The so-called Hammer is a candlestick pattern that shows itself when a trend reversal is expected to happen. A trend reversal is something that happens when the price of an asset changes its direction after being on a downward or upward trend for some time. A hammer consists of a long lower shadow, the body, and a small upper shadow. 

“All you need is one pattern to make a living.” - Linda Raschke

A Hammer candlestick pattern shows itself after the price of an asset has been on a downward trend, and it suggests that the price is going to start rising. In order to spot this candlestick, you should look for one that has a long lower shadow, a body that is at least twice smaller than the lower shadow, and in most cases, it will have a very small upper shadow. This candlestick tells us that when the selected period opened, the price continued to drop, but before closing, the price started to rebound and managed to gain back a big chunk of the value it lost. This signals that prices are expected to start rising. But believing just one candlestick is not advised. Because of this, there is a confirmation candle that forms after a Hammer, which strengthens the possibility of a price reversal. This confirmation candle should close higher than the Hammer, and ideally, it should show a strong buying trend. Once this confirmation candle forms, we can then start taking this signal more seriously and it will be a good idea to start opening long positions or closing our ongoing short positions. 

Inverted Hammer

A Hammer also has another variation called an Inverted Hammer, which is also a trend reversal signal after an ongoing downtrend. But as the name suggests this candlestick pattern is an inverted version of a Hammer, meaning that it has a body, a long upper shadow that is at least twice the size of the body, and a small lower shadow. Just like the Hammer candlestick, the Inverted Hammer suggests that the buying power has intensified, despite the price still closing way lower than the peak value it reached during this period. Just like the Hammer, the Inverted Hammer needs a similar confirmation candlestick that will strengthen the signal, and traders should start opening long positions or closing the ongoing short positions.

But compared to the Hammer, an Inverted Hammer candlestick is considered to be less reliable, and believing this candlestick blindly is not advised. 

To better understand what a Hammer candlestick pattern is and how we can use it, let’s take a look at a real-life example. In this case, we are trading with the BTC/USD trading pair, where the price of Bitcoin has been on a downward trend. Looking at the chart, we can see that the price of Bitcoin opened at $27,580, it then started to drop and reached a low point of $27,238. But then the price started to grow once again and the candle closed at $27,525. This has formed a Hammer and signaled that a reversal is likely to happen, but as we mentioned earlier it is important to wait for a confirmation candle to form. Looking at the candle after the Hammer, we can see that it closed above the Hammer, and this should have been our signal to open long positions. 

While the following candles showed both ups and downs, looking at the big picture, the price of Bitcoin started to rise, meaning that a reversal had happened. As you can see, this is a simple candlestick pattern to use, but simply believing a Hammer candlestick is not advised. It is best to use this candlestick pattern in combination with other indicators and patterns to strengthen the market read and make better-educated decisions.