Traders devise their strategies in financial markets, including crypto markets, based on technical analysis of price trends. The analysis involves understanding price patterns, trends, and price actions using a set of indicators. One of the popular indicators used by traders is the hammer candlestick pattern. In this article, we will discuss how to trade the hammer candlestick pattern.
What is a hammer candlestick pattern?
The hammer candlestick pattern predicts the trend reversal in the price pattern on the bullish side. It is a parameter that can work for a wide variety of financial assets, including stocks, forex, indices, and crypto assets.
The traders can use it as a reliable indicator for trend reversals and successfully trade using hammer candlestick patterns.
What does the hammer candlestick indicate?
The hammer candlestick is a bullish reversal pattern, i.e., it predicts an increase in price after a decline. The shape of the candlestick is like a hammer with a stocky body and a tail/wick downwards. The figures below will help you identify the hammer candlestick pattern.
The opening price and the closing price are close in this formation, which shows more sellers initially pulling the price down, followed by buyers entering the market and pushing the price up before close.
If the closing price is higher than the opening price, the hammer candlestick pattern is called a bullish hammer. If lower than the opening price, the hammer candlestick pattern is called a bearish hammer.
In terms of representation, the body of a bullish hammer candlestick is green in colour, while the body of the bearish one is red. Irrespective of the body colour, the pattern indicates a bullish movement.
Understanding hammer candlestick
Looking closely, the hammer candlestick pattern represents the level of demand and supply of the crypto asset. It can be observed by the way the formation of the candle takes place. A longer wick indicates that more sellers are present, and as a result, the price is being pulled down due to selling pressure. At a later stage, though, the price tends to rise, which means the buyers become active as the downside potential of the price is exhausted, and trend reversal takes place. This pushes the price again to the opening level or above it. Generally, the hammer candlestick appears after a decline in the price.
Whenever a hammer candlestick forms, it indicates a trend reversal in price movement and market sentiment. This can be confirmed by observing price momentum following the formation of this pattern.
Trading Strategies using Hammer Candlestick
Traders can use the hammer candlestick to plan their entry or exit into the security. Mentioned below are some hammer candlestick pattern tips that traders can use.
Support and resistance strategy
Support and resistance are the price levels on the lower and higher sides, respectively. They are not broken easily, but once they are broken, there is a significant price movement. Generally, some news or event is required to break either support or resistance. Therefore, the trader can predict the price using price action and while trading, a hammer candlestick can be seen as a confirming indicator of a bullish trend.
In the given chart of ETH prices, both support and resistance can be seen around 2330. The price breaks this level with buying pressure and later falls back again to the same point, at which the traders will need a confirmation from the hammer candlestick to buy.
Intraday trading with moving averages
In this strategy, a trader has to identify a bullish trend using exponential moving averages (EMA). Once the trend is identified, any bearish correction can be seen as a buying opportunity. The same can be confirmed by the appearance of a hammer candlestick followed by the bearish price movement.
In this strategy, the first step is identifying the bottom, i.e. a new low, that breaks all the short-term lows. On reaching the new low, an indecision candle will appear in the charts with sellers trying to pull the price down. If this is followed by the formation of the hammer candlestick, it indicates a bullish reversal. The trader can consider entering at this point to get the advantage of price rise with a stop loss below the wick with a buffer.
We can see that the hammer candlestick pattern is a reliable indicator of trend reversals, and it complements other price action indicators like moving averages and trends. This can help the traders devise their strategies to a great extent. So don’t wait; don your trader’s hat and start trading in your favourite crypto assets by logging on to ZebPay Australia.