They key behind any investor’s success is the time they spend understanding and analysing information and their ability to do this successfully. This is why traders and buyers depend greatly on charts and indicators to make sure that their financial decisions are fully justified. They need a signal or an indicator that can help them to decide whether they should buy or sell. In this article we talk about one of the indicators that are of great importance for people who want to practice Forex.
What is a hammer?
A hammer is a pattern in a regular candlestick chart where a security trades really declines but then it goes back up to close above or near the opening price. The tail is usually double the size of the body.
A hammer happens after a security has been going down. Sometimes it is the market’s way to find a bottom. It is a sign of the strengthening of the bulls.
A hammer candlestick is confirmed when the next candle closes at a low that is higher than the hammer candle. After that the next candles will keep on forming higher lows and this means that the pullbacks are supported by the buyers and it might even be the reason of the earlier sellers considering to buy into the stock again.
It is easy to measure hammers on a candlesticks chart. The size of the timeframe candlesticks chart will determine how thorough the hammer will be.
You should be careful not to go as soon as you see a hammer. You must wait for other confirmation candlesticks.
Why do hammer candlestick form?
In a bear market and after the formation of several bearish candlesticks, another bearish candlesticks forms. But suddenly buyers decide that they want to take control. So they start buying and the bearish candlesticks’ body turns to a long shadow as the prices go up.
But usually the bulls are not strong enough to take the price high enough and this is why the candlestick closes at a small body.
What is inverted hammer?
When the candlestick closes below its opening price, this is called an inverted hammer. This means that the bears are still strong but its reversal effect might be weaker than that of a hammer.
A typical form of hammer candlesticks doesn’t have any form of upper shadow, but in Forex they usually do. This is because the price fluctuation is very strong in Forex and the price is very volatile.