Learn how to effectively use the hammer candle trading strategy in this informative post with real-time example. Discover what the hammer candle is, how to identify it, and how to use it to make profitable trades in the stock market.
The bullish hammer occurs at the bottom of the trend. It is a 1-candle bullish reversal pattern that forms after a downtrend.
How to identify it?
- Little or no upper shadow
- The price at the top is 1/4th of the range
- The lower shadow (wick) should be 2 to 3 times the length of the body (The longer the lower shadow the more bullish the pattern)
Below is an example of hammer candle
In a simple language a hammer is a bullish reversal candlestick pattern that shows rejection of lower prices.
Thought process behind a hammer
- The market is in a downtrend where the seller (bears) are in total control of the market.
- During this down-move the price making lower low pattern.
- At the low point some amount of buying pressure emerges which pushes the price higher.
- The buying pressure is so strong that it closed above the opening price.
- This action by the buyers (bulls) has the potential to change sentiment of the stock, hence one should look for buying opportunities.
Hammer Trade Setup
The chart below is an example of hammer candle occurs at the bottom of the downtrend
- The hammer formation suggests to go long in the stock.
- According to the risk taking ability traders can take positions. A trader who is aggressive, he can buy after the formation of the candle and a conservative trader can buy it after crossing the hammer candle's high (i.e., after confirmation).
- Stop loss should be the low of the hammer candle.
Example:
The real time example of hammer setup which occurred on April 6th, 2023 at 9:45 AM
For learning purpose, it should also be noted that an announcement "RBI keeps repo rate unchanged at 6.50%" which had a positive effect on the market. And the same was so nicely reflected on the chart after forming the hammer candle.
As per the setup one can go long above the hammer candle's high, which was 17,535.
Stop Loss would have been the low of the hammer candle, which was 17,502.
So it is clear that the trade had given a return at 1:3 ratio.
The above is just a basic example to demonstrate the formation of hammer candle and what returns can be expected from it. In the future posts we will come up with more examples and will go deeper technical fundamentals on this topic. So stay tuned with us!
