What is Hammer candlestick pattern & how it works?

 Hammer Candlestick pattern

A hammer candlestick pattern is a bullish candlestick pattern that formed in a downtrend, and it shows trend reversal in the market. A hammer consists of a long lower shadow with a small body and a small end upper shadow. Below the chart, you can see hammer candlestick pattern formation in the chart.

A hammer can be any color it does not matter about the color of the hammer candlestick pattern. The thing matter is it qualifies ‘The shadow to real body’ ratio.

A hammer candlestick pattern is stronger when it is formed after two or three declining candles.

The Previous Trend for hammer should be a downtrend

1. The previous trend will be a downtrend and it gives more confirmation about your trade.
2.  The market previous trend will be a downtrend and bears are absolute control in the market.
3.  During the downtrends, everyday market opens in low and closes in lower compared to the previous day’s close and again close lower from the new day.
4.  On the day the hammer pattern forms, the market as expected traders lower, and makes a new low
5.  how every at a low point some amount of buying interest will come which push the price higher and close to the high point of the day.
6.  The price action hammer formation day indicates that buyers were taking the lead of the market and the trend will be reversed.
7.  The action of these bulls was performed to change the sentiment of the trend. Hence it should be buying opportunity.   

Trade setup for Hammer candlestick pattern.

A hammer is a long bullish trade setup for the long bullish rally.

The trader entry depends upon their risk capacity. If the trader if ready to take risk (Risk taker) then he will buy the stock on the same day at the time of closing hammer candle and if the trader is want to be confirmed and take careful trade decision then he will buy after 2 to 3 candle from hammer formation.

1 Risk takers can qualify the day as a hammer by checking the following condition at 3:20 PM on the hammer day…

1. Open and close should be almost the same (within 1-2% range)
2. The lower shadow length should be at least twice the length of the real body.
3. If both these conditions are met, then the pattern is a hammer, and the risk-taker can go long.

2 The risk-averse trader should evaluate the OHLC data on the 2^nd If it’s a blue candle, the trade is valid so that he can go long.

3 The low of the hammer acts as the stop loss for the trade.

The chart below shows a hammer’s formation where both the risk taker and the risk-averse would have set up a profitable trade. This is a 15-minute intraday chart of Cipla Ltd.

Example of hammer candlestick pattern.

Suppose a stock name is ABC limited and a hammer formation in downtrends so as hammer has formed we shell take a trade a per both perspective.

Risk-taker will be buying the stock when the hammer is formed in the chart.

Where as risk-averse will take trade after two to three candles of hammer formation.