Hammer Candlestick Pattern: What Is It and How to Use It

The hammer pattern in candlestick analysis is a candle with a narrow body and a long lower shadow. It is believed that a proper hammer appears after a downtrend and indicates the end of selling pressure and the start of buying activity. In other words, it signals a trend reversal from downward to upward. However, a simplified interpretation that ignores important details can lead to losses if one opens a long position immediately after the hammer pattern appears (or after confirmation by a following bullish candle). This article explains how considering additional details on footprint charts can help minimize risks when trading the hammer pattern and have a better understanding of market processes. Read more:

What Is a Japanese Hammer Candle?

Simply put, the hammer is a reversal pattern that indicates a potential shift from a bearish trend to a bullish one.  You might ask: Is the hammer a bullish pattern? Yes, it is. The candle looks like a hammer: the long lower shadow resembles the handle, while the small body represents the hammer’s head. In the 15-minute chart (LTC/USDT, data from Binance Futures) shown below, you can see a Japanese candle that serves as an example of the hammer pattern:

In this scenario:

• The candle forms after a period of falling prices.
• It has a small body and a long lower shadow (the handle).
• The next candle is bearish, which could be seen as a failed confirmation.
• However, despite this, the downtrend still eventually reversed into an uptrend within the day.

The benefits of the hammer pattern are clear: ✔ Simplicity. ✔ The chance to enter at the start of a new trend with the potential for significant profit. However, trading based on this pattern does raise some valid concerns.

Limitations of the Hammer Candlestick Pattern

Subjectivity. While the pattern is just a single candle and visually easy to recognize, an analyst might still question whether the shadow is long enough or the body is small enough. These uncertainties can make interpreting the pattern more challenging. No guarantee of an upward reversal. The hammer pattern could represent a test of a bearish breakout level, suggesting the continuation of the bearish trend. Time dependency. Let’s clarify with an example. Imagine the price follows a simple trajectory, as shown by the jagged line in the chart below.

The issue is that the hammer pattern can only be recognized as bullish if the candle opened at point 1 and closed at point 3. If the candle opened at point 2 and closed at point 4, it would not be a hammer, but a different pattern, even though the market is the same. This means that an analyst’s interpretation of price action can vary depending on their perspective and timing. Risks. Let’s say you decide to buy an asset after a bullish hammer pattern appears on the chart. You wait for confirmation from the next bullish candle. But where do you place your stop-loss? Below the hammer’s low? The risk might be too high if the shadow is long.

Enhancing Hammer Pattern Trading with Volume Analysis

To overcome the limitations and boost your confidence when trading the hammer pattern, it is recommended to use professional volume analysis tools, such as: 

• footprint charts (cluster charts);
• Depth of Market (DOM) analysis indicator.

Notice how the hammer pattern becomes clearer on the LTC/USD chart when you use the Magnifier tool, which shows clusters within the candle (to activate Magnifier mode in the ATAS platform, simply press “M”).

Numbers indicate:

• Sellers capitulated (1);
• Buyers became more active (2);
• Market was supported by Limit-Buy orders (3), highlighted by the DOM Levels indicator.

This detailed approach enables you to identify the hammer as a true reversal with much greater confidence.

How to Identify the Pattern on a Chart

The Cluster Search indicator can be useful for this. For example, to identify seller capitulations that form a hammer pattern, you can use the following settings:

For this specific market and timeframe, the recommended settings are:

• Minimum Volume = 300;
• Delta filter set to negative, to detect spikes in selling activity.
• Candle Direction = Bullish though any candle type can be used.
• Price Location Filter = Lower wick (this helps identify clusters in the lower shadow of the candle). 

With these Cluster Search settings, large clusters with negative delta on the lower wicks of candles will be highlighted in pink, indicating potentially trapped or capitulated sellers. For other markets and timeframes, you will need to adjust the Cluster Search settings accordingly.

The Inverted Hammer Candle

The inverted hammer is similar to the hammer pattern, but flipped upside down. It has a small body with a long upper shadow.  Like the regular hammer, the inverted hammer appears after a period of falling prices. There are two main ways to interpret the inverted hammer:

• The most common view is bullish. In this case, the long upper shadow suggests that buyers stepped in and pushed the price significantly higher from the opening point.
• Bearish. Alternatively, the inverted hammer can indicate that buyers failed, and the downtrend may continue. A close near the low point shows that sellers became more active, erasing the buyers’ gains during the candle.

An example of the inverted hammer can be seen on an 8-hour chart. The footprint charts display the volume distribution as a profile.

The inverted hammer, highlighted with an arrow, is a candle where:

• the opening and closing prices are close to each other, around the 57,650 level;
• the upper shadow is long, with the price almost reaching 60k.

Notice the bulge in the profile at the lower part — this shows where most market participants agreed on a fair price for Bitcoin. The fact that trading then moved above this bulge signals increased buyer activity, which aligns with the interpretation of the inverted hammer. Let’s look at a few more examples of the hammer pattern in different market conditions and how professional volume analysis tools can help make more informed trading decisions.

The Hammer Candle in an Uptrend

The term hammer candle in an uptrend is more accurately used for a different pattern known as the hanging man.  However, to provide the most practical and valuable information, let’s look at an example of a hammer appearing after brief price declines within a larger uptrend. Below is a screenshot from two charts showing a period of rising prices in the NQ futures market in late spring 2024:

• On the left – a daily timeframe. This chart shows a hammer pattern that formed after two days of decline.
• On the right – a 5-minute timeframe. This is a classic example of the hammer pattern.

