Hammer Candlestick: What the Pattern Means in Stock Trading

On trading pricing charts, a hammer candlestick is a bullish reversal pattern that shows the closing price eventually increased to a point near or above the opening price.

The wick (or shadow) of the candlestick is a line indicating the fluctuation in the stock’s pricing—for example, in a given day—while the body of the candlestick represents the stock’s opening price (the top of the body) and closing price (the bottom of the body).

Hammer candlesticks have a small body, a long shadow, and little to no upper wick, indicating the security traded at a much lower price initially but started to rise as buyers purchased shares. This pattern on a price chart usually occurs after a downward trend and highlights a potential reversal in price. Hammer candlesticks appear on different timeframes, including weekly and daily charts.

Hammer candlesticks are either red or green. While a red hammer candle indicates the closing price is below the opening, a green hammer candle means the closing price is above the opening price. Below are the three types of hammer candlesticks.

1. 1. Bearish: Also known as the hanging man, a bearish hammer shows a small body with a long lower wick. Since the security price has already increased from buying pressure, a bearish hammer signals the price has topped off, typically resulting in a bearish reversal.
2. 2. Bullish: When the closing price ends above the opening price, a bullish hammer occurs. This chart pattern usually indicates an uptrend after a price low point.
3. 3. Inverted: In an inverted hammer candlestick, the shadow stays above the candle body. This type of hammer indicates a price reversal that can be bearish or bullish. Inverted hammer candlestick patterns also typically appear at the bottom of a downtrend.

On pricing charts, the wick, or shadow, of the candlestick appears as a line. It indicates the difference between the stock’s highest selling price and lowest selling price. The body of the candlestick, which appears as a green or red four-sided shape, indicates the stock’s opening price and closing price (the body’s top and bottom, respectively).

When economists analyze a hammer candlestick, they focus on the length of the wick rather than the color. The wick is a key aspect of the hammer candlestick pattern because it corresponds to buying potential. A wick two times the length of the hammer body indicates a higher success rate.

Investors also analyze additional technical indicators alongside hammer candlesticks. Some of these data sets include trendlines and moving averages. Examining hammer candlestick charts in conjunction with this information helps traders identify entry points for long and short positions (i.e., selling long or short selling). Confirmation of a trend reversal occurs once the price moves upward and the closing price surpasses the opening price.

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