Hammer Candlestick Pattern Explained & Backtested (2024)

The hammer is a frequently-occurring, one-bar bullish reversal Japanese candlestick pattern that is best traded using a bearish continuation strategy in all markets according to multiple decades of historical backtesting.

If you’re a candlestick technician, you might be surprised to learn that traditional trading advice points you in the wrong direction.

Keep reading if you want to increase your trading profits and best traditional traders by understanding what history says about the best hammer candle trading strategy.

What Is a Hammer Candlestick Pattern?

The hammer is a frequently occurring one-bar bullish reversal pattern that’s best traded in the other direction.

The hammer candlestick gets its name from its hammer-line appearance on a candlestick chart.

Most traders go bullish when seeing this pattern, but they’re likely to hammer their portfolio profits into oblivion with this strategy. But before we get into the optimal hammer candle trading strategy, let’s learn how to identify this single-bar pattern on our candlestick charts.

How to Identify the Hammer Candlestick Pattern

The following are the requirements for a valid hammer candlestick pattern:

• Small real body with no to little upper shadow and a long lower shadow at least 2x the size of the real body.
• The hammer must occur in a downtrend.

We see the hammer candlestick pattern on the Apple (AAPL) October 13th, 2021, daily chart.

There’s a single candle whose with a small real body, almost no upper wick, and a large tail resembling a hammer. The candle occurs below the fifty-day moving average, fulfilling the pattern requirements.

Now that we’ve hammered this pattern into our brains, let’s learn how to trade it.

How to Trade the Hammer Pattern

The hammer pattern should be traded using a bearish continuation trade strategy using the high as a stop and the close as your entry in all markets, expecting a significant risk-to-reward bearish move, according to our 21-year backtest.

Before we cover the hammer candle’s optimal trading strategies, let’s learn how most traders lose money on this candlestick.

Hammer Bullish Reversal Trade Setup

We see a little real body with a little upper wick and a long lower wick occurring in a downtrend. With the pattern identified, traditional traders enter long when the price moves past the hammer candle’s high, setting a stop loss below the low.

Any Amazon traders using the traditional trading strategy on March 26th, 2021, added to their merchandise. Unfortunately for these traders, their profits inventory will likely diminish over time as they’re on the wrong side of history.

Instead, data-driven traders go bearish.

Hammer Bullish Reversal Trade Setup

We see a downtrend, a candle with a short upper wick, a small real body, and a lower wick at least 2x the size of the body. With the pattern identified, data-driven traders enter short when the price moves below the hammer candle’s close, setting a stop above the hammer’s high.

Data-driven crypto traders that used this strategy trading the Bitcoin/USD Pair (BTCUSD) on May 28th, 2020, added to their satoshi stack.

Speaking of portfolio profits, what does history tell us about the best hammer candlestick trading strategy?

Does the Hammer Candlestick Pattern Work? (Backtest Results)

Using the following rules, I backtested the hammer candlestick pattern on the daily timeframe in the crypto, forex, and stock markets.

• A close above the 50-day SMA constitutes an uptrend.
• I tested risk-reward ranges from 1 to 5. 
• The optimal risk-reward ratio is selected using profit per bar.
• Entry and exits are discussed in the how-to trade section above.
• Confirmation must occur within three days of the pattern signal.

Similar Candlestick Patterns

Multiple candlestick patterns are often confused with the hammer candlestick pattern. It’s essential to understand the differences when using candlestick pattern technical analysis.

Shooting Star vs. Hammer Candlestick

The shooting star candlestick pattern is the mirror opposite of the hammer candle. The shooting start requires an uptrend, while the hammer forms in a downtrend. The shooting star has a large upper wick, a little real body, and little to no lower shadow, whereas the hammer has a large lower tail, a small real body, and little to no upper wick.

Hanging Man vs. Hammer Candlestick

The hanging man is a one-bar bearish reversal pattern. Aside from direction, the only difference between the hanging man and the hammer candlestick is that the hanging man occurs in an uptrend and the hammer candle occurs in a downtrend.

Inverted Hammer vs. Hammer Candlestick

The inverted hammer is a one-bar bearish continuation pattern. The only difference between the inverted hammer and the hammer candlestick is the inverted hammer is precisely that–inverted. The inverted hammer has a long upper wick, a small real body, and little to no lower shadow, whereas the hammer has a long lower shadow, a small real body, and little to no upper wick.

Takuri Line vs. Hammer Candlestick

The tasuki line candlestick pattern is a one-bar bullish reversal pattern. The only difference between the takuri and the hammer candlestick is that the takuri has a doji body, whereas the hammer has a short real body.

The Bottom Line

The hammer candlestick is a frequently occurring one-bar bullish reversal pattern that is best traded as a bearish continuation, according to the data. This is one of the best patterns to master due to its frequency and risk-reward dynamics. Learn more about the best day trading candlestick patterns.