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Hammer Candlestick Pattern
Hammer candlestick pattern is a popular technique for technical analysis and a tool that is used by traders to identify potential trend patterns and reversals. This pattern is often characterized by a small body and a long lower wick and with almost little or no upper wick. The hammer pattern indicates that sellers have pushed prices down during a trading session, but buyers have subsequently stepped in and pushed the prices back up, causing a rebound to come in from all-day lows and bearish patterns.
In cryptocurrency trading, Hammer patterns are valuable tools that help traders to make profitable trading decisions. Here are some quick tips on how to trade with Hammer candlestick patterns in crypto field.
Identify the Hammer Pattern
The first step while trading in Hammer candlestick pattern is to identify where they are forming or formed on the trading chart. Look for a candle with a small body and a long lower wick. The lower wick in this case should be twice the size of length of the body. There should be little to no upper wick.
It is important to note here that the hammer pattern is only valid if it appears after a downtrend. This is because hammer pattern signals a potential reversal of downtrend, with buyers stepping in to push the prices back up.
Confirmation of the Signal
Hammer pattern is a strong signal and therefore it is important to evaluate it with a technical analysis tool. Looking for other indicators such as moving averages, trendlines and other candlestick patterns confirm the potential reversal as well.
For example, if the hammer pattern appears at key support level, and is accompanied by bullish divergence on RSI (Relative Strength Index). This could be a strong confirmation signal. On the other hand, if the hammer pattern appears in a sideway market or at resistance level it would not be a reliable signal.
Setting Entry and Exit Points
Once you have identified and confirmed the hammer pattern, it is time to set for the entry and exit points. The entry point should be set above the height of the hammer candlestick. This is because a breakout above the high shows that the buyers are in control and the trend might reverse.
Stop loss should be set just below the low of the hammer candlestick. This is because, if the price falls below this level, it is an indication that the reversal is not valid, and the downtrend will continue. Take profits and its targets should be set at a key resistance level. Taking profits here can help to maximise profits.
Risk Management
With any trading strategy, it is important to manage risk when trading with hammer candlestick patterns. This can be done by setting a stop loss at a predetermined level and sticking to it. Traders must also consider risk to reward ratio when setting up the entry and exit points. A good risk to reward ratio is at least 1:2, which means that potential reward is at least twice the potential risk.
Moreover, traders must consider their position size when trading with hammer pattern. Position size should be determined based on one’s risk tolerance and account size.
Conclusion
Hammer candlestick pattern is a powerful technical analysis tool that can help traders to identify potential trend reversals in crypto sphere. Identifying the pattern and confirming the signal, while setting entry and exit points are crucial to manage risks while trading. Traders can use the hammer pattern to make profitable trading decisions.
Whereas it is important to remember that no trading strategy is foolproof and should always be double checked. And necessary adjustments in entry and exit points must be made while observing the market trends. Combining hammer pattern with other technical analysis tools and staying up to date with market news can help you make informed decisions. This can help traders increase their chances of success in the crypto market.
About BITFLEX
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