Hammer candlestick reversal is a pattern that appears in a downtrend. It also signals investors about a market reversal. In forex trading, the investor’s determination of the entry point will determine the investor’s profit percentage. In the article below, Forex Trading will provide investors with a more general overview of the Hammer candlestick.
Learn about the pattern hammer candlestick reversal used in Forex
Candlestick chart pattern Hammer is a form of a chart that identifies strong reversal trends in price charts. Each new trend is often determined by this candlestick pattern.
What is the concept of a Hammer candlestick?
The hammer candlestick, also known as hammer candlestick reversal is one of the popular Japanese candlestick patterns. They signal a strong market reversal after a period of determining the bottom. Hammer candlesticks often appear at the end of a downtrend. This shows that sellers seem to be able to control the market and this is the time to push prices down.
However, this does not confirm that the buyers have lost control. At this time, the market is simply rising again. They predict that the downward trend will gradually weaken and is likely to increase again soon in the future.
See more: Read candlestick charts: Basic & advanced material
Structural analysis hammer candlestick reversal when used in forex
Basically, the Hammer candlestick has a structure quite similar to the Hanging Man candlestick but in an inverted version. The Hammer candlestick has a fairly small and short body, but the shadow below is very long. They have a minimum length of 2 times the candle body.
The candle is green in case of increase and red in case of decrease. However, with this candlestick pattern, the bullish candle will have a stronger reversal signal. There are usually at least 2-3 bearish trades before the hammer candlestick pattern appears. However, a clear and long-term downtrend before the hammer candlestick forms is still the most important requirement.
Types of hammer candlestick patterns that investors need to know
Bullish Hammer candlestick and Bearish Hammer hammer candlestick are two popular hammer candlestick patterns today.
Hammer Bullish candlestick in forex
The Hammer Bullish candlestick is similar to the candle bullish engulfing candle, both of which are strong reversal candlestick patterns. The Hammer candle is the only candle that investors can find on the price chart. They represent bullish price reversals for a trend.
It differs from other candlestick patterns in that it stands alone within an established downtrend. The Bullish Hammer is often confused with the Hanging man candle. However, each candle has its own characteristics and they are not exactly the same.
The difference between these two candles is their location in trending markets. The Hanging candle has a small body and long wick but hangs at the end of the uptrend. Hammer candles also have small bodies and long hearts but only appear at the end of a downtrend.
Bearish hammer candlestick in Forex trading
The red Bearish Hammer candlestick is a Japanese candlestick pattern that occurs when the foreign exchange market has significantly low liquidity compared to the opening price. However, it may recover over a period of time to close close to the opening price.
This pattern forms a hammer candlestick with a lower shadow at least twice the size of the candle body. The Hammer candle body helps investors better understand the difference between the opening price and closing price. Meanwhile, candle shadows represent the highest and lowest prices at that time.
The Bearish hammer candle signals the possibility of sellers capitulating and forming a bottom while rising prices indicate the possibility of a price reversal. All of this happens during a period when the price falls after the open but rises near the opening price.
Instructions for trading with hammer candlestick reversal Hammer in forex
Optimizing trading with Hammer reversal candles is what many investors want. However, not everyone can do this because sometimes investors do not fully understand the process of using candles. Let’s join Forex Trading to learn in detail how to trade with Hammer candles.
Apply the inverted hammer candlestick to choose the entry point and TP, SL
Before determining the appropriate entry point, you need to choose the trading time. The most suitable trading time for Hammer candles is the D1 time frame, followed by the H4 time frame. Currently there are 3 ways to determine the entry point for the model. The first way is to enter a buy order at a price of 50% of the candle’s length. This is considered the most effective way because the entry point is the standard point. The second way is to enter a buy order at the opening price of the confirmation candle. This method will yield less profit but is highly safe, ensuring investors face little risk.
The third way is to enter a buy order right after the trading session has ended. Although the profit of this method is less than methods 1 and 2, it is the safest option. Because the current purchasing power is very strong, the upward trend in prices will increase even more. For traders who do not have much experience and little capital, the second way to place an order is the most reasonable. For the stop loss point, cut right under the shadow of the candle and about 2-3 pips away. Choose the take profit point above the highest price when the R:R ratio is 1:1
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Combination hammer candlestick reversal with indicator tools
The first is to combine candles with the support threshold indicator. Regarding trading methods, after determining the general trend of the market is down. Investors should wait for the Hammer candlestick pattern to appear in the support price zone. At this time, the trader can open a buy order as soon as the hammer candle ends and place an order to decrease a few pips away from the end of the candle. Besides, investors can also place a buy order when the candle has been confirmed to form a price. When investors combine it with support levels, trading signals will become more reliable and safe. Placing orders will also ensure higher safety.
Next is combined with the RSI indicator. The RSI indicator is a technical analysis tool that provides reputable reversal signals and is popular with most investors. When determining overbought and oversold zones using RSI, traders use the 30 to 70 line. When the RSI line enters the oversold zone and lowers the threshold to 30 or below and the hammer candlestick pattern is ready, you can enter purchase order.
Conclude
Above is information on how to apply the hammer candlestick reversal to forex trading. Investors need to note that, no matter how they use any analytical tool, they need to have a specific trading strategy. You should not just pay attention to the risks to your account just for the immediate profit. To provide more knowledge about forex, let’s read more details with Forex Trading .
FAQs
Should Hammer candles be used to trade sideways markets?
With sideways markets, it is difficult for investors to determine the trend. Hammer candlesticks are not trend-forecasting candlesticks, if determined incorrectly, the candlestick cannot be applied.
Is it possible to use Hammer candles alone?
How many tools to use in combination will depend on each investor’s needs. Combining additional indicators will increase reliability when trading.
Do you need to pay attention to volume when trading?
Volume is also an important factor when trading. If volume is weak, it shows that sellers are weak, and using hammer candles will increase accuracy
