The hammer and inverted hammer candlestick patterns are two of the most common and easily identifiable reversal patterns in technical analysis of financial markets.
These two candlestick varieties typically appear at the end of downtrending price action and are characterized by:
Small body (open, high, and close are approximately the same price)
Long shadow or wick that is at least twice the size of the body.
A hammer candlestick is a bullish reversal pattern that often appears at the end of downtrends.
It is characterized by a small bullish body with a long wick to the downside.
In terms of market psychology, a hammer candlestick indicates a complete rejection of bears by the bulls.
The long wick to the downside shows us that bears were able to push price downward before bullish momentum emphatically pushes the price back up to the candlestick’s opening price or high price.
Examples of hammer candlesticks
On this BCH/USD one-hour chart, BCH is at the end of a clear downtrend. The green arrow highlights a hammer candlestick that is followed by a 36% move to the upside.
As you can see, this candlestick has a very small body with a very long lower wick. This indicates that while bears were able to push price downward, the bearish momentum was eventually surpassed by the bulls.
On this LTC/USD 30-minute chart, you can see a hammer candlestick highlighted by the green arrow.
Unlike the previous green hammer, this one is red.
Bears were able to push the price of LTC down to USD22.20 during this trading period before bulls took control and pushed price back up to the USD22.80 area.
Despite the positive momentum, bulls were unable to push price above the candle’s opening price.
While a red hammer is technically not as bullish as a green one, don’t let that fool you. The bullish influence during this trading period is significant when you consider the length of the lower wick.
In a situation like this, it’s best to look for additional confluence from other indicators and candlestick developments over the next few bars.
Inverted hammer candlestick
Despite having a similar appearance to the bearish shooting star candlestick, an inverted hammer candlestick is actually a bullish reversal pattern that typically occurs at the end of a downtrend.
In terms of market psychology, an inverted hammer depicts a situation where bulls are successfully able to push price to the upside before closing at or above the opening price.
The inverted hammer sets the stage for bulls to enter the market after establishing an initial level of confidence.
Examples of Inverted Hammer Candlesticks
On this XRP/USD 1-day chart, you can see XRP in a clear downtrend. This particular downward move started around the USD0.56 area and ended at USD0.28 with a clear inverted hammer candlestick highlighted by the green arrow.
The lack of a significant lower wick indicates that bears were unable to push price much lower than the candle’s opening price.
As a result, bullish momentum took over and XRP rallied over 40% to the upside.
On this ETH/USD 15-minute chart, ETH is finishing off a consolidation period after a fall from USD110. After five successive bearish candles, the ETHUSD chart prints an inverted hammer.
Once again, the lack of a lower wick indicates the inability of bears to push the price lower than candle’s opening price. As a result, bulls regain confidence with the change in market sentiment and the price of ETH rallies 20% to the upside.
Trader, analyst, Liquid contributor. Editor of Decrypto.net.