Hammer and Inverted Hammer Candlesticks

The hammer candlestick looks like hammer. The lower shadow forms the handle and the small body forms the head. This candlestick forms at the bottom of a bearish market. It is a reversal signal, however it is not that strong and it needsconfirmation.

Hammer

Hammer is so frequent in the forex market. You should be careful not to go long as soon you see a hammer formed at the end of a bearish market or after formation of a series of bearish candlesticks. You always have to wait for the confirmation candle which is a bullish candle. The bigger the body of the confirmation candle, the stronger the reversal signal:

Why Does the Hammer Form?

After the formation of several bearish candlesticks on a bearish market, another bearish candlestick is forming. It forms a reasonable bearish body, but suddenly the bulls (buyer) decide to take the control. They buy and so the price goes up and the bearish body of the candle changes to a long lower shadow. However, still the bulls are not strong enough to take price too high, and so the candle closes with a small bearish body. If the bulls succeed to take the price higher after the next candle is opened, they form a bullish confirmation candle, and then we will have a reversal signal. You can go long and set your stop loss a little blow the low price of the hammer.

The longer the lower shadow of the hammer and the body of the confirmation candle, the stronger the reversal signal. Look at the below  strong reversal signal that formed on EUR/USD 15min chart. The hammer has a too long lower shadow and the confirmation candle has a too long body. Therefore, the reversal pattern is too strong:

Inverted Hammer:

It is the inverted form of hammer. This candle closes below the level that it opens which means bears are still strong. Therefore, its reversal effect can be weaker than the regular hammer. However, if a strong bullish candle forms after that, you can go long and set your stop loss below the close price of the inverted hammer.

Inverted Hammer

Source : FxKeys.com