What is Hammer Formation?

The hammer formation is a candlestick pattern used in technical analysis. This pattern usually appears at the end of a downtrend on the price chart and can signal the beginning of an uptrend. In a hammer pattern, there is a candlestick that usually shows a downward move, and the body of this candlestick may be long, but this is not necessarily the case. There is also a small upper shadow that extends up the body and a long lower shadow that extends down the body. The length of the lower shadow indicates that the price started to rise again after the decline. These features are what define the hammer formation and signal the price's transition to an upward trend. The hammer formation occurs in a situation where prices are in a downward trend, and the formation of this formation may indicate that the power of sellers has weakened and buyers have begun to put pressure on prices. However, the mere appearance of a hammer formation should not be considered a buy signal on its own. It is recommended to verify it by using it together with other technical analysis tools, indicators and indicators.

How is the Hammer Formation Formed?
The hammer formation forms as a candlestick pattern that appears at the end of a downtrend on the price chart. This formation generally develops in four main steps:

Downtrend: The hammer formation usually occurs at the end of a downtrend. It occurs in a market condition dominated by sellers while prices are steadily falling.

Dominant sellers: When prices are falling rapidly during a downtrend, sellers dominate the market and pressure prices to fall even further.

Hammer formation: During a downtrend, a candlestick forms and the body of this candlestick usually represents a downward move. However, after this movement, prices begin to move upwards again and close above the opening price at the end of the day. This condition is characterized by a small upper shadow extending up the trunk and a long lower shadow extending down the trunk.

Bullish expectation: The formation of a hammer formation may indicate that the power of sellers has weakened and buyers have become active in the market. Therefore, the hammer formation can often signal the beginning of a period in which prices may begin to rise.

What are the Hammer Formation Variations?
A hammer candlestick usually has a long body that represents bearishness. This body indicates that sellers are dominating the market and prices are falling. Additionally, a small upper shadow extending up from the body and a long lower shadow extending down from the body are other important features of a hammer candlestick. A small upper shadow may indicate that buyers are having difficulty pushing the price higher, while a longer lower shadow may indicate that the price is starting to rise again after a decline. These features help us better understand the formation of the hammer candlestick and its potential price movements.

Inverted Hammer Candlestick
An inverted hammer is defined as a candlestick pattern in which the opening price falls below the closing price. In this pattern, the long wick above the body indicates that there was buying pressure trying to push the price higher, but this pressure retreated before the candle closed. While not as bullish as a regular hammer candle, an inverted hammer is also seen as an up reversal pattern after a downtrend.

Hanging Man Candlestick

Hanging Man Candle Pattern is a technical analysis pattern that shows a bearish trend in the markets. This formation indicates a situation where prices rise but eventually end in a decline. The Hanging Man appears as a red candle with a small body with the opening price above the closing price and a long upper wick underneath. The upper wick indicates that buyers are trying to push the price higher, but the sellers' pressure is getting stronger. This indicates that the trend is weakening and there is a potential for prices to turn downwards.

Shooting Star Candlestick

Shooting Star Candle Pattern is a technical analysis pattern that shows a bearish trend in the markets. This formation forms at the end of an uptrend and indicates the potential for prices to turn downward. A Shooting Star appears as a red candle with a small body with the opening price above the closing price and a long upper wick above it. The upper wick indicates that the uptrend is weakening and sellers' pressure is increasing. This indicates that buyers have lost control and prices may turn downwards.

Advantages of Hammer Formation ,
Trend Reversal Signal: The hammer pattern usually occurs at the end of a downtrend and can be interpreted as a harbinger of an upward reversal. Therefore, it provides a potential buy signal for investors.
Clear and Distinctive Indicators: The hammer formation is a visually clear and distinct pattern. A hammer has a small body and a long lower wick underneath, indicating that sellers are losing control and buyers are gaining ground.
Risk Management: The hammer pattern can help determine stop-loss levels. By placing a stop-loss below the pattern, it is possible to limit risks in possible reversals.

Disadvantages of Hammer Formation,
Not Reliable Alone: The hammer pattern alone does not provide a reliable trading signal. It should be used in conjunction with other technical indicators and market conditions.

False Signal Risk: In some cases, the hammer pattern may not be a true reversal signal but merely a temporary pause or price surge.

Therefore, additional confirmatory indicators should be used to verify the accuracy of the pattern.

Trend Continuation Possibility: The hammer pattern can sometimes be interpreted as a trend continuation pattern. Especially in a strong uptrend, a hammer formation may result in prices falling briefly, but continuation of the trend may occur later.