Welcome To Street Investment
By Admin
Posted on August 26, 2024
In this post, most of the people visiting will likely have knowledge about trading. Some people are here to learn something new, while others want to understand how to identify the perfect the Hammer candlestick pattern.
A candlestick is very helpful for understanding the market, so some people may be here with the intention of mastering only technical analysis. So what does a Hammer candlestick indicate that allows us to capture the market’s next move and book some profit?
In this article, you will learn how to find a perfect Hammer candlestick and make a trade with it.
The Hammer is a candlestick pattern that can start or end any market trend. It forms at the end or start of a trend and can reverse the trend if the formation is correct. It also indicates a potential trend direction, whether up or down, depending on which way it forms.
In a Hammer candlestick, the shadow is longer than the body, and there is also a shadow above the body. Most people consider the Hammer to be the strongest candlestick because it often forms when a trend starts or ends. Therefore, trading with a Hammer can be a good opportunity.
So now understand the psychology behind a Hammer forming on the chart because it helps you better understand the trade. Therefore, it’s important to grasp this first. For example, if I take a 15-minute Hammer, guess how it might have formed, and I’ll explain.
For a 15-minute chart, remember that it consists of three 5-minute candles. If you want to quickly understand the formation of this candle, develop a strategy on the 5-minute timeframe to identify the entry early. However, this approach might also be unreliable. The first step is to read the 5-minute candlestick chart and predict if a Hammer will form, then trade based on that prediction.
For example, if a Hammer is likely to form on a 15-minute chart, there’s a good chance you’ll see a Tweezer Bottom on the 5-minute timeframe. You can make an entry based on that and continue the trade once the Hammer forms.
So first, let’s understand how the environment for buying will be created on the chart pattern. When a new support level is being established, a red candle might form, followed by a green candle of equal size. This will create a Tweezer Bottom pattern. After that, another candle will form, which will decide the color of the Hammer on the 15-minute chart. However, as I mentioned earlier, the color doesn’t matter. If the next candle moves upward, you will see a green Hammer, and if it moves downward, you will see a red Hammer.
Look at this image to better understand what happens in a smaller timeframe before a Hammer forms.
For selling, it will be similar at resistance levels. When a new resistance is formed, a green candle might appear, followed by a red candle of equal size. This will create a Tweezer Top pattern. The color of the follow-up candle will decide the color of the Hammer on the 15-minute chart.
Look at this image to better understand what happens in a smaller timeframe before a Hammer forms.
By looking at the image, you will better understand how a Hammer forms. If you see such a candle forming on the 5-minute timeframe, you’ll recognize that a Hammer might form on the 15-minute timeframe, allowing you to plan your trade in advance.
Overall, a Hammer will look like this when you analyze it in the 5-minute timeframe and then see it on the 15-minute timeframe.
A Hammer will only form if the price is either overvalued or undervalued. To determine this, you can use indicators and experiments to find which timeframes work best. I explained the zones of overvalue and undervalue in a previous article where I discussed how to create a winning trading strategy. If you want, you can read that article as well.
In indicators, the RSI is commonly used, so you should follow that. If you know of anything better, be sure to mention it in the comments. When a stock’s price becomes undervalued, buyers become active because the price likely hits a support level. At this point, a rejection candle may start forming on the 5-minute timeframe, and the RSI may drop below the 30 level. This encourages buyers to become even more active, leading to the formation of a Tweezer Bottom. After that, when a Hammer forms on the 15-minute timeframe, even more buyers come in, turning it into a trend reversal candle.
Psychologically, the Hammer is considered such a strong candle that buyers, confident in its significance, start buying, leading the price to make a strong move in the direction of the Hammer.
A Hammer is considered one of the strongest candlesticks because it has the power to reverse any trend. With this candle, you can also see how many buyers and sellers are in the market because it indicates all these things to you. It’s important to know how to identify a Hammer after a strong trend in the market.
In a Hammer candlestick, the shadow is double the size of the body, and the smaller shadow, which forms in the direction of the Hammer, should be half the size of the body. We will understand this further.
You can understand what a Hammer indicates by looking at this chart. You just need to learn how to read the candles, which will help you grasp the sentiments of buyers and sellers.
In this picture, you can see the presence of buyers and sellers in the market, which helps you capture the market’s next move. The green zone represents the buyers, and the red zone represents the sellers. These are the things a Hammer candlestick indicates.
The same thing applies to selling; you just need to wait for a perfect Hammer to ensure your trade remains profitable.
This is the XAUUSD (Gold) chart. After a significant downtrend, you can easily capture this reversal and gain profit with the help of a Hammer and RSI.
After this movement, Gold’s price created a new all-time high, so you can understand how important it becomes to make the right entry at the right time in a trade.
In this example, after a strong downtrend, a red Hammer formed. As I mentioned earlier, the color doesn’t matter. After the Hammer formed, the market continued in a downtrend for a while, but it was just manipulation. The stop loss wasn’t hit, and the target was hit the next day. However, some people might have closed the trade early during the initial downtrend Because they didn’t have any trading rules and due to fear, they will exit the trade and their trading psychology wasn’t stable. That’s why I recommend they read my article on trading psychology.
While trading, we come across many Hammers, some of which work, and some don’t. This causes many traders to incur losses because they fail to identify a perfect Hammer. So, let’s learn how to identify a good Hammer that will work.
Remember what a Hammer consists of: a long lower shadow, a body that isn’t too large, and another shadow above it. To identify a perfect Hammer, you’ll need to measure a bit and understand what I’m trying to convey through this image.
Now, this is a buying Hammer, but you might be wondering what the numbering 1, 2, and 4 is about. These are the measurements of a perfect Hammer that I mentioned earlier, which we need to measure.
Now, understand in detail: a Hammer consists of three parts—its upper shadow, body, and lower shadow. However, follow these steps to find a perfect hammer candlestick.
You all must have understood the selling candle as well. It’s the same: just measure the body and its shadows, and that’s it.
You might have already read somewhere that you should enter a trade when the high of a Hammer is broken or low. However, this is often just manipulation, and it usually results in a loss. Therefore, it’s important for you to know how to make an exact entry on a Hammer to reduce the chance of loss.
Understand from this image when you should enter, as well as where to set your target and stop loss. This is crucial because, to be profitable in trading, you need to learn these aspects.
Enter a trade on a Hammer only when a candle with momentum equal to the size of the Hammer’s body moves in the direction of the Hammer. This will confirm that the momentum is likely to continue, giving you confidence in the trade and helping to maintain a positive trading psychology.
You can mark zones for targets, such as TP 1, 2, and 3, which will give you an idea of how long to hold the trade. Normally, you can set a target equal to the size of the Hammer or, at most, aim for the next resistance level. It’s up to you to decide when to exit the trade.
You can mark zones for targets, such as TP 1, 2, and 3, which will give you an idea of how long to hold the trade. Normally, you can set a target equal to the size of the Hammer or, at most, aim for the next resistance level. It’s up to you to decide when to exit the trade.
So, in the end, I would say that trading with a Hammer allows you to capture great opportunities and generate good profits. The Hammer is the strongest trend-reversal candle and, psychologically, it also gives confidence to both buyers and sellers.
If you have learned something new from this article, please let me know. Also, tell me what improvements I can make so that I can enhance it further.
Good luck to all the new traders, and my wish is that all of you remain profitable.
