The hammer candlestick is one of the most reliable bullish reversal patterns in technical analysis. When it appears at the bottom of a downtrend, it signals that sellers are losing control and buyers are stepping in. This guide will teach you everything you need to know about trading hammer patterns.
What is a Hammer Candlestick?
A hammer is a single candlestick pattern with a small body at the top and a long lower shadow (wick). The lower shadow should be at least twice the length of the body. There should be little to no upper shadow.
The psychology: During the trading session, sellers pushed prices significantly lower. However, buyers overwhelmed them and pushed prices back up near the open. This rejection of lower prices shows that demand is increasing and a reversal may be coming.
Hammer Pattern Requirements
For a valid hammer pattern, look for these characteristics:
- Small real body at the upper end of the trading range
- Lower shadow at least 2x the length of the body (ideally 2-3x)
- Little or no upper shadow
- Appears after a downtrend (at least 3-5 red candles)
- Body color can be green or red, but green is stronger
Hammer vs Inverted Hammer
Standard Hammer
The standard hammer has the body at the top with a long lower shadow. It shows rejection of lower prices.
Standard Hammer Characteristics
- Small body at the top of the candle
- Long lower shadow (2x body length minimum)
- Appears at the bottom of downtrends
- Signals bullish reversal
Inverted Hammer
The inverted hammer has the body at the bottom with a long upper shadow. Despite looking bearish, it is also a bullish reversal signal when it appears after a downtrend.
Inverted Hammer Characteristics
- Small body at the bottom of the candle
- Long upper shadow (2x body length minimum)
- Appears at the bottom of downtrends
- Signals bullish reversal (needs strong confirmation)
Why it works: The inverted hammer shows that buyers tried to push prices higher. Even though they failed that day, their attempt signals that buying interest is increasing.
How to Trade Hammer Patterns
Step 1: Identify a Clear Downtrend
The hammer pattern only works as a reversal signal. You need a prior downtrend for it to reverse. Look for at least 3-5 consecutive lower closes or a clear downward price movement.
Step 2: Spot the Hammer at Support
Hammers are most powerful when they form at key support levels. This could be a horizontal support, a trendline, a moving average, or a Fibonacci retracement level.
Step 3: Wait for Confirmation
Never buy immediately after a hammer forms. Wait for the next candle to confirm the reversal. A strong green candle that closes above the hammer high is ideal confirmation.
Step 4: Plan Your Entry and Exit
Trading Setup Example
Stock ABC has fallen from $50 to $40 over two weeks. A hammer forms at the $40 support level.
- Entry: Buy when price breaks above the hammer high ($41)
- Stop loss: Below the hammer low ($38)
- Risk: $3 per share
- Target 1: Previous resistance at $45 (1.3:1 reward)
- Target 2: $50 level (3:1 reward)
Real Trading Scenarios
Scenario 1: Hammer at Moving Average Support
A stock pulls back to its rising 50-day moving average and forms a hammer. The combination of the moving average support and the hammer pattern creates a high-probability long setup. Enter on confirmation with a stop below the hammer low and the moving average.
Scenario 2: Hammer with Volume Spike
A hammer that forms with significantly higher volume than recent candles is particularly powerful. The high volume shows real commitment from buyers. This combination often leads to strong reversals.
Scenario 3: Hammer at Round Number
Round numbers like $100, $50, or $10 often act as psychological support. A hammer forming at these levels has added significance because many traders place orders at round numbers.
Hammer Pattern Variations
Hanging Man (Bearish Hammer)
The hanging man looks exactly like a hammer but appears at the top of an uptrend. It signals a potential bearish reversal. The same shape has opposite meaning depending on where it appears.
Hammer vs Hanging Man
- Hammer: Appears after downtrend = Bullish reversal
- Hanging Man: Appears after uptrend = Bearish reversal
Location on the chart determines the pattern name and signal.
Common Mistakes When Trading Hammers
- No prior trend: A hammer in a sideways market is not a reversal signal
- Ignoring confirmation: Many hammers fail; wait for the next candle
- Shadow too short: The lower shadow must be at least 2x the body
- Upper shadow too long: A significant upper shadow weakens the pattern
- Wrong timeframe: Hammers on daily and weekly charts are more reliable than on 1-minute charts
Combining Hammers with Other Indicators
Increase your success rate by combining hammer patterns with:
- RSI below 30: Oversold conditions strengthen the bullish case
- Support levels: Hammers at support have higher success rates
- Bullish divergence: Price making lower lows while RSI makes higher lows
- Volume analysis: Higher volume on the hammer day adds conviction
Track Your Pattern Trading Performance
Pro Trader Dashboard lets you tag trades by pattern type and see which candlestick patterns work best for you. Improve your pattern recognition with real data from your trades.
Summary
The hammer candlestick is a powerful bullish reversal pattern that signals buyers are taking control after a downtrend. Look for hammers at support levels, wait for confirmation, and always use a stop loss below the hammer low. The inverted hammer is a variation that also signals bullish reversals but requires stronger confirmation.
Continue learning with our guides on shooting star patterns and doji candlesticks.