
- The lower shadow’s length should be very tall. It is better to be over 75 percent of the Daily ATR-264.
- The upper shadow does not exist, or if it does, it is very small. It shouldn't be more than 25 percent of the Daily ATR-264.
- The hammer that has a bullish body is stronger than the one which has a bearish body.
Strong Hammer: The picture shows a strong Hammer candlestick.
As can be seen, the candle’s height is tall, and it has a very short body height. Also, the lower shadow is very long and the upper shadow is very short.
As regards the Close price of the market is above its Open price, therefore the body of this hammer is bullish, and it is very strong.
Hammer: The first sign of the beginning Ascending wave.
Hammer shows that buyers are the winners in the war between buyers and sellers. At the beginning of the day, sellers were able to make significant decreases in prices by investing heavily. But when the price reached its lowest level that day, huge buyers entered the field with more investment than sellers. Once again, they were able to increase the price close to or above the beginning of the day. In short, in the war between buyers and sellers, the buyers have been the winners of the day, and the market is largely in control of them. Therefore, the probability of a further price increase in the next few days is high.
Example: picture shows, AUD/USD currency pair in a 30 minutes time frame.
In the beginning, by increasing investments of sellers, the price reaches to 0.8847. But in this range with the arrival of large buyers to the market and sell order overcome by buy orders, the price increased again. llers could increase the selling price due to the amount of demand from buyers. The starting price is maybe at 0.8914 but it increased by the end of the day to 0.8928.
As it can be seen, after forming Hammer, an Ascending wave started and the Price has increased more.
For having successful and steady transactions, Simple detection of market patterns is not enough. But with a deeper look, we should calculate the success possibility of each pattern. One of the determining power Parameters of hammer stick is about Descending or ascending that the body can be. Thus, if the body of a hammer is ascending, Possibility of starting an ascendant wave is very high.
The opening price of the day is very important. This price - is the previous day's closing price, in fact, it is the price that they had a war at in previous day where buyers and sellers come to equilibrium. So on the day that the Hammer is forming. If buyers can raise prices to the point of closing price of yesterday, and by the end of the day, they keep the price at the top of it, they will be the winners of the war. If we can raise the price above yesterday's closing price, they are not conclusive winners of today’s war, and this war will continue for the next few days.
Thus, if the body of hammer is ascending, Possibility of the beginning Ascending wave is very high. But if the body of a hammer is Descending, Possibility of the beginning Ascending wave is less. In this case, it is said a weak hammer has made.
- The picture shows a hammer candlestick with descending body.
As it can be seen, candle’s height is tall, but it has very short body height. Also, Lower Shadow is long, and the upper shadow is very short.
As regards the Closing Price of market is under its Opening Price, therefore the body of this hammer is Descending, and the power is very low. Possibility of the beginning ascending wave is less.
Example: The picture shows price of gold versus the price of US dollar in 2013.01.04. As the Picture says, the buyers weren't able to raise prices above the opening price of that day. Thus, the final result was not clear and the sellers could reduce the price in the next day. (Consider the red thick arrow)
But with the reduction of price that increases the (Reward/Risk) proportion, Attraction of Transactions has increased, and new buyers have entered to the battlefield. But the war lasted five days, As a result, in the fifth day, the price has increased same as what it was in the first day. With a Serious Loss of balance of market, Prices began rising Ascending wave speed.
Hammer is most important and successful patterns without a doubt. And using by most Professionals in financial markets to enter to markets and make new deals.
We also recommend following hammer in the service "Daily Trading Opportunity (DTO)", to watch the Success of this pattern. To learn more and see how to combine this model with other technical parameters please read "Daily Trading Opportunity: Forming Hammer pattern in price".