The Hammer candlestick pattern is a powerful entry trigger. If you were to trade it, your stop loss is at least the range of the Hammer (or more). But won’t it be great if you can reduce the size of your stop loss and improve your risk to reward?
According to most textbooks:
Whenever you spot a Hammer candlestick pattern, you should go long because the market is about to reverse higher.
And that’s what you do.
But the next thing you know…
The price immediately reverses and you get stopped out for a loss.
And you wonder to yourself:
“Wait a minute, isn’t a Hammer candlestick a bullish signal?
“Why did the market reverse against me?”
“What’s going on?”
Well, let me tell you a secret…
A Hammer candlestick pattern doesn’t mean jackshit (and I’ll explain why later).
But first, let’s understand what a Hammer candlestick pattern is about…
What is a Hammer candlestick pattern?
A Hammer is a (1- candle) bullish reversal pattern that forms after a decline in price.
Here’s how to recognize it:
- Little to no upper shadow
- The price closes at the top ¼ of the range
- The lower shadow is about 2 or 3 times the length of the body
And this is what a Hammer means…
- When the market opens, the sellers took control and pushed price lower
- At the selling climax, huge buying pressure stepped in and pushed price higher
- The buying pressure is so strong that it closed above the opening price
In short, a hammer is a bullish candlestick reversal candlestick pattern that shows rejection of lower prices.
Now, this is important.
Just because you see a Hammer candlestick doesn’t mean you go long immediately.
The truth about Hammer candlestick (that most gurus don’t even know)
Are you ready?
Here you go…
- A Hammer is usually a retracement against the trend
- The Hammer doesn’t tell you the direction of the trend
- The context of the market is more important than the Hammer
Let me explain…