The hammer candlestick indicator is one of the indicators in crypto asset trading that is often used to identify reversals. To note, there are two patterns that are most common and easy to identify in technical market analysis, including in crypto trading, and one of them is this one candle.
In general, this candle will appear at the end of trend price action, with a characteristic small body shape and shadow / wick that is longer than its body size.
For information, this hammer indicator is often observed in the forex market and provides important knowledge about trend reversals. For traders, it is very important to understand there is a lot to know about this hammer.
On the other hand, an important validation factor for this candlestick is the price action and the location of the candlestick—when viewed in terms of the current trend. Then, what exactly is this type of candlestick? Check out the following explanation.
What is a Hammer Candlestick?
Basically, a hammer candlestick is a pattern on a price chart that occurs when a security trades significantly lower than its open, but rallies in a period close to its opening price.
According to a number of experts, this one candlestick also means a bullish reversal pattern that is often present at the end of a downtrend. The pattern then forms a hammer-like candle, with the lower shadow at least twice as long as its true body size.
The body of this candle represents the difference between the opening and closing prices. Meanwhile, the shadow shows the high and low prices for the period.
It is known that the most common hammer candlestick, the bullish hammer, has a small candle body and an extended lower wick—to indicate rejection of lower prices.
There is also another pattern that traders watch out for, namely the hammer reversal, which is an inverted bullish hammer. An explanation of the two is as follows.
Bullish Hammer Candlestick
As for the hammer candlestick, this one will appear at the bottom of a downward trend and signal an upward reversal. This hammer pattern has a small body, little, or no upper axis, while the lower axis is long or hammer-like.
In this pattern, it will be seen when the price drops to new lows, but further buying pressure will force the price to close higher, signaling a potential reversal. As for the extended lower wick, indicating rejection of lower prices.
Inverted Hammer Candlestick
Like a bullish hammer, this inverted hammer candlestick will also provide a signal for an upward reversal. As the name implies, candlestick means an inverted hammer, which has a long upper wick, a small body, with little/or no lower wick.
For information, this one candlestick opened at the bottom of a downtrend before the bulls pushed the price up, which is seen on the extended upper wick. On the other hand, the price will eventually go back down towards the opening level, but close above the open—that is to give a bullish signal. If the buying momentum continues, it will be seen in the next price movement that moves higher.
How to use the Hammer Candlestick and its Limits
To find out how to use the hammer pattern, first consider the price movement chart of an asset below.
Advantages and Disadvantages of Using Hammer Candlestick
There are several advantages or advantages when using this hammer candlestick, including:
1. Traders will find it easier to recognize signals of rejection of lower prices.
There are two signals given in this case, namely:
a. A reversal signal, which is a pattern that indicates a rejection of the price lower. When found in a downtrend, the signal can signal the end of the selling pressure and starting to move sideways or reverse upwards.
b. Exit signal: Traders who have short positions can monitor the hammer candlestick as an indicator that selling pressure is easing—this also presents an ideal time to close short positions.2. Can be used to identify easing selling pressure. Thus, traders can determine the exact closing time of short positions.
Meanwhile, some of the disadvantages of the hammer candlestick are as follows:
a. This indicator tends to ignore the trend so it has the potential to give rise to the presence of false signals.
b. The use of hammers still requires other data to be able to obtain an ideal analysis of the asset price reversal situation.
Well, beyond the advantages and disadvantages, the placement of this hammer candlestick indicator must indeed be accompanied by a strategy. As a trader, you can learn about it at Tokonews. Good luck!