Hammer Candle Pattern

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Hammer Candle Pattern

 

The hammer is another candle pattern that many traders rely on. It is supposed to act as a bullish reversal and testing reveals that it does 60% of the time, placing the reversal rank at 26. That is quite respectable. Once price reverses, though, it does not travel far based on the overall performance rank of 65 where 1 is best out of 103 candle types.

 

Hammer Candlestick: Important Results

 

Theoretical performance: Bullish reversal
Tested performance: Bullish reversal 60% of the time
Frequency rank: 36
Overall performance rank: 65
Best percentage meeting price target: 88% (bull market, up breakout)
Best average move in 10 days: -4.12% (bear market, down breakout)
Best 10-day performance rank: 48 (bear market, down breakout)

All ranks are out of 103 candlestick patterns with the top performer ranking 1. “Best” means the highest rated of the four combinations of bull/bear market, up/down breakouts.

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

The ideal hammer candlestick

Hammer

Hammer Candlestick: Discussion

 

The hammer is a single line candle that appears in a downward price trend and it signals a reversal 60% of the time. That’s not bad, but it’s also not far from random (50%). Once the candlestick appears and price breaks out, the move is unexciting, ranking 65 out of 103 candles where 1 is best. But the hammer appears frequently, so if you blow one trade you can try again to compound the loss.

 

If you project the height of the candle in the direction of the breakout (candle top for upward breakouts and candle bottom for downward ones), price meets the target 88% of the time, which is very good. The best average move occurs after a downward breakout in a bear market. Price drops an average of 4.12% after a hammer, placing the rank at 48 where 1 is best. That, of course, is just mid range out of the 103 candle types studied. A good performance would be a move of 6% or more.

 

Hammer Candlestick: Identification Guidelines

 

CharacteristicDiscussion
Number of candle linesOne.
Price trend leading to the patternDownward.
ConfigurationLook for the hammer to appear in a downward price trend and have a long lower shadow at least two or three times the height of the body with little or no upper shadow.

 

Hammer Candlestick: Three Trading Tidbits

 

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.

Hammer Candlestick: Example

 

The chart shows a hammer candlestick on the daily scale at point A. After two weeks of trending lower, the stock reaches a support level and a hammer appears.

 

The small body with long lower shadow and no upper shadow qualifies the candle as a hammer. Price bounces off support and closes above the top of the hammer the next day, staging an upward breakout and forming a doji. The doji speaks of indecision and the following day, price opens lower but closes higher forming a tall white candle in the process. A day later, price gaps upward in a burst of enthusiasm but cannot hold it. Price collapses in the days that followed, returning it back to the support area where the hammer appears.

 

If the hammer’s body color was white, it would also qualify as a bullish harami since the hammer snuggles inside the body of the prior candle.

 

The hammer candlestick on the daily scale
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