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 probability of increasing price in next days.
Example: The picture shows currency pair of USD/CAD 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 to 0.9964 and then closed.
Also in this picture - for better understanding - the Hammer Candlestick in the daily time frame - in the result of changes in a day - is drawn.
Conditions of a Perfect Hammer:
- Body height must be short.
- The total height of the candle must be taller 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 an ascending body is stronger than the one which has a descending body.
For more information on this article, please read: “Professional Parameters to Determine the Strength of Hammer and Shooting Star.”
Perfect Hammer: The picture shows a perfect Hammer candlestick.
As can be seen, the candle’s height is tall, but it has a very short body height. Also, the lower shadow is long and the upper shadow is very short.
As regards the Closing Price of market is above its Opening Price, therefore the body of this hammer is ascending, and the power is very high.
Hammer: The first sign of the beginning Ascending wave.
Hammer shows that the war between buyers and sellers, at the beginning of the day sellers could create significant reduction in price, with their high investments. But when the price had come to the lowest extent of it, many of buyers have entered with more investments than sellers. And again they could increase the price close to what it was at the beginning of the day or may even more. And at the war that was between buyers and sellers, the buyers have been the winners of the day, and the market is largely in control of them. Thus, the possibility of further price increases in the coming days is enormous.
example: picture Shows, currency pair of AUD/USD in a 30 minutes time frame.
At the beginning, by increasing investments of sellers, the price became to 0.8847. But in this range with the arrival of large buyers to the market and overcome to turnover of shopping on sales transactions, the price increased again. Sellers could increase the selling price due to the amount of demand from buyers. The starting price is may be at 0.8914 but it increased by the end of the day to 0.8928.
As what can be seen, after forming Hammer, an Ascending wave started and the Price have 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 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 hammer is Descending, Possibility of the beginning Ascending wave is less. In this case, in this case it is said a weak hammer has made.
For more information on this article, please read “Professional parameters to determine the Strength of Hammer and Shooting Star”.
- The picture shows a hammer candlestick with descending body.
As what 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 high. 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 program. 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.
If you want to learn more professional points of Hammer's pattern. You can join "Secrets of Successful Traders" Courses and for more information on this article, please read “Professional parameters to determine the Strength of Hammer and Shooting Star”.
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, for more information on this article, please read "Best Strategies to Enter the Market with Hammer and Shooting Star"
We also recommend to follow 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".