Bullish hammer is one of the candlestick formations that often appears on our trading charts. Bullish hammer itself can be relied on when there is a prolonged decline in the trend. For more details about this bullish hammer, you can read the following article. Also, make sure to join GIC and register so you can trade with GIC trading experts!

Understanding Bullish Hammer

The hammer candlestick is a candlestick formation used by technical analysts as an indicator of a potential upcoming bullish (upward) reversal in financial security trading.



The hammer pattern is seen as one of the most reliable indicators in candlestick charting, especially when it occurs after a prolonged downtrend and at a recognized price support area for a security. After the formation of the hammer candlestick, many bullish traders may enter the market, while traders holding short-sell positions may look to close their positions. Several candlestick patterns are used by traders and market analysts as indicators of potential market reversals. In addition to the hammer candlestick formation, other candlestick charting market reversal signals include the hanging man candlestick and the shooting star candlestick.

Characteristics of Bullish Hammer Pattern

Traders expect a trend reversal when they see a hammer. This occurs when the price of an asset declines, indicating that the market is trying to find a bottom and that momentum has finally shifted. The formation of a hammer candle in a downtrend indicates an active day in the market – the price fell after the open but pulled back to close higher than the open – all during a single period.

The hammer position also shows vital signs. Traders consider it a strong signal if it is preceded by three or more bearish candles. Also, the next candle formed after the hammer candle should act as a confirmation and should close above the hammer candle's close. When all these events are in line, traders can consider it a strong enough signal of a potential trend reversal and enter a long position.

During the formation of the confirmation candle, traders take a position to enter the market. However, like other candlestick formations, the hammer candlestick pattern should not be treated alone. From the image below, the hammer candle is located after a downtrend where the price fell from around $3,500 to around $2,000. The appearance of the hammer candlestick is a potential bullish reversal signal which means that the asset is forming a bottom, which may be followed by a price increase. The signal is confirmed when the candle right after the hammer has a closing price that is higher than the opening price. In this example, the asset price did increase after the appearance of the hammer candle and rose to $2,900.

 

 Candlestick hammer is identified from the price chart

Ethereum ( ETH ) from May 16 to May 29, 2021, 4-hour time frame (Source: TradingView)

How to recognize the Bullish Hammer pattern:

  • Candle with short body and long wick (minimum 2x body size)
  • Occurs at the bottom of a downtrend
  • Confirmation from other indicators as mentioned below

What it shows:

  • Upward trend reversal (bullish reversal)
  • Price rejection at certain 'key levels'

Value for traders:

  • Shows potential price reversals that could lead to entering a long position at the start of an upward swing – taking full advantage of the upward move.
  • Easy to identify

How to Use the Bullish Hammer

Bullish hammer candlestick in forex market

Bullish hammer candles can be found on a variety of charts and time frames. Pictured above is an example of a hammer on the AUD/USD daily chart. From April 20 to May 31, AUD/USD fell 892 pips. This downtrend ended with a bullish hammer candle, and price then rallied 792 pips through today’s price action. Bullish Hammer Candle AUD/USD:



Since the strength of the hammer depends on its placement on the chart, traders typically use this candle in conjunction with other price support indicators. This includes using tools such as Fibonacci retracements, pivot points, and psychological whole numbers. In an ideal scenario, the hammer wick will break the support level, but the body will close above support on renewed buying sentiment. With a new buying opportunity presented, traders may then choose to place a stop below the wick created below support.

Bullish hammer candlestick in equity market

Bullish hammer candles are interpreted in the same way in all financial markets (indices, forex, commodities and stocks), however, stock analysis requires further data for confirmation. It is important to note that brokers generally show internal volume figures for other financial markets including forex, which is why volume indicators are not reliable for estimating the overall market volume.

The chart below shows a bullish hammer candle on the Barclays PLC chart. In conjunction with the bullish hammer, there is a subsequent relative increase in traded volume as highlighted. This highlights the institutional activity for this period due to the large volume – retail traders would not have been able to influence such large volume. This ‘rejection’ by the bulls (traders who took long positions) after the recent swing low indicates a rejection of price at that level.

This level may be a key level where a ‘buy’ order is triggered. With the bullish hammer and volume showing this relationship, traders may have some form of validation to place a long trade. As always, risk management principles should apply to all trades. Barclays PLC Bullish Hammer:



Inverted Hammer Bullish

The Inverted Hammer is a single candle that appears when a stock is in a downtrend. It is an important candle because it has the potential to reverse the entire trend – from a downtrend to an uptrend. That is why it is called a ‘bullish reversal’ candlestick pattern. The ‘Inverted Hammer’ forms when the price opens at a certain level and then moves much higher.

Price hits a high and then drops sharply to close near its open. The color of the candle doesn’t matter – it can be red or green. It will be a red candle if the close is lower than the open. It will be a green candle if the close is higher than the open. Both are called ‘inverted hammers’ See image:



Let's take a simple example:
  • HDFC Bank price opened at 100.
  • Up to 105.
  • It then fell to close at 101.
The above price action will create a candle that looks like an 'inverted hammer'.

Characteristics of the Bullish Inverted Hammer Pattern

To accurately gauge the effect of the inverted hammer candlestick pattern, traders should focus on what happens the day after it occurs. If the inverted hammer candlestick pattern is green (the commodity's opening price is lower than its closing price) it is considered a stronger bullish signal than a red inverted hammer candlestick pattern (the commodity's closing price is lower than its opening price). A red inverted hammer candlestick pattern is still considered bullish. To qualify as an inverted hammer candlestick pattern, the candle must meet 3 basic requirements:
  1. It happened at the end of a downtrend
  2. The actual body can be either bullish or bearish (better if bullish)
  3. The upper wick is at least twice as long as the actual candle body.

How to Use the Inverted Hammer Bullish

To trade when you see an inverted hammer candlestick pattern, start by looking for other signals that confirm a possible reversal. If you believe it will happen, you can trade via CFDs or spread betting. These are derivatives, meaning you can trade on both rising and falling prices. To trade an uptrend, you can ‘buy’ (go long). If you think the signal is not strong enough and the downtrend will continue, you can ‘sell’ (go short). You can follow these steps to trade when you see an inverted hammer candlestick pattern:
  1. Login to your trading account
  2. Search for the asset you want to trade in the 'searcher' panel.
  3. Enter your position size
  4. Select 'buy' or 'sell' on the deal ticket
  5. Trade confirmation

Advantages of Using Bullish Hammer

Listed below are the major advantages of trading the hammer pattern –
  1. It is relatively easy to recognize and trade using this pattern
  2. The occurrence of this pattern is quite frequent, and therefore provides quite a trading opportunity.
  3. It is ideal for short-term and quick trading
  4. Reversal signal : The pattern shows a rejection of lower prices. When found in a downtrend, it can signal the end of selling pressure and the start of sideways trading or a reversal to the upside.
  5. Signal out : Traders who already have a short position, can view the hammer candle as an indication that selling pressure is easing - presenting an ideal time to close the short position.
After learning about the bullish hammer along with the related discussion about the characteristics, how to use it, and its advantages, then you can observe and identify the movement of the pattern and take action that can be done. However, make sure to also read the Difference between Hammer and Inverted Hammer Candlestick to better understand this pattern.