What is a hammer candlestick pattern?
A hammer candlestick pattern is a bullish reversal candlestick pattern that forms after a period of decline. The hammer pattern consists of a small green body with a long lower shadow. It looks like a hammer, the long bottom wick being the handle and the metal part being formed by the open and the close price.
The long lower shadow indicates that buyers were present during the session, but were unable to push prices higher. The hammer candlestick is considered a reversal signal because it shows that buyers are beginning to take control of the market again after prices have been falling.
How to trade the hammer candlestick pattern?
The hammer candlestick pattern signals a potential bullish reversal in the market. It can be used to place buy orders above the high of the hammer candle, with a stop loss order placed below the low of the hammer. However, trading with a candlestick pattern as a sole indicator is never a good idea. It is better to think of candlesick patterns as part of a larger trading system and make use of several indicators at the same time to confirm a trade signal.
What other technical indicators can be used with the hammer candlestick pattern?
There are a few technical indicators that can be used with the hammer candlestick pattern. One indicator that can be used is the moving average convergence divergence (MACD) indicator. The MACD indicator is a momentum indicator that can be helpful to identify trend reversals. Another indicator that can be used is the Relative Strength Index (RSI). The RSI is a momentum indicator that measures overbought and oversold conditions in the market.
Using MACD with the hammer to confirm the trend reversal
When using the MACD indicator to trade the hammer candlestick pattern, you would buy after spotting the hammer when the MACD line crosses above the signal line. This indicates that momentum is shifting from bearish to bullish. You would then set your stop loss below the low of the hammer candlestick.
Using RSI with the hammer to confirm the trend reversal
If you are using the RSI indicator to trade the hammer candlestick pattern, you would buy after spotting the hammer pattern when the RSI moves above 50. This indicates that prices are starting to move higher after being in an oversold condition. You would then set your stop loss below the low of the hammer candlestick.
Final thoughts on the hammer candlestick pattern
The hammer candlestick pattern is a bullish reversal pattern that can be used to trade the stock market. This pattern is easy to identify and provides a trader with a high probability of success. The MACD and RSI are two technical analysis indicators that can be used in conjunction with the hammer candlestick pattern. When trading this pattern, it is important to wait for confirmation from both indicators before entering into a position.