On the left, you can see that the 18,300 level acted as resistance in early May, but the bulls managed to break through it.  On May 30th, a daily hammer candle formed. The market profile indicates that this was a test of a key volume level that had accumulated before the 18,300 level was breached. It could have unfolded this way:

• at first, buyers absorbed the sell orders;
• then, they enjoyed seeing their positions become profitable after July 13-14. Their stop-losses might have been moved to breakeven in the 18,250-18,300 zone;
• however, the hammer candle on May 30 probably triggered those stop-losses, taking away the joy of their profitable long positions. The uptrend continued but without those buyers.

The right chart highlights an interesting detail: a hammer also formed when the 18,250-18,300 zone was tested on the 5-minute chart. The behavior of the Delta indicator is very interesting. Although the Delta was negative, the candle closed at its peak, indicating that buyers stepped in during the day after the sellers had given up.

Inverted Hammer in a Downtrend

As mentioned earlier, the inverted hammer is a bullish pattern that forms during a downtrend, signaling that buyers might be stepping in and potentially reversing the trend. Below is a screenshot of the AAPL cluster chart on a daily timeframe:

The inverted hammer, marked with the number 1, is a candle with a small body and a long upper shadow that appeared after a period of declining prices. In this instance, the pattern did not fail.  The downward momentum began to slow around March 5-6, 2024. This slowdown could have been due to the price breaking through the psychological level of $170 per share. The inverted hammer suggests that bulls were trying to take advantage of the fading bearish momentum. On March 8, AAPL’s price surged at the market open, peaking at the upper boundary of the gap that formed between March 4 and 5. In the following days, the price did not fall below the psychological level of $170 per share — it seems as though the inverted hammer is acting as support. In reality, the optimism was short-lived. On March 20, the bulls attempted to break through the gap that had formed between March 1 and 4, but found themselves caught in a trap (indicated by number 2): 

• they were actively purchasing the stock as the price surpassed the $178 level;
• however, the following day, trading opened at $177. The price did not give the bulls a chance to exit their positions, closing at the day’s low after a substantial decline.

FAQ

What is the hammer pattern?

The hammer pattern is one of the most recognized candlestick patterns in technical analysis. It suggests a potential reversal from a downtrend to an uptrend. 

How to interpret the hammer pattern?

• A bullish pattern signals that the selling pressure is weakening and buyers are starting to take control of the market.
• A reversal pattern suggests a potential change in the current trend. In the case of the hammer, it indicates a reversal from a downward to an upward trend.
• An inverted hammer pattern appears after a downtrend and shows that buyers tried to push the price up but could not maintain it at a higher level, which might signal further attempts at growth.

How profitable is trading the hammer pattern?

Thomas Bulkowski, a recognized expert on candlestick patterns, estimates that the hammer pattern has a 60% chance of signaling a bullish reversal. When the market is already in an uptrend, this pattern’s effectiveness can rise to 80% (after short-term declines). Research by CandleScanner, covering daily charts from 1995 to 2015 for S&P 500 stocks, reveals:

• the hammer pattern appears about 1% of the time;
• it provides a false signal in 20-21% of cases; 
• the chance of achieving significant profits ranges from 35% to 44%.

How to increase the profitability of trading the hammer pattern?

The simplest approach is to look for bullish hammers near significant support levels. Of course, like any method, this does not guarantee profit. More effective strategies involve using volume analysis to confirm a shift in sentiment from bearish to bullish.

How to Use the Hammer Candlestick in Trading

Even though research shows that the hammer is a straightforward pattern with positive profit potential, traders should be cautious and not rely solely on this pattern for their strategies. To see how effective the hammer pattern can be for trading trend reversals, try using the ATAS Market Replay simulator for traders. This feature of the ATAS platform uses historical data to recreate real-time trading conditions.  Beginner traders can hone their skills in real conditions, avoiding any financial risks.  To try the simulator, download the ATAS platform for free, install, and launch it, and then:

When practicing trading patterns in the Market Replay simulator, you can:

• adjust the playback speed, and pause;
• analyze footprint charts;
• use more than 400 indicators. Alternatively, you can use Cluster Search to help identify hammer patterns;
• use Chart Trader and other features to trade on the built-in demo Replay account and then analyze your performance;
• use drawing objects, for example, mark support and resistance levels;
• use various chart types (e.g., non-standard Range XV). It is important to note that the hammer pattern and its variations will not work with these types of charts since they form on classic candlestick charts and standard timeframes;
• use exit strategies;
• do much more to sharpen your skills in spotting hammer patterns.

ATAS enables you to load tick-by-tick data from cryptocurrency, stock, and futures markets, providing a comprehensive basis for analyzing price and volume interactions. This helps refine your trading strategy by identifying key patterns.

Conclusions

The hammer pattern is popular, but trading it comes with risks since it involves opening a position against the current trend. Therefore, to gather enough evidence for opening a position based on the bullish hammer and inverted hammer patterns, it is recommended to use professional volume analysis tools like cluster charts, the Delta indicator, market profile, and others. Download ATAS. It is free. Once you install the platform, you will automatically get the free START plan, which includes cryptocurrency trading and basic features. You can use this plan for as long as you like before deciding to upgrade to a more advanced plan for additional ATAS tools. You can also activate the Free Trial at any time, giving you 14 days of full access to all the platform’s features. This trial allows you to explore the benefits of higher-tier plans and make a well-informed purchasing decision. Do not miss the next article on our blog. Subscribe to our YouTube channel, follow us on Facebook, Instagram, Telegram or X, where we publish the latest ATAS news. Share life hacks and seek advice from other traders in the Telegram group @ATAS_Discussions.