Let’s start with candlestick journey with single candlestick reversal pattern ‘hammer’. The Hammer is a single candle bullish reversal pattern and it is a very powerful pattern to trade. You can use it in all markets and in all time-frames. This what makes this pattern very powerful.
- The small real body on the top side of a candle. Very small or no upper wick/tail.
- Long lower tail or wick and tails should be at least twice or more than twice that of the body.
- The market should be in downtrend and color of the Real body doesn’t matter.
This is how a hammer looks like. The stock is already in a downtrend. Bears try to push stock further down. They succeed somewhat, but bulls take the control and push the stock higher and they manage to close stock at a higher price. The color of candle really doesn’t matter.
How does this pattern work?
Observe the following. In the first chart I have marked one weekly candle of the stock ICICI Bank from 16 July to 22 July 2018 and in second chart I used an hourly chart of ICICI Bank from 16 July to 22 July 2018.
In the above chart of ICICI Bank weekly, I have marked Hammer with an orange rectangle box. When the stock is in a downtrend, bears are the dominating force at that movement and the same happened in the first few days of the week. But in the last two days, bulls started dominating and overpowered the bears.
Here in this chart, the action between two white vertical lines indicates the trading from 16 July to 22 July 2018. The stock was in a downtrend and opened gap down on 16 July and was trading in the range. Now, tug of war takes place between the bulls and the bears. Finally, bulls take control and manage to keep the stock on higher levels till weekly close. If you observe closely, there are many patterns in the smaller time-frame like the hammer; spinning top and engulfing (I will share about each in detail in the coming weeks).
If the stock is in a downtrend, bears are happy with their short positions as they are enjoying profits in their short positions and keep on selling and pushing the stock down. At some time, bulls started taking control and pushing the stock up. Now, bears started feeling pressure and to close their short position they start buying at lower levels and started pushing the stock upside.
Identifying Correct Entry –
In trading, there will be the number of hammer formation but choosing correct formation is important. In the following chart, there are two Hammers. If we take the position after forming the first hammer, we will be
In the above chart even though 1st hammer satisfies all conditions, like the stock is in a downtrend, small real body on the top side and long lower tail which is twice of a real body, the stock is still going down and our positions will be stopped out. To avoid this, we will be adding one more condition to this pattern to decrease the chances of hitting stop loss. The condition is, after forming Hammer; we need to wait for the next green candle to close above high of the hammer to get a good trade. Check the second hammer, after forming the second hammer there is a green candle which closes above to the hammer high.
Bharat Electronics –
The daily chart of Bharat Electronics, the stock went down from 170 to 145. Bears were dominating force until bulls took control from 145 and manage to close near day’s high. From here, bulls take control and keep pushing the stock, making new highs. There are more hammers after retracement, after a rally which gives bulls more power to take the stock to new highs.
More Examples (Only Charts) –
Marico Daily Chart –
JSW Steel Weekly Chart –
Reliance Intra-day 5 Min Chart –
Using the above charts, you must have got an idea about how to trade the hammer candlestick pattern. In the next post, I will cover a single candlestick pattern, multi-candlestick pattern and after finishing the candlestick patterns, I will start supply and demand trading.