How To Trade Cryptocurrencies with the Hammer Candlestick Pattern?

How To Trade Cryptocurrencies with the Hammer Candlestick Pattern?

When people decide to enter the market and trade cryptocurrencies, a large number of newcomers think that this is a simple buy when prices are low and sell when they are high. In essence, this is correct, but it involves a lot more than that, especially if we want to increase our chances of success. When trading with cryptocurrencies it is essential to implement different tools that will make it easier for us to read the market and make correct decisions.

Candlestick patterns are one of the best things to look at when trading cryptocurrencies. A simple chart showing the opening, closing, highest and lowest prices of an asset, and can give us quite a lot of information if we know what to look for. The Hammer is one of the candlestick chart patterns that are quite commonly used by traders and today we will be taking a look at this chart pattern to see how we can implement it in our crypto trading.

What is a Hammer Candlestick Pattern?

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. 

Example of Hammer Candlestick Pattern

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. 

FAQs on Hammer Candlestick Pattern In Crypto

Is Hammer a good candlestick pattern to use when trading cryptocurrencies?

The Hammer candlestick pattern is a very simple and effective pattern if used correctly. Since it is a trend reversal pattern, traders can take advantage of it and open long positions during the early stages of trend reversals. But using only a Hammer as a way of confirming upcoming trend reversals is not advised and the best way to use this candlestick pattern is in combination with other trading tools. This way, you will have a better read of the market and will make better decisions. 

Is Hammer Candlestick bullish?

A Hammer candlestick is a bullish candlestick, meaning that it shows when the price of cryptocurrency is going to turn bullish, after being on a bearish trend for some time. It indicates that the price of crypto has reached the lowest point it's going to go and that there is a high likelihood that the price is going to start going up. But believing this candlestick blindly is not advised and it is best to use it with other bullish indicators and chart patterns.