Don’t Trade Before Learning These 14 Candlestick Patterns

Arul Pandi

Don’t Trade Before Learning These 14 Candlestick Patterns

Dedicated to passionate traders

to learn & practice trading with

candlestick patterns successfully

Chapter 1

Hammer

Hammer pattern is a single-candlestick bullish reversal pattern that occurs at the bottom of a downtrend. The pattern occurs frequently. It is easy to identify also. It shows that sellers are able to bring down the price to a new low but the downtrend could not be sustained any longer as strong buying pressure pushes the price up and the market closes near and mostly above the open.

Formation in detail

• The hammer candle, to be an indicator of bullish reversal, should be occurring at the bottom of a downtrend.
• Its body should be short and located at the top of the price range.
• Its upper shadow should ideally be non-existent.
• Its lower shadow should be at least double the length of the body.
• The closing and high positions are similar or the open and high positions are similar connoting that bulls are able to overpower the bears during the time frame.
• The body can be white or black i.e., the close can be a little lower or higher than the open though a white candle is considered to have a more bullish indication and make a stronger pattern.

A candlestick with the same shape but occurring after a bullish trend is not a hammer but is a hanging man pattern.

Interpretation:

The Hammer candlestick pattern implies that price moved lower after the open and then ran out of sellers at such low prices and buyers entered because of such low prices and the price closed at or near to the open.

There is little or no upper shadow which means that the market could not trade higher at any point of time during the trading session.

The long lower shadow implies that the price fell to a support level, then bounced upward and went near to the open. In other words, the market’s support and resistance levels were being tested by the long lower shadow.

Formation of hammer pattern during downtrend implies that the bottom of the downtrend is nearby and price will start moving up again.

How to trade:

Hammer pattern is a signal to prospective buyers to be alert as bullish trend is gaining momentum.

Many traders will buy the next morning itself if the day’s open is higher than the hammer day’s close.

However majority of traders wait for firm confirmation of bullish trend reversal by way of a few consecutive white candles.

We recommend entry after a close above the real body of the hammer candle preferably supported by increased volume and long-term ascending channel.

Low of the hammer candlestick is recommended as stop-loss. However, if the lower shadow is very long, stop-loss level will be far away, and hence trigger will entail huge loss. One can, therefore, consider a more conservative stop loss, say, at a level below half of the lower shadow.

Signal strength

• The buy signal of the pattern is stronger when it is formed after a long downtrend in the price.
• The pattern’s buy signal will be stronger if the hammer candle is followed by a candle that closes above the opening price of the hammer candle.
• A white-bodied hammer signals a stronger bull market than a black-bodied hammer.
• The longer the lower shadow, the stronger the bullish reversal.
• A hammer candle backed by large volume signals a stronger bull market.