Hammer Candlestick pattern is very useful to make good profits if you know how to use them on charts properly. This kind of pattern used to identify the bottom and bearish reversals in a falling market.
This kind of pattern form in continuous down trend. It indicates bears strength decreased and bulls power increased. Hence, it is a sign of positive move and bulls will push price in bullish direction.
I have sorted out some important information to make you clear view on this pattern
Hammer candlestick pattern form with small body and a long wick.
In the above figure there are two candles one is having little green body and other having little red body. We can consider both as hammer pattern.
Color of the body is not considered because activity happened in body of the candle is very less.
This kind of patterns can be used in any kind of market like forex, commodity and in equity.
How Hammer Candlestick Chart Pattern form
In the below figure I have explained clearly how a Hammer candlestick form and what are the phases involved in it and how we have to understand.
Phase 1. This we can call as the starting of the candlestick. Price opens at a point after the completion of before candle. Here no activity happened between bears and bulls.
Phase 2. After open price bears take active participation and push price down. This happens due to the selling pressure there in the candle. They want to show how aggressive they are so, they try to push price down.
Phase 3. We can say this is very important phase because main activity happens here. In phase 2 bears try to push price down and bulls will allow them to some extent.
At some particular point of time selling pressure decreases and buying starts. Buyers will buy and make the price to move up because of this activity long lower shadow forms.
Phase 4. In this phase as selling pressure decreases and buyers want to buy the stock and move the price little higher to show their domination.
How to Trade Profitably with Hammer Pattern
This kind of candlestick pattern is so useful if we know how to use it properly.
1. This kind of pattern should form after a down fall. Never consider in the middle of the trend. It may lead you to make mistakes.
2. Volume should increase while forming hammer pattern. Spike in volume is an indication of the bull’s participation. This is useful to take confirmation about the buyers interest towards the price.
3. This kind of pattern should always form at Support level. We have to check the previous support level and resistance levels with price action. In case there are previous bounce backs at the same level. Chances success will be more.
4. You should always take the confirmation before taking any trade. Don’t go for trade blindly if a hammer pattern forms.
Some times this kind of formation fails which may turn your trade to loss. To over come this kind of situation you should wait for next candle to form.
Next candle should close bullish and have to be higher price than hammer candle. Then only you should initiate your trade.
Any kind of strategy depends on purely probability. Your success rate increases only with practice. Practice to master in this skill.