Forex market is not a simple space to navigate, especially if you are a newcomer. There are many different terms, indicators, charts, patterns, and more that traders need to learn how to use. One of those terms is Hammer, and today we will be discussing what is it exactly.
Hammer definition
Hammer is a Forex candlestick pattern that usually appears after there was a downtrend for at least a few days. It consists of a small real body with a long bottom shadow, meaning prices fell throughout the day but still closed near the open position. It can be considered a trend reversal pattern, as it usually shows the bottom of the price, and it is unlikely that they will fall beyond that.
Why is Hammer important for traders?
- Hammer is an easy pattern to spot, so both experienced and inexperienced traders can spot it.
- Hammer can be considered as a trend reversal pattern, giving traders a good insight into the market.
- Traders who have short positions open can use Hammer as a signal to exit the market.
- It can be used to determine the bottom price of an asset.
Thorough Hammer explanation
Many traders ask, what is Hammer? So let’s take a look at thorough explanation. Hammer is a bullish candlestick that appears after the downtrend. It forms when prices fall down significantly during the day, but then manage to rally back up and close near the opening position. Because of this, it has a long lower shadow and a small real body. For a candle to be considered a Hammer, the lower shadow should be at least two times the size of the real body.
Just like any candlestick, Hammer requires confirmation, and it is done by looking at the next candle. If the next candle closes above the closing price of the Hammer, we can confirm that indeed, we are seeing a Hammer pattern. Once confirmed, traders can start to enter long positions or exit from short positions.
Example of Hammer in Forex
Now let’s look at the Hammer example in Forex trading. Let’s say that we are trading with the GBP/USD currency pair that has been on the downtrend for a few days. Then one day the market had an opening price of 1.248, before going all the way down to 1.243. But until the closing of the market, it managed to somewhat rebound and closed at 1.247. Because of this, it created a long bottom shadow and a small real body. This gave us a sign that we have a Hammer pattern on our hands, and everything was confirmed the very next day when the market went green and prices rose. This is a simple to spot and use pattern and because of this, understanding Hammer in trading is simple and yet very important, as they are not as common to spot.
FAQs on Hammer in trading
Is Hammer bullish?
Hammer can be considered a bullish pattern if it forms following a downtrend. It shows the bottom of the price, and it is highly unlikely that these prices will fall beyond this.
Is Hammer candlestick accurate?
Hammer is a relatively accurate candlestick pattern that occurs when a downtrend comes to an end. But making a decision just by looking at the Hammer candlestick is not the best decision and for further confirmation, it is best to wait for the next day’s candle to form and confirm the trend reversal that way.