# Hammer Candlestick: What It Is and How Investors Use It

> **Definition**
>
> The hammer is a bullish reversal candlestick pattern characterized by a small body near the top, a long lower wick, and little to no upper shadow. It signals a shift from selling to buying pressure.

If you're a swing trader looking for a long entry at the end of downturn, a hammer offers valuable information, signaling a short-term shift from bearish to bullish momentum that may itself mark a turning point.

The hammer is a single bullish candlestick with a small real body near the top, a long lower shadow at least twice the body's length, and minimal or no upper shadow. It is most effective after a significant downturn or countertrend pullback and when confirmed with another bullish candlestick, technical indicators, or established support levels.  

### Key Takeaways

*   The hammer candlestick is a bullish reversal pattern with a small body and long lower shadow.
*   It is most effective when appearing after a downtrend and confirmed by subsequent candlesticks or technical indicators.
*   Trading strategies should include clear entry points, a stop-loss order, and profit targets.
*   The pattern's reliability increases when it appears at support or Fibonacci levels.
*   Always use the hammer candlestick in conjunction with other technical analysis tools.

![Hammer Candlestick](https://www.investopedia.com/thmb/UMqqNZRK8O32o9xYlYoxoqOUwbE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TermDefinitions_Hammercandlestick-8fc5044f91c043daa882e879308deb0b.png)

*— Investopedia / Mira Norian*

## Understanding Hammer Candlesticks

The hammer is one of the easiest, most intuitive candlesticks to recognize because, well, it looks something like a hammer. It has three components:

*   A small real body located near the top
*   A long lower wick that is at least twice the body's length
*   A tiny upper shadow or no upper shadow

The unique shape tells traders that even though prices initially dropped, buyers stepped into reverse the decline, pushing the closing price up to near the opening price. This signals a potential shift from bearish to bullish sentiment momentum.

A hammer with a closing price higher than the opening price is an even stronger bullish signal, giving traders even more confidence. It's still a bullish signal if the closing price remains below the open, but the failure to push the close higher is a sign of residual selling pressure, prompting most traders to proceed with more caution and seek additional confirmation.

Hammers are most reliable after a significant downtrend, especially if they occur at an area of established support, whether via previous price action or major moving averages.

## How to Trade the Hammer Candlestick

There are several basic steps to effectively trading the hammer:

**Step 1: Pattern Identification**

Identify the hammer. Some charting software offers candlestick pattern analysis, including the hammer. If the trader is eyeballing, they would need to confirm the small body near the candle's high, the long lower shadow and a minimal or non-existent upper shadow.

**Step 2: Confirm the Pattern**

Good traders wait for confirmation, most often in the form of a bullish candle that shortly follows the hammer and closes above the high of the hammer. Additionally, increased volume on the confirmation candlestick enhances reliability. Technical indicators such as the [Relative Strength Index](https://www.investopedia.com/terms/r/rsi.asp) (RSI) also offer useful confirmation.

**Step 3: Trade Entry**

More aggressive traders may enter at the close of the confirmation candlestick if it closes above the hammer's high. Others may enter at the open of the day following the confirmation candle.

**Step 4: Stop-Loss Entry**

The most common approach is to place the stop-loss order just under the hammer's low—if the price falls below the hammer's low, the pattern has definitely failed.

**Step 5: Profit Targeting**

Traders usually set profit targets using nearby resistance levels, [moving averages](https://www.investopedia.com/terms/m/movingaverage.asp), [Fibonacci retracements](https://www.investopedia.com/terms/f/fibonacciretracement.asp), or [pivot points](https://www.investopedia.com/terms/p/pivotpoint.asp). But before entering the trade, most traders would want to be sure the market has enough room to run to achieve their minimum [risk-reward ratio](https://www.investopedia.com/terms/r/riskrewardratio.asp) before hitting resistance levels or other areas where profit-taking makes sense.

## Tips for Trading with the Hammer Candlestick

Traders keep these points in mind when using the hammer candlestick:

*   **Look for Longer Shadows**: Longer shadows signal stronger buyer strength, as buyers aggressively reversed prices from intra-period lows. The lower shadow should be at least twice the length of the real body, but on the most bullish hammers, they can be three to five times longer.
*   **Confide in Confluence**: A hammer appearing near major support levels, trendlines, or Fibonacci retracement zones dramatically enhances reliability. Such confluence indicates multiple traders recognize the level as a buying zone, strengthening the reversal signal.
*   **Technical Analysis Combos**: For confirmation, use indicators such as the RSI, [Moving Average Convergence Divergence (MACD)](https://www.investopedia.com/terms/m/macd.asp), or moving averages.
*   **Volume Analysis**: Increased trading volume accompanying the hammer or confirmation candle indicates strong institutional buying support, validating the reversal.

## Common Mistakes and How to Avoid Them

Below are some common pitfalls and ways to avoid them.  

## Example of Hammer Candlestick Pattern in Action

Toward the end of 2022, a currency trader closely observing the Canadian dollar-Japanese yen's (CAD/JPY) downtrend on the daily chart spots a bullish divergence forming on the RSI, suggesting weakening bearish momentum.  

![Hammer Part I](https://www.investopedia.com/thmb/DLlnrq8STqhftW4Ln1NXIeWxLJM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HammerPartI-6f44e2f4c25c4965b1ef650c2199f59e.jpg)

*Hammer Part I. — Tradingview*

Patiently waiting for a clear sign of a reversal, the trader sees first an inverted hammer and then a hammer. These are confirmed by a bullish candle in the next period, making this a strong buy signal. The trader enters a long position at the close of the confirmation candle, placing the stop-loss just below the low of the hammer and aiming for a risk-to-reward ratio of 1 to 2.

![Hammer Part II](https://www.investopedia.com/thmb/LhpjXdvwJON_-1ymIvfRRLj1uBM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HammerPartII-b1502b575b2d4291ad63e612d979e83a.jpg)

*Hammer Part II. — Tradingview*

The pair rises again on the day after the confirmation bar, trades sideways for a while, then moves higher again, hitting the trader's profit target.

![Hammer Part III](https://www.investopedia.com/thmb/UqLhtWYsRgTkyHW5mT2HjiCLcwg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HammerPartIII-cc7957335ce04ecca098bf1304dac007.jpg)

*Hammer Part III. — Tradingview*

## The Bottom Line

The hammer candlestick helps swing traders enter long positions after downtrends while minimizing the risk of "catching a falling knife." That's because the hammer pattern reveals a potential shift in buying pressure and the balance of power between bears and bulls. Traders look for confirmation from subsequent bullish candles and higher volume, ideally supported by other technical analysis indicators like the RSI or MACD, pivot points, or Fibonacci levels.

By combining the hammer pattern with disciplined trading, traders can effectively manage risk, avoid common pitfalls, and improve their results when looking to enter bullish reversals.

> **Article Sources**
>
> 1.  Tradervue, "[Hammer Candlestick Pattern](https://www.tradervue.com/blog/hammer-candlestick-pattern)"
>     
> 2.  TrendSpider, "[The Hammer Candlestick Pattern: A Trader's Guide](https://trendspider.com/learning-center/the-hammer-candlestick-pattern-a-traders-guide/)"
>     
> 3.  Tradingview,"[Hammer-Bullish](https://www.tradingview.com/support/solutions/43000583775-hammer-bullish/)"