Japanese Candlesticks are one of the most commonly found charts used in binary options trading. Investors who are looking for technical indicators that can give them signals about how to execute future trades are always on the lookout for patterns in market trends, and use a variety of chart types to interpret their findings. Japanese Candlesticks is one popular chart type that is chosen by many traders. Based on a system created by Japanese rice traders hundreds of years ago, these charts are now used regularly all over the world to derive as much information as possible from existing trends in asset prices.
Japanese Candlesticks consist of both lower and upper shadows on each end of the candlestick’s body. The candlestick represents the interval between the closing and opening price of an asset. If the market has moved up, the body of the candlestick is often shaded green, and if it has moved down, the candlestick’s body is often shaded red. When analysing the Japanese Candlestick chart type, the primary task of the investor is to identify existing patterns which can either predict the continuation or the reversal of a trend. When a change in the situation is observed, the trader can then react quickly in order to use this information to inform his next trade and maximise his profits.
What is the Price Action Hammer Pattern in Japanese Candlestick Formations?
The Hammer Pattern is a reversal Bullish Japanese Candlestick pattern which tends to occur at the bottom of a down trend. This pattern occurs when the opening price, the high price and the closing price of an asset are all roughly the same. There will also be a long lower shadow in evidence, which will be around double the length of the real body.
The Bullish candlestick is formed when the closing price and the high price of an asset is the same. It is a strong formation as the bulls have completely rejected the bears and have been able to push the market price past the opening price.
When the opening price and the high price are equal, the Hammer formation is considered to be not quite so Bullish, as the bulls have been able to counteract the bears but have not been able to bring the asset’s price back to the opening price.
The Hammer’s long lower shadow is a sign that the market has tested to find the location of the demand and support. When the area of support was found, the bulls were able to push the price back up, close to the opening price, therefore showing that the downward bearish advance had been rejected by the bulls.
This pattern indicates a reversal in trend, and the Hammer pattern should be traded within the context of the trend or market. A true Hammer pattern will only occur following candlesticks which are indicating a downward trend. Never try to trade the Hammer pattern from either a ranging or a neutral market as this is too risky a strategy.
How to Trade the Hammer Pattern
The Hammer can be used to assist traders in visualising where demand and support is located. Following a downtrend, the Hammer pattern is a signal to investors that a downtrend could be coming to an end and therefore short positions are a possibility to be covered. Investors should always, however, use other indicators in conjunction with the Hammer pattern to confirm potential buy signals. Indicators like a break of a downward trendline for example would be a useful confirmation, while looking at the clues from the previous days could also assist in analysis.
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