What is the Hammer Candlestick Pattern in Forex Trading?

Markets often fall hard, but sometimes a single candle signals that pressure is fading. Price moves down sharply, touches new lows, then snaps back near the open. Buyers take control, and the candle leaves a clear footprint.

What creates this kind of move? Why does the market shift so suddenly? More importantly, how can you trade when that happens?

This pattern is called the hammer candlestick. It shows a potential reversal forming right in front of you.

Let’s discuss how to spot it, confirm it, and use it to build smarter trades.

What is a Hammer Candlestick Pattern?

A hammer candlestick pattern is a single candle formation that appears at the bottom of a downtrend and signals a possible reversal to the upside. It forms when the market opens, moves sharply lower, but then rebounds and closes near or just below the opening price. The result is a small real body near the top of the candle and a long lower shadow at least twice the body’s length. The upper wick is minimal or completely absent.

If you see this pattern after a downtrend, it signals that the market tested lower prices but did not stay there. The price went down during the session, but by the time the candle closed, it had come back up close to where it started. So, this action leaves behind the hammer shape on the chart.

For example, suppose the market opens at 1.3000, drops to 1.2950, and then closes at 1.2995. The long lower wick represents the move down to 1.2950, but the small body at the top shows the close was very close to the open. This is what creates the hammer.

It is worth noting that when hammer candlestick patterns form after a downtrend, traders often take it as an early sign that the market may be ready to reverse. It shows the price rejected lower levels, but traders usually wait for the next candle to confirm the signal before making a decision.

Key Characteristics of the Hammer Candlestick

• Forms at the end of a downtrend
• Has a small real body near the top of the candle
• Features a long lower shadow, at least twice the size of the body
• Shows little or no upper shadow
• Can be green or red, but green is stronger
• Represents a session where the market dropped and then recovered
• Indicates potential bullish reversal, but requires confirmation from the next candle

Why is the Hammer Pattern So Important in Forex?

Let’s suppose you are looking at a forex chart after several consecutive bearish candles. The market keeps printing lower lows, and the trend looks strong. Suddenly, a new candle forms where price opens at 1.2050, drops sharply to 1.2000, but then climbs back and closes near 1.2048. The shape of the candle leaves a long lower wick and a small body near the top.

At that moment, you recognize a hammer. The pattern tells you that the market reached a level where sellers lost strength. Price pushed down, but buyers absorbed the pressure and brought it back near the opening level. The long lower shadow shows the rejection of the low, and the small body confirms the close near the high of the range.

Now, how do you approach the next move? You do not jump in without a plan. You wait for the next candle to give you the answer. If the following candle trades above the high of the hammer, you treat that as confirmation. You place your entry just above the hammer’s high. You place your stop loss just below the hammer’s low. That structure controls your risk. You define your reward target by looking at nearby resistance or by measuring a reward that is at least double the distance of your stop.

So, it is clear that the hammer pattern creates a structured setup. It defines the entry, the stop, and the target. The pattern moves from signal to execution with clear steps, turning analysis into action.

Types of Hammer Candlestick Patterns

Standard Hammer

The standard hammer appears after a downtrend. The candle forms with a small body near the top and a long lower shadow at least twice the size of the body. No significant upper shadow exists. Basically, this structure signals that the market reached new lows but failed to close near them, indicating rejection of lower prices.

If you spot GBP/USD trading at 1.2500, dropping to 1.2450, and closing at 1.2495, you are looking at a standard hammer. You should consider it a potential signal of selling exhaustion. You need to wait for the next candle to break above the hammer’s high to confirm the reversal.

Inverted Hammer

The inverted hammer forms after a downward price move. It shows a small body at the bottom and a long upper shadow. The lower shadow remains short or absent. This pattern signals that buyers tried to push the price higher but failed to hold gains into the close. However, it often suggests sellers are losing control.

If you observe EUR/JPY falling from 142.00 to 139.50, opening at 139.60, rising to 140.50, and closing at 139.65, you are seeing an inverted hammer. You should wait for a break above the high of the candle before considering a long entry.

Hanging Man

The hanging man appears after an uptrend. Its shape is identical to the standard hammer: a small body near the top with a long lower shadow. In this case, the pattern warns that the market experienced heavy selling during the session but recovered before the close. You may interpret this as a sign of possible weakness in the upward trend.

