Hammer

Hammer

Hammer

Hammer is a Japanese candlestick formation, a bullish reversal pattern that usually appears after a significant bearish move. In this article, we will show you how it can be used in your trading and what its significance is. The article is meant for traders who are looking to perfect their skills as much as they can, so if you still haven’t grasped the basics, we suggest you start with some less demanding articles first, especially because this formation can be easily confused with some other ones. However, if you feel up to it, let’s move on and see how this pattern can be used to bring you some profit while trading binary options.

Hammer | Type of pattern

Like we said, a hammer is a bullish reversal pattern – it appears after a bearish move. To estimate a hammer’s strength, it is important to note how much effect the bearish move had. If the price was brought down very close to the support level, you can expect a pretty strong hammer because traders will notice that the bearish move has ended and will start increasing the price. On the other hand, should a hammer appear close to the centre of your trading range, or even gravitate be closer to the resistance level, do not expect much from it. That’s why hammers are considered to be moderately reliable indicators – it all depends how close to the bottom Trend Line they appear because they tend to bring prices back to the centre of the range.

Hammer | Don’t mix it up

It should be mentioned that the color of a hammer’s candle usually does not matter very much, although some traders think blue indicates a stronger signal. Generally speaking, however, the difference is not very significant. But you have to be careful not to mix you hammer up with the Hanging Man pattern. This is often the case because these two patterns look identical if observed on their own. What sets them apart is the trend that comes before them – the Hanging Man follows a bullish pattern and indicates a drop of an asset’s price. So don’t get these two mixed and you should be able to predict Market Movements correctly.

Hammer | Conclusion

To conclude, a hammer will appear only after a significant bearish move and can only be considered reliable if it is close to the support level. If it appears higher in the trading range, it is very likely that it will not be very strong. Also, do not mix it up with some other patterns that look very similar, but indicate completely opposite market trends. Because of all this, it is important that you are well versed in trading binary options before you start using this formation. Basics simply have to come first if you want to grow as a trader.  

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FURTHER READING:

1. The Ascent Of Money: A Financial History Of The World (N. Ferguson, 2008)
2. Trading By The Minute (J. Ross, 1994)
3. The Essays Of Warren Buffett: Lessons For Corporate America (W. E. Buffett, L. A. Cunningham, 1997)
4. The Master Swing Trader: Tools And Techniques To Profit From Outstanding Short-Term Trading Opportunities (A. Farley, 2000)
5. Midas Technical Analysis: A VWAP Approach To Trading And Investing In Today’s Markets (A. Coles, D. Hawkins, 2011)

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Author: Ben Prescott
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