Hammer candlestick pattern - YouTube

Do you want to learn about the Hammer candlestick pattern?

How to correctly recognize such a pattern on the chart?

How to use it in your trading?

How it really performs on the charts?

Then simply watch this video!

In this video, we describe the candlestick pattern called

Hammer.

Japanese name: kanazuchi Forecast: bullish reversal

Trend prior to the pattern: downtrend Opposite pattern: Hanging Man

Construction white or black candle with a small body

no upper shadow or the shadow cannot be longer than the body

lower shadow between two to three times longer than the body

if the gap is created at the opening or at the closing, it makes the signal stronger

appears as a long line

The Hammer is a frequent one-line pattern that appears as a long line in a downtrend.

It is characterized by a candle having a long lower shadow, two to three times longer than

the body.

This requirement implies that a candle can be one of the following: White Spinning Top

or Black Spinning Top.

Most of the sources allow the presence of an upper shadow.

CandleScanner software accepts upper shadow up to the length of the candle’s body.

Also, the whole candle body has to be positioned under the trendline in order to consider the

pattern as a valid one.

Although the pattern belongs to the bullish reversal patterns group, it very often happens

that is merely a brief pause on the falling market, after which the price does move even

lower.

The Hammer works best in a long downtrend, and its appearance after the declines lasting

only two or three candles usually does not matter.

The strong meaning has its occurrence within a support zone.

As every one-line pattern, the Hammer requires a confirmation within the next two or three

candles, during which the closing prices should be higher than the closing price of the pattern's

body.

The Hammer can also occur, for example, as a second line of the Bullish Harami pattern

and as a first and second line of the Tweezers Bottom pattern.

It was already mentioned that the Hammer's lower shadow height cannot exceed more than

three times the body's height.

If a lower shadow exceeds that height, we deal with the Takuri Line pattern.

In other words, the Takuri Line is like the Hammer but with a very long lower shadow.

The occurrence of the Long Black Candle creates a resistance zone that is strengthened by

a high trading volume.

The bears are stopped, however, by an Opening White Marubozu.

The next day, the market opens slightly lower than the previous closing price.

The market falls even deeper, but eventually, the bulls are able to retake control, and

a Hammer pattern is formed.

The disadvantage to its occurrence is a relatively low trading volume.

Now, the Hammer, a bullish reversal pattern, has to be confirmed by breaking out of the

resistance zone formed by the Long Black Candle two days earlier.

The next two days bring the Hammer confirmation, strengthened by the occurrence of the Turn

Up pattern.

Straight after the market tries to turn down, the support zone formed by the Hammer and

the first line of the Turn Up pattern is strong enough.

The price eventually moves up.

The first half of the chart presents a clear downtrend.

The marked Black Candle occurrence is preceded by a number of black candles formed at a high

trading volume, creating a significant resistance zone.

The first instance of Bullish Harami pattern contains a Hammer pattern in its second line.

On the next day, the market almost cancelled the bullish signal, but finally, another occurrence

of Bullish Harami appeared on the chart.

It turns out that the resistance area formed by the Black Candle occurrence is strong,

and the market is forming a narrow price band sideways between $28.50 and $29.40 (3.16%).

The chart shows the flexibility in searching the patterns.

In the first occurrence of Bullish Harami, the first line is a short line, but there

should be a long line as it was in the second occurrence of Bullish Harami.

In this case, the short line does not differ much from the long line.

Therefore, the pattern occurrence was perceived as appropriate, which was confirmed in the

next few days.

Please note, however, that it is up to the trader whether he or she wants to treat this

pattern as a valid Bullish Harami or not.

When using computer algorithms for scanning the candlestick patterns, we have to define

some strict rules stating the effect that a short or long line has on search results.

CandleScanner implemented a more sophisticated approach: although we see on the chart that

we have a short line, we can accept a small deviation and still allow the found pattern

to be considered as a correct one.

This deviation is a setting in the algorithm of CandleScanner application.

Let's see some basic statistics of the Hammer pattern that are produced by the CandleScanner

software.

For that purpose, we use the stocks from the S&P500.

Statistics is calculated for the 20 years period, starting from the beginning of 1995

to the end of 2014, using daily data.

Within this period, there are over 2.2 millions of candlesticks that are analyzed.

Please remember that the results that I will show now shouldn't be treated as a trading

recommendation.

The topic is far more complex to cover it in just a few minutes.

That's why what I present here may look somewhat different for different markets, candlestick

timespan, or search criterias used to find patterns on the charts.

I deeply encourage you to do your homework, which is now a much easier thing while using

software like CandleScanner.

Before going into the detailed Hammer's statistics let's quickly see some statistics on a higher

level for all patterns.

As I said, we are analyzing 20 years' period for all stocks from the S&P500 index.

Among over 2.2 million candle lines, CandleScanner found almost half million patterns, not only

Hammers, but all patterns in general.

We can see that there were slightly more bearish patterns during that period than the bullish

counterparts.

We can see also that the 2-line patterns are the most frequently occurring patterns.

The Hammer pattern belongs to the 1-line pattern group.

The 4 and 5-line patterns are extremely rare.

Further, we can see the efficiency settings, splitted into 5 and 10 candles period during

which it was measured.

I'll return to that topic a bit later when discussing the Hammer's efficiency.

For now let's only see that less than 20% of all patterns' occurrences are marked as

FALSE.

These occurrences would produce losses when we would open positions following that pattern.

This means that in more than 80% of occurrences we had chances to break even or to generate

a profit.

Let's see now how frequently the Hammer pattern occurs on the S&P500 daily charts.

It turns out that during 20 years, among 500 stocks, there were over 10 thousand Hammer

occurrences, which is about 2% of all other patterns occurrences.

In practice, it means that the Hammer is neither a frequent nor a rare pattern.

Here we need to add however one more important remark.

As you maybe still remember from this video, there is a pattern which is very similar to

the Hammer, called the Takuri Line.

Its only difference is a longer lower shadow, which has to exceed more than 3 times the

body's height.

Depending on the particular market that is traded, differentiating between these two

patterns, that is the Hammer and the Takuri Line, may or may not make sense.

Looking at the very broad statistics of the S&P500 it turns out that these patterns could

be interpreted the same way.

More differences may be seen on the level of particular stocks, however.

If we would treat the Hammer and the Takuri Line as a single pattern, then we would end

up here with almost twice more occurrences, making the pattern among the more frequently

occurring patterns.

The efficiency of a pattern is measured by checking the maximum price (for bullish patterns)

or minimum price (for bearish patterns) within test period.

CandleScanner is using two periods: 5 or 10 candles following the pattern.

Every period is producing a separate result.

Stop Loss order is used to have more realistic results.

If Stop Loss level is reached, the algorithm stops and the so far the most extreme price

is used to calculate efficiency level.

The user can set Stop Loss level, and ranges for FALSE, LOW, MEDIUM and HIGH efficiency.

These settings may have a great impact on the efficiency readings.

Let's move now to the Hammer's efficiency statistics.

In general over 20% of all Hammer occurrences were classified as FALSE.

On the other hand over 40% Hammers ended in moving the price up by over 3.5% within 10

candles period following the pattern.

On average in more than 70% cases, if we would open a long position, following just the pattern

occurrence, we would either break even or generate some profit.

These figures are only to visualize that there is a market edge behind the Hammer pattern.

It is up to the trader to come up with a detailed trading strategy which would use this information.

The strategy should contain detailed entry and exit conditions plus a position sizing,

that is how much capital we should place on every single trade.

On this screen here you can see how the Hammer pattern performed on particular symbols.

Even more detailed information is accessible under the specific symbol's statistics.