If you find USD/CHF rising from 0.8800 to 0.9100, opening at 0.9100, dropping to 0.9000, and closing at 0.9095, you have a hanging man. You should prepare for a potential bearish reversal if the next candle confirms lower prices.

Shooting Star

The shooting star shows up after an uptrend. It has a small body near the bottom and a long upper shadow. Price moves higher during the session but closes near the open, signaling rejection of higher levels.

If you catch AUD/USD rising from 0.6700 to 0.6900, then opening at 0.6905, reaching 0.6950, and closing at 0.6902, you are looking at a shooting star. You need to watch for a move below the low of the pattern to confirm the reversal.

How to Trade the Hammer Candlestick?

Let’s break it down using a hypothetical trading scenario.

You are watching GBP/USD on the 4-hour chart. The price has been dropping all day from 1.2650 to 1.2500. Sellers keep pushing the price lower.

Here’s what you need to do:

Step 1: Spot the Hammer

The first step is to recognize the pattern.

On your chart, the hammer appears after a clear downtrend. The price dipped to 1.2450, but the candle closed at 1.2505. Sellers tried to push the market lower but failed to keep it there. Buyers forced the price back near the open.

This creates a candle that looks like a hammer:  Small body on top, long tail underneath.

Step 2: Wait for Confirmation

Do not enter the trade just because you saw the hammer.

Wait for the next candle. In this example, the next candle opens at 1.2510 and rises to 1.2540 without breaking the hammer’s low. This confirms that buyers are now stronger.

Step 3: Place the Buy Order

Now you need to set your trade. You can place your buy order slightly above the hammer’s high. In this case, the high of the hammer is 1.2510. You decide to buy at 1.2512 once the next candle breaks this level.

Step 4: Set the Stop-Loss

It is important to protect yourself from a false signal.

You may place the stop-loss just below the hammer’s low. The low was 1.2450, so you set the stop-loss at 1.2448. You’ll see how effectively it limits your risk if the market decides to drop again.

Step 5: Choose the Target

You must plan your profit before the trade runs. You see the next resistance level at 1.2580, which gives you a target.

• Entry at 1.2512
• Stop-loss at 1.2448
• Target at 1.2580

Now your risk is about 64 pips, and your potential reward is 68 pips. That keeps your trade balanced.

Final Step: Manage the Trade

Once the trade starts moving in your favor, you can trail your stop or lock in some profit. If the price hits 1.2580, you close the trade and book your gain.

Hammer vs Doji: What’s the Difference?

How to Combine Hammer with RSI for a Smarter Confirmation?

• Start by scanning for a hammer pattern after a clear market drop. Focus on charts where the sellers pushed hard but failed to keep control.
• Open your RSI window at the same time. If RSI shows a reading below 30, it means the market reached oversold territory. This usually happens when sellers have pushed too far, too fast.
• When both signals appear together—a hammer forms and RSI drops below 30—you’ve got something special. Price rejects the new lows, and momentum starts shifting. That’s not just coincidence; it’s a clue that the market may turn.
• Don’t jump in too early. Let the next candle close above the hammer’s high. That simple rule filters out weak signals.
• Place your buy order just above the hammer’s high. For example, if the high is 1.2510, set your order at 1.2512. This lets the market prove it wants to go higher before you commit.
• Protect the trade properly. Set your stop-loss just below the hammer’s low. If the low is 1.2450, place your stop at 1.2448. This way, you control the risk from the start.
• Plan your target before you enter. Aim for the next resistance level or choose a risk-to-reward ratio like 1:2. This keeps your trading consistent.
• Watch the RSI after you enter. If RSI crosses back above 30, that’s extra confirmation you’re on the right side of the trade.
• Look for RSI divergence if you want an even stronger setup. If price makes new lows but RSI prints higher lows, momentum is slowing down. Combine that with a hammer, and you may catch the start of a bigger reversal.

Advanced Strategy: Hammer and Bullish Divergence

So, reversal builds before most traders even notice. Momentum slows down first, even though price still shows new lows on the chart. It’s like the market is running out of fuel, but the engine keeps moving forward for a bit. In fact, that’s exactly where opportunities appear—when momentum and price disconnect.

