What is Candlestick?

Candlestick is a financial instrument used to measure price movement in the financial market. Examples of these financial markets are stocks, forex, cryptocurrency, etc. Candlestick can also be used to measure the price movement of livestock, food, fibers, energy, and a lot more. Candlesticks are very useful for traders in trading and analyzing financial markets.

A group of candlestick variations with time is called a candlestick pattern. Candlesticks patterns are used to understand price movement in a financial market. Candlesticks patterns are also used to analyze markets and determine when a trader buys or sells an asset which is also known as taking a Long position and Short position respectively. There is never an ideal analysis using these candlestick patterns, wherever traders use these candlesticks patterns to analyze the market. This analysis is known as technical analysis.

There are two types of candlesticks in technical analysis.

Bullish Candlestick:

A bullish candlestick signifies an increase in the value of a financial asset over a timeframe. A white or green candlestick is used to represent this bullish movement. Bullish movement is also known as uptrends and Bullrun.

Bearish Candlestick:

A bearish candlestick signifies a decrease in the value of a financial asset over a timeframe. A black or red candlestick is used to represent this bearish movement. Bearish movements are also known as downtrends and bear-run.

In this article, you'll know the Hammer Candlestick pattern. The hammer candlestick is one of the most important candlestick patterns in candlestick analysis. The hammer candlestick pattern is common in the cryptocurrency and forex markets and provides important information about trend reversals.

Types of Hammer Candlestick

There are two types of Hammer Candlestick namely:

Hammer Candlestick Pattern
Inverted Hammer Candlestick Pattern

1. Hammer Candlestick Pattern

The hammer candlestick is a candlestick pattern in a financial market, a hammer candlestick signifies a bullish reversal in the price of a financial market. The bullish reversal pattern appears after a long bearish trend in a hammer candlestick. Hammer candlestick pattern occurs at the bottom of a downward trend. The bullish hammer candlestick has a narrow candle body and an elongated lower wick, indicating rejection of lower prices. When the open, close, low, and high prices are nearly the same, the hammer candlestick is formed. The hammer candlestick body represents the difference between the open and closing prices. The hammer candlestick shadow represents the period's high and low prices. The hammer candlestick appears when sellers enter the market during a price decline. The hammer candlestick is structured with a lower shadow that is twice as long as the candlestick body as shown below.

hammer candlestick with small or no upper shadow

Hammer candlestick patterns typically alert a trader or a market analyst to an impending potential reversal or shift in market sentiment. The price shows momentum following the hammer pattern to confirm the price reversal or shift in market sentiment. The price momentum following the hammer candlestick pattern alerts the traders to make certain trading actions. Trading actions like waiting for the perfect opportunity to enter long positions or exit short positions.

In trading, long positions mean when a trader or investor buys an asset expecting an increase in price within a period of time, this price increase is known as a bullish movement. While short positions mean when an investor or trader sells an asset or security intending to buy it after a price reversal or retracement.

How to Identify a Hammer Candlestick?

Due to its distinguishable appearance, the hammer candlestick is one of the simplest candlesticks to identify. The hammer candlestick looks literally like a hammer. The opening, high, and closing prices of the period covered by the candlestick formation are all very close together in the hammer candlestick, forming a concise body for the candlestick. The candlestick lacks an upper shadow, and the lower shadow on a hammer candlestick is twice as long as the candlestick's body.

2. Inverted Hammer Candlestick Pattern

An Inverted hammer pattern indicates a bullish reversal, When the opening price is less than the closing price, an inverted hammer candlestick is formed. The Inverted hammer candlestick looks literally like an inverted hammer. The main distinction between the normal and inverted hammers is that the shadow remains above the body of the candlestick.

How to Identify an Inverted Candlestick?

The inverted hammer candlestick appears following a downtrend. The inverted hammer candlestick's upper shadow is twice the height of the candlestick's body. The lower shadow of an inverted candlestick does not exist, but it can be very small. The inverted candlestick's body is at the lower end of the trading range.

There are two types of Inverted Candlesticks:

Bullish Inverted Hammer Candlestick
Bearish Inverted Hammer Candlestick

1. Bullish Inverted Hammer Candlestick

A Bullish Inverted Candlestick is a candlestick that has a tiny body and a long upper wick. In the bullish inverted candlestick, the closing price of the financial asset trading pair is always greater than the open price, indicating greater market buying pressures.

The bullish inverted candlestick appears after a long bearish movement of the financial asset and indicates a bullish market reversal. Most traders leverage the bullish inverted candlestick and take long positions using this candlestick because of an imminent bullish movement.

2. Bearish Inverted Hammer Candlestick

The Shooting Star pattern is another name for a Bearish Inverted Hammer. The bearish inverted hammer candlestick is recognized with a short upper wick and a tiny body. The opening price of the financial asset trading pair is always greater than the closing price in the bearish inverted hammer, indicating that shorting position pressures exceed longing position pressures.

After a long bull run, the bearish inverted hammer candlestick appears in the market and signals a bearish market reversal. With this candlestick, traders can enter a short position because the market is expected to witness an imminent downtrend.

Conclusion

In summary, hammer candlesticks are very important in market analysis. Technical analysts leverage these candlestick patterns in trading pairs and take necessary trading positions. The positions traders take depend on the type of hammer candlestick. In a bullish inverted hammer candlestick, traders take long positions using this candlestick because of an imminent bullish movement. While in a bearish inverted hammer candlestick, traders enter short positions because the market is expected to witness an imminent downtrend.