Hammer

Under the reversal patterns the first important one to look for is the hammer. Reversal patterns are closely looked for by traders because, suppose you are bullish on a currency pair that is falling and looking for clues about a possible turning point, than this is something you might be interested in seeing on your chart.

The real body of a hammer can be black or white, or, for the purpose of our analysis in here we’ll use red and green, red being bearish and green being bullish, bearish meaning the candle’s closing price is lower than the opening price and bullish meaning the candle’s closing price is higher than the opening one, however, the success of a hammer is not dependent on the color of its real body ( body means the distance between the opening and closing price of the candle while a shadow of a candle represents the distance from the absolute high/low price makes on that specific candle and the body of the candle/or the closing price).

One important characteristic when you’re looking for a hammer is to keep in mind that this is a bottom reversal signal, so look to identify bottoms when looking for it. Hammers are being formed of an extended lower shadow and a small real body and judging by these two properties they are easy to spot on when looking at a chart.

Talking about how to trade such a pattern, ideally one would wait for a correction to within the hammer’s lower shadow before taking a trade, but this correction is not mandatory as many times market just flies aways after the moment the hammer is completed. From my experience, when dealing with hammers, the higher the time frame, the powerful the pattern. Have to think of the fact that bears see the pattern too, so it should come as no surprise that eventual stop losses orders below the hammer’s shadow are being targeted often with success on lower time frames.

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