What is a Hammer Candlestick? – Definition and example


A hammer candlestick, characterized by a short body, a long lower wick, and no upper wick or shadow, signals a bullish reversal and often occurs after a downtrend, aiding investors and analysts in gauging supply and demand.

Hammer in a nutshell

  • A hammer candlestick signals a bullish reversal after a downtrend, indicating supply and demand shifts.
  • The candlestick’s formation suggests a battle between buyers and sellers, impacting market sentiment.
  • Integrating the RSI indicator alongside the hammer pattern improves trading accuracy in binary options.

What is the Hammer Candlestick pattern utilized for?

Reviewers utilize hammer candlesticks as a technical analyst tool to spot a bearish trend reversal. As a result of the stock price being unable to decline further, a hammer candlestick develops in which the high, open, and close are all very close in number to one another, making a little real body. The candlestick resembles the capital “T” in the English alphabet.

Such a candle formed when the bulk of traders was selling throughout the day, which is why prices fell, but they were quickly surpassed by buyers, who then raised the price to the candlestick high. This signifies that the stock started at a certain price, dropped to its lowest point, and then closed at or above that price. The action on that stock grows more substantial the lengthier; the lower shadow is under the natural body. 

Hammer is a crucial candlestick pattern that aids investors in determining supply and demand. The preponderance of traders decides to keep short positions due to the establishment of the hammer, which denotes a reversal.

What does the Inverted Hammer Candlestick demonstrate?

On the other hand, an inverted hammer candlestick demonstrates how sellers could take control in a situation where buyers had previously been in charge. It appears near the bottom of a steady decline and has the appearance of a reversed capital “T.” But it is referred to be a shooting star when it moves upward.

Why to avoid investing in stocks with high P/E ratios?

Traders should be cautious with high P/E stocks because, although lower P/E ratios may suggest better value, a company’s price reflects its potential to generate future income and cash flow.

It is therefore simple to conclude that Applied Materials is the largest value because it has the lowest multiple when comparing its P/E to that of eBay (NASDAQ: EBAY), New York & Co. (NYSE: NWY), and Applied Materials (NASDAQ: AMAT), which have P/Es of 20, 57, and 37, respectively.

Of course, this makes sense. But according to the same reasoning, NovamericanSteel (NASDAQ: TONS), with a P/E of 4, would be the obvious pick for your investment funds over all others. But think about this: There has never been a time in the last 15 years when Cisco’s P/E ratio was lower than U.S. Steel’s.

Over the long term, Cisco, the more “expensive” corporation, has far beaten its “cheaper” rival.

This hammer didn’t go straight for an investor brandishing a “P/E” hammer. Why? Because a company’s operations determine its profitability, whereas the market’s estimate of the company’s ability to generate potential income (and, more significantly, cash flows) determines its price. In the long term, pricey businesses may be completely worthwhile.

Of course, P/E isn’t the only hammer. Although each is beneficial to the savvy investor, neither should be considered.

How to trade the Hammer with Binary Options?

Trading the Hammer candlestick pattern in binary options can be a strategic approach to identify potential reversals in market trends. In binary options trading, a bullish hammer during a downtrend suggests a bullish reversal, while a bearish hammer after an uptrend hints at a potential bearish reversal. If you notice a hammer pattern in the chart during trading a single candlestick, this means buyers are in action.

Leveraging support levels

Utilizing the Hammer candlestick pattern alongside support levels presents traders with valuable entry opportunities in binary options trading. When a hammer candle appears at a support level, traders may consider placing Higher orders. This occurrence indicates a potential shift from a bearish to a bullish trend, offering a secure entry point for trades.

Integrating the RSI indicator

Incorporating the Relative Strength Index (RSI) indicator alongside the Hammer candlestick pattern improves trading accuracy. When the Hammer candle forms in the oversold zone of the RSI indicator, it signals a favorable opportunity for Higher orders. This direction suggests that the momentum of the downtrend may be fading, which could lead to a bullish reversal and provide experienced traders with an optimal entry point.

Is the Hammer Candlestick useful in technical analysis?

Yes, the hammer candlestick pattern serves as a valuable tool for technical analysts, signaling potential bullish reversals after downtrends. Its formation reflects a battle between buyers and sellers, often indicating a shift in market sentiment.

When used in conjunction with other indicators like support levels and RSI, traders can make informed decisions in binary options trading, capitalizing on potential trend reversals for profitable outcomes.

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About the author

Marc Van Sittert
Marc Van Sittert is an experienced Binary Options Trader and coach who is originally from South Africa. He started his career in 2014 by trading old-school Binary Options online. His main focus is on short-term contracts with 60-second trades.

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