Trading the Hammer Candlestick Pattern

Interested in trading the hammer candlestick pattern? Pin bars, like the shooting star and hammer, are great for price action trading. Many traders use them incorrectly, so I’d like to show you how to profitably use these candlestick formations in your own trading.

 

We’ve already gone over how to trade the shooting star candlestick formation earlier in my free price action course. The hammer is basically the opposite of the shooting star. 

 

Rather than go over the same material, we’ll quickly go over identifying a true hammer candlestick formation, and then add some depth to our understanding of how to trade these two pin bar formations.

 

What is a Hammer Candlestick Pattern?

The hammer formation is a Japanese candlestick that consists of a long lower shadow with a relatively small real body at or near the top of the range of the candlestick. The lower shadow must be at least 2x the length of the real body of the candlestick. The color of the real body (bullish or bearish) does not matter, and it should have a small upper shadow.

 

Like the shooting star, this candlestick is a reversal formation. A hammer candlestick must be traded within the context of the market or trend, i.e., a true hammer formation only occurs after downward trending candles. Trying to trade the hammer or shooting star from a neutral/ranging market is a good way to lose your money.

 

Trading the Hammer Candlestick Pattern

In the picture below, you can see a good example of how trading the hammer candlestick formation can be very profitable.  This hammer signal was followed by a nice rally in price. It formed on the Aussie (AUDUSD) market on the Daily time frame. As you can see, price reversed aggressively after this hammer formation.

 

 

If you would have gotten into this trade at the 50% entry, you would have been risking about 80 pips. This swing in price has already moved about 828 pips from the 50% entry of that hammer, and could possibly go further. So, far this trade would have given you more than a 1:10 risk to reward ratio.

 

I took this trade, but my take profit was set to a 1:2 risk to reward ratio, which was hit within three days. In retrospect, I would have done much better to close only half of my position when price reached 2x what I was risking. I could have let the remaining half ride up to 3x my original risk, and then closed half of that position, leaving the remaining half (one quarter of my original position) to ride the swing to the top.

 

After moving the stop loss to break even, this becomes a free trade. The only risk in this trade, at that point, is risk to potential profit. Each time the upward trend made a new higher low, I could have moved my stop loss to just below the latest higher low – effectively capturing the majority of this swing in price (see the image below).

 

 

Another piece of advice that you might consider is that these price action formations are more meaningful on longer time frames. I typically do not take any trades based on the price action of a chart less than 15 minutes; however, the 1 Hour chart is more meaningful, the 4 Hour chart is better, the Daily chart is even better, etc….

 

That being said, you will not see as many of these price action formations as you move up to higher time frames. That should be pretty obvious, because there are simply less candlesticks for any given amount of time on a higher time frame chart.

 

This is true, not only for price action trading, but for any style of trading. There will always be a delicate balance of trying to get enough trading setups, while also trying to choose the most meaningful trade setups.


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Posted By melvinjones : 04 November, 2020
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Hi all,I want to present you a simple but profitable system.It use a MA 13, a gann hilo=ssl bar (10) and ichimoku with 4,12, 24.I use it on M15.For a buy:- price must me above MA- SSL Bar must me green- ichimoku must indicate a bulish trendYou can exit when you have an oposite sign (ssl change color OR price is bellow MA OR ichimoku indicate bearish trend)Hope you like it and make big money with this!!  

Hi,Trading systems vs price action tradeswanted to start a new thread based on price action trading, Price action will determine where price is going.I like using 20 50 200 ema14,3,3 stochasticup bars down barsthen look for trend line breaks 1 2 3 set upslook at this trade I took todaywas a pending order entry based on trend line break retest then entry on the 1 2 35 min chartfeel free to share any ideas you may have or ask any questions about what I am doing,I find this to be the best system  

Price remains near all time highs. Price is over all key moving averages. On Thursday price regained the 10 day ema as end of day support. The 50 day sma is the next line of support after the 10 day ema. Wednesday resulted in a quick bounce before getting close to the 50 day SMA. The Average True Range (ATR) for trading $SPY expanded last week from 1.76 to 2.23. The up days were on lower volume than the down days. The MACD remains under a bearish cross. RSI at 59.89 give $SPY room to go higher before becoming overbought. $VIX spiked as high as 16.86 intra day Wednesday but ended the week back down to 12.64 which is still low historically. The $SPY chart remains bullish and the market continues to reward buying the dip and taking profits into key resistance levels.  


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