Basically, bullish divergence tells you momentum is shifting. RSI or MACD starts forming higher lows, while price keeps dropping. Sellers lose strength underneath, but the chart doesn’t reveal it yet. That’s where the hammer comes in.

The hammer forms right at the moment sellers push one more time. Price drops fast, but buyers step in near the bottom. The candle closes near the top, leaving a long lower shadow behind. This is not just a pattern; it’s a message that buyer strength is now taking control.

What you need to do next is simple. 

Set the buy order just above the hammer’s high. Let the market prove that buyers are still pushing. Fix the stop-loss just below the hammer’s low. That locks in your risk with precision.

Next, choose your target. Go for the next resistance zone or use a 1:3 reward-to-risk setup. Divergence with a hammer usually points to bigger reversals, not small bounces, so give the trade room to develop. Stay patient as the price unfolds. A setup like this often leads to powerful moves because both momentum and price agree on the shift.

Top 7 Hammer Candlestick Trading Strategies

• Use the Support Zone Reversal strategy by entering long above the hammer’s high when price forms the pattern at a key support level.
• Apply the RSI Oversold Confirmation strategy by combining a hammer with RSI below 30 to confirm exhaustion in selling before buying.
• Follow the Volume Spike Validation strategy by trading hammers that appear with a volume surge to confirm real buying pressure behind the move.
• Execute the Moving Average Bounce strategy by going long after a hammer forms near the 50-day or 200-day moving average to catch a trend continuation.
• Use the Fibonacci Reversal Setup strategy by buying when a hammer forms at 38.2% or 50% Fibonacci retracement, confirming price rejection at key levels.
• Trade the Bullish Divergence Reversal strategy by combining a hammer with bullish divergence on RSI or MACD to capture early reversal signals.
• Apply the Pullback Continuation Entry strategy by rejoining an existing uptrend after a hammer forms at the end of a minor price dip.

Strength and Weakness of Hammer Patterns

Can You Use the Hammer Pattern for Scalping?

Yes, the hammer pattern works effectively for scalping, especially on short timeframes like the 1-minute and 5-minute charts. 

According to Opofinance (2025), the hammer is among the most reliable candlestick patterns for scalpers because it provides a visual clue of market sentiment shifts at critical moments. Scalpers rely on fast price action, and the hammer pattern signals immediate rejection of lower prices during a session, creating a potential for quick upward moves.

Forextraders (2025) further supports this by explaining that a hammer after a price drop shows sellers losing momentum as buyers step back in near session lows. Scalpers can capitalize on this shift by setting a buy order slightly above the hammer’s high, while placing a stop just below the low. The goal is to capture small, rapid price movements, often 5–10 pips, without holding positions for long.

Bagheri (2025) in the Best Candlestick Patterns for Scalping guide emphasizes that confirmation is crucial. A valid hammer trade requires the next candle to break above the hammer’s high before entry. Without this confirmation, the pattern remains incomplete for scalping purposes. He also highlights the need for context—hammers near support zones or after volume spikes tend to produce better results.

Moreover, XS.com (2025) recommends combining the hammer with additional tools such as the RSI or pivot points during scalping. For instance, if the hammer forms while RSI shows an oversold reading, the probability of a successful quick trade increases.

So, in short, the hammer pattern is indeed a powerful practical tool for scalping. Its quick formation, clear visual setup, and ability to reflect price exhaustion make it valuable for traders focusing on micro timeframes. However, successful scalping with the hammer depends on precise execution, strict stop-loss placement, and fast confirmation from the next price action.

Final Words

The hammer marks a shift from selling pressure to buying strength. Price drops, rejects the low, and closes near the high. That’s your signal to prepare for a potential reversal.

But you need to wait for confirmation. Look for the next candle to break the hammer’s high. Place your stop below the hammer’s low. Manage the trade with clear targets and risk control. Use the hammer pattern with context. Make sure to check the trend, watch the support zones, and combine tools like RSI or volume to filter better entries.

Remember one more thing: the hammer candlestick pattern gives structure. So, follow it as part of a disciplined setup, not just as a pattern but as a plan for smarter trades.