Hammer Candle Pattern Explained (real chart examples)

Hammer Candle Pattern Explained (real chart examples)
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The hammer is a candlestick chart pattern which signals a potential reversal in the market. In this article we will show you how to identify it in the right market position with real chart examples. We also include a link to a free MT4 indicator download.

The Hammer Candle Pattern is a one candle pattern which signals a reversal in the market. The Pattern is Bullish and should be identified as a signal when occurring in a down-trending market or at the bottom of a range.

Hammer Candle Pattern Criteria:

  • A small real body formed at the upper end of the trading range. The real body colour is not important, can be red or green.
  • A long lower shadow at least twice the height of the real body.
  • It should have a very short or no upper shadow.
  • It occurs in a downtrending market or at the bottom of a range.
Hammer Candle Pattern RED
Hammer Candle Pattern RED
Hammer Candle Pattern GREEN
Hammer Candle Pattern GREEN

Quick Reference Guide – Candlestick Basics. If you need a reminder of what candlesticks are have a look at our free PDF – Candlesticks Explained.

The criteria and examples above are just the technical definitions of this pattern. However patterns are only useful with context and with real chart examples.

No pattern will ever exactly match the criteria and in order to be a useful signal must occur in the correct place in a trend. Let’s start by looking at the the classification table for this pattern.

Hammer Candle Pattern Classification Table

Number of Candles In Pattern 1
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bullish
Market Conditions: Range, Down-trend, Up-trend Down-trend, Ranging
Position: Top, Bottom, Range Bottom

What Price Action Does The Hammer Pattern Represent?

All candlestick patterns are formed by price action. But the popular ones represent price action that may have significance in signalling the direction of the market.

The hammer pattern forms when a market trades significantly lower than the price that it opens at and then rallies to close near the opening price (above or below) in that time period. This creates a long lower shadow and a small real body.

When this happens in a downtrend or the bottom of a range, the Hammer Candle Pattern can be seen as a rejection signal in the market. This may mean that the market is more likely to reverse.

This is especially true when the pattern occurs in line with key support and resistance areas. Whenever a pattern happens in key support and resistance areas it makes this pattern more important and more likely to be valid – this is known as confirmation.

Hint: It is always good practice to look for confirmation for any signal that you are looking to trade.

Hammer Pattern Example With Confirmation

In the example below of the FTSE100, the market was downtrending and then the Hammer Candle Pattern formed at the bottom of the trend.

This pattern coincided with a key area of support as it happened on the S2 pivot point level. This confirmation can help the trader to feel more confident in the signal and the potential for a good trade.

Bullish Hammer Candle Pattern Example on a Key Level
Bullish Hammer Candle Pattern Example on a Key Level

In What Market Conditions Does The Hammer Pattern Become A Signal?

The Hammer Candle Pattern can be seen as a potential signal when it occurs in a down-trending market or in a ranging market if it occurs at the bottom of trading range.

Let’s look at a couple of real chart examples.

Hammer Candle Pattern In A Ranging Market

A ranging market is one where the price action moves up and down between two sets of support and resistance. This is also known as a sideways, balancing or horizontal market. In essence the price action is struggling to break out of the range decisively either on the upside or downside.

Ranging Market Example
Ranging Market Example

As you can see in this example of the FTSE100 the market was ranging and a Hammer Candle Pattern occurred at the bottom of the range. This signaled the bottom of that leg down. The market reversed and even broke the top of the range and went higher.

Bullish Hammer Candle Pattern Example in a Ranging Market
Bullish Hammer Candle Pattern Example in a Ranging Market

Hammer Candle Pattern In A Down-Trending Market

A down-trending market is one where the price action generally moves down over time and is characterized by lower lows and lower highs.

Down-trending Market Example
Down-trending Market Example

As you can see in this FTSE100 example, the market was down-trending and then the Hammer Candle Pattern occurred at the bottom of the trend. The market reversed and went higher.

Bullish Hammer Candle Pattern Example in a Down-trending Market
Bullish Hammer Candle Pattern Example in a Down-trending Market

Hammer Candle Pattern MT4 Indicator Download (free)

If you trade using MT4 then why not try out our free MT4 indicator? The indicator will scan the market based on the criteria shown in this article and identify them on the chart.

There is also an alternate version which can show the signal in a separate indicator window of the chart if that is your preference.

To download either or both, follow this link to the Hammer And Hanging Man MT4 Indicator.

Important Information About Candlestick Patterns

Attribution:

All of the candlestick patterns that we explain on NothardTrading.com must be attributed to Steve Nison and his books on candle charting, the most famous of which was Japanese Candlestick Charting Techniques (Amazon). You can also find out more at his website here.

Interpretation Of Candle Patterns:

It is important to note that these patterns were originally identified on the daily timeframes of index charts, which is still where they are the most useful. However, this does not mean that they cannot be used for other markets or time frames.

No signal is perfect and should never be used as such. Any patterns that you identify only signals a potential move based on the fact that history repeats itself and forms regular patterns in similar situations.

But past performance is no guarantee of future results! So always treat these patterns with care and think of these guidelines when using them:

Best practice guide for trading of candle patterns:

  • No pattern is ever perfect. Be aware that patterns will form slightly differently each time and in different markets.
  • Use them as consistently as possible. Even though you will never find patterns exactly the same, you should always implement a consistent ruleset when identifying and using patterns.
  • It is never a guarantee, only an indication.
  • Make sure you are using it in the right context. For example if it is a continuation pattern then don’t use it to trade reversals!
  • Use multiple signals (confirmations) to have more confidence in your trading.

Related Patterns

Hanging Man Candle Pattern

The actual Candle Pattern is Identical to the Hammer Candle Pattern, but it is a bearish signal that happens on the opposite side of the range to the Hammer Pattern. For the full rundown see the article here: Hanging Man Candle Pattern.

Inverted Hammer Candle Pattern

As the name suggests the Inverted Hammer Pattern is the reverse of the Hammer Pattern with a small real body at the lower end of the range and a long upper shadow. It is also a bullish reversal pattern but a weaker signal that requires confirmation. 

For the full rundown see the article here: Inverted Hammer Candle Pattern.

More About Candlestick Patterns

If you are interested in reading more about candlestick patterns you can find our articles on this topic here: https://www.nothardtrading.com/category/candle-patterns/ or choose a pattern below to read more. 

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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