Hammers: Two of the Most Powerful Candlestick Patterns
It’s not difficult to understand why candlesticks have become so popular.
Unlike your typical bar or line chart, candlestick charts tell us four essential things in a given day – the open, high, low and close. More importantly, they can tell us how strong or weak the bulls or bears are at a point in time.
For example, if I spot a doji cross at top of trend, it’s an indication of indecision among the bulls and bears. It can also tell technicians – based on historical observations – if a trend is likely to reverse in the opposite direction.
Unfortunately for beginner candlestick users, the enormous amount of patterns, and candles to be aware of are too much to handle. But with time, they become easier. In fact, we’ve discussed many of the major ones with you already.
And we’ll continue to share the most commonly used, most powerful ones, including two of my favorites – the hammer and the inverted hammer. Laughable names, I know. But they’re incredibly powerful when spotted on a chart.
When it comes to the hammer candlestick, it’s typically found after a market or stock decline. It’s a bullish signal of a potential reversal higher.
You’ll typically find these when a stock price moves lower after the open and then rallies to close significantly higher than the day’s low. The candles ends up looking like a square hammer with a long handle. For example, in late May 2017, a hammer candle formed after a slight pullback in the Dow Jones, as you can see here.
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We can also see a hammer formation in a chart of Randgold Resources (GOLD).
With the inverted hammer, we simply invert the normal hammer.
These are also bullish reversal patterns. The only difference with the inverted hammer is that the price of a stock will move higher after the open and then rally to close significantly lower than the day’s low. For example, in late May 2017, an inverted hammer candle formed after a slight pullback in shares of Microsoft (MSFT).
However, just because a candle appears on your chart, don’t rush out to buy.
Always wait for confirmation of potential trend change. The last thing you want to get stuck in is potential false break higher. Also, it is essential that you always confirm with other indicators, including your Bollinger Bands, MACD, relative strength (RSI), Money Flow and even Williams’ %R.
In short, pay close attention to everything before buying on a candlestick.
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