Inverted Hammer Candlestick Pattern: Definition and Indications
Then, one day, a candlestick forms with a small real body near the bottom, a long upper shadow, and almost no lower shadow; this is your inverted hammer candlestick. The inverted hammer candlestick pattern has a small real body at the bottom and a long upper inverted hammer meaning shadow. The color of the Inverted Hammer candle is not a key aspect in market analysis.
According to the Encyclopedia of Candlestick Charts by Thomas N. Bulkowski (link), the Inverted Hammer candlestick pattern has a success rate of 67%. Pivot Points are automatic support and resistance levels calculated using math formulas. Everything that you need to know about the Inverted Hammer candlestick pattern is here. Now we’ve tackled the basic approach to trading the inverted hammer, what are some general strategies that can be applied?
Advantages of Inverted Hammer Candlestick Pattern
- The pattern has been widely recognised as a reliable signal for potential bullish reversals in various markets and timeframes.
- Another crucial difference is that an Inverted Hammer can be found right after a downtrend whereas a Hanging Man can be found right after uptrends.
- The color of the Inverted Hammer candle is not a key aspect in market analysis.
- Traders look for confirmation from subsequent bullish candles and higher volume, ideally supported by other technical analysis indicators like the RSI or MACD, pivot points, or Fibonacci levels.
- Because each inverted hammer shows that buyers are trying to push the price higher, even if sellers still have some control.
The market reversed its direction after this bullish reversal pattern and provided a profitable position in both situations. In the above chart GBPJPY H1 price chart, the market was in a downtrend making a series of lower lows. But during the inverted hammer candle we can identify the buyers entering the market. The difference between hammer and inverted hammer candlestick pattern is just that they are upside down of each other.
The accuracy of the Inverted Hammer pattern, like all the other technical analysis patterns, depends on the trader’s skill, experience, and ability to interpret the market sentiments. The Inverted Hammer Candlestick Pattern is highly accurate for technical analysis. The accuracy of the Inverted Hammer candlestick pattern in technical analysis varies depending on several factors.
The formation of this candlestick occurs either after a slight retracement in an uptrend or in the middle of a downtrend at an important support level. Yes, the inverted hammer is generally considered a bullish reversal pattern that appears after a downtrend, signaling that buyers are starting to gain control. The inverted hammer candlestick pattern must form in a downtrend; this is an important prerequisite for this candlestick pattern. In fact a similar pattern if formed during an uptrend is called a shooting star candlestick pattern. The Inverted Hammer forms at the bottom of a downtrend, with a small body and long upper wick.
How to trade when you see the inverted hammer candlestick pattern
Most candlestick patterns reveal the direction of trend if the trader has the ability to identify and understand these patterns. Reversal and continuation candlestick patterns can be further looked into as bullish and bearish patterns. However, its reliability depends on the context in which it appears and whether it is confirmed by other technical indicators or price action.
- The RSI is a popular trend reversal indicator that finds areas of overdemand or oversupply and may indicate a possible reversal.
- Traders can confirm that the market is in a downtrend, if the market makes a series of lower lows.
- Traders should consider this when making decisions and developing trading strategies.
- By using this information the trader can easily prepare a trade plan and execute them accordingly.
As the uptrend progresses, there will be one candle that moves largely against the prior downtrend. However, by the end of the session, the price ends up closing near the opening price of the session. This suggests that the sellers may have lost control of the downtrend and a reversal may occur. What happens during the next candlestick after the Inverted Hammer pattern is what gives traders an idea as to whether or not the price will push higher. It is frequently seen at the end of a downturn, which indicates that likely bullish market turn. The lengthy upper wick indicates that buyers are currently pushing commodity prices back up, and the market may witness a bullish price reversal.
However, the green Inverted Hammer signals a stronger bullish sentiment, while the red Inverted Hammer warns that the trend change requires confirmation from additional buy signals. This pattern occurs when the closing price is higher than the opening price, indicating potential buyer activity. If the green Inverted Hammer appears after a downtrend, it may suggest a shift in market momentum in favor of the bulls. A good trader and a good technical analyst would choose to take risks based on candlestick patterns with the companionship of proper risk assessments based on the support and resistance levels.
If the sellers were fully in control, why wasn’t the candle body much larger and in the red? The inverted hammer is a hidden sign that buyers have absorbed and exhausted the seller’s bearish pressure, and that price may be ready to reverse. Very good inverted hammer formation on this NASDAQ 1-minute chart that led to the bullish gap and upward spike. Although the price pulled back later to the inverted hammer candle levels, it initially covered some nice distance upward. Some traders who use swing trading strategies might also use weekly and monthly charts but they are mostly investors.
Notice how each pattern has a small candle body positioned at the extremes of the candlestick, and a long wick or shadow. The inverted hammer has its candle body at the bottom, and a long shadow to the upside. Conversely, the hammer has its candle body at the top, and a long shadow to the downside.