There are many techniques and strategies traders can use to make their investments more efficient. One of these techniques that attracts a lot of traders is candlestick trading, where you learn about candlestick patterns and interpret and predict price movements using them. An inverted hammer is one of the most well-known candlestick patterns in this realm, offering warnings of a potential bullish trend reversal.
As a trader who’s trying to learn more about this pattern, you probably know that there’s no shortage of sources and educational materials. However, some of these sources can confuse you with their lengthy descriptions and hard-to-understand jargon, and others may appear too short, not offering much. In the midst of all this, team ITBFX has your best interest in mind. With comprehensive research on the needs of novice traders, we’ve got what you really want! So, without further ado, let’s get into inverted hammer candlestick pattern and how you can use them to your benefit.
What Is an Inverted Hammer?
An inverted hammer is a type of reversal candlestick patterns that is often seen in different financial charts. It forms at the end of long downtrends and signals a potential trend reversal from bearish to bullish. The candle is super easy to pinpoint, as shown below.
As you can see, an inverted hammer has a long upper shadow, a slim body (bullish or bearish), and a small to non-existent lower shadow. Keep in mind that the candle’s upper shadow should be at least twice the size of its real body for it to be considered an inverted hammer.
Although an inverted hammer candlestick is usually considered to be a potential bullish reversal signal, it should first be confirmed. Other considerations, such as the candlestick patterns that form after the inverted hammer, are also super important in helping traders make more informed trading decisions.
What Does an Inverted Hammer Tell You?
As mentioned before, inverted hammers are in their most powerful form when they form at the bottom of prolonged downtrends. To interpret this candlestick pattern, you need to start with the market context. We established that inverted hammer patterns should ideally form at the bottom of prolonged downtrends. So, the bears have been in control of the market for a while, pushing the prices down and having the time of their life. Then, the inverted hammer candlestick begins to form. It usually opens with a gap down, creating the illusion that the market is gonna go further down.
However, the candle will come to meet support down the road, which forms its low. This support comes from a simple discipline of market psychology. The bears are no longer willing to sell the asset at a lower price than the support level. That is why the candle’s low forms. After that, the bulls return to the market and start pushing the price higher and higher. Because the bears are currently having their moment of weakness, this whole process works well, that is, for a while.
After a while, the bears regain their strength and prevent the price from further increasing. From there, there is an active battle between the buying and selling parties, causing the price to fluctuate until it comes down and closes the candle near its opening price. And just like that, an inverted hammer candlestick pattern has formed. Whether the candle closes above or below its open price determines if the inverted hammer is bearish or bullish.
Red and Green Inverted Hammer Candlesticks
Like any other pattern, an inverted hammer candlestick can be bullish or bearish. An inverted red hammer candlestick forms when the inverted hammer candle closes below its open price. At the same time, an inverted green hammer forms when the inverted hammer pattern closes above its open price. As far as an inverted hammer candlestick’s meaning goes, there’s no difference between a bullish inverted hammer and a bearish inverted hammer. However, a green inverted hammer candlestick pattern is considered to be a slightly stronger potential signal in terms of trend reversals. However, both green and red inverted candlestick patterns signal a potential bullish reversal in the near future.
Note that this blog shows bullish candlesticks in orange and bearish candles in navy blue.
How to Recognize an Inverted Hammer Pattern?
So far, we learned what inverted hammers are, how they look, and what they mean. If you’re looking for a comprehensive guide to help you pinpoint one of these bad boys in any chart, though, you should learn this section by heart. So, these are the visual characteristics of a good ole’ inverted hammer:
- They form in a well-defined downtrend
- They have a small body, a long upper shadow, and a short lower shadow.
- Their upper shadow should be at least twice the size of their real body.
- Their real body should be located at the bottom end of a candle.
- Their lower shadow should be very short or absent.
- The color of the candle’s body is insignificant, although it might represent a slightly more bullish or bearish bias.
Inverted Hammer Candlestick Pattern Confirmation
You should consider several factors to confirm an inverted hammer. There are the following candlesticks, price action patterns, market volume and sentiment, and other technical indicators to check. But first, we’re gonna take a look at factors that make inverted hammer candlesticks a stronger reversal signal.
First off, look at the candle’s upper wick (shadow). The longer it is, the more likely the potential reversal will be. We also mentioned how these candles tend to open with a gap down from the previous candle. The larger this gap is, the stronger a warning the candle provides. On top of that, a green (orange) candle and a high market volume represent the increased likelihood of a potential reversal.
Aside from these factors, you should closely watch the candles that form after the inverted hammer. If there are candles that close above the inverted hammer’s high, that’s a good sign. Additionally, other bullish patterns, such as bullish engulfing, morning star, three white soldiers, and dragonfly doji, can also confirm the inverted hammer.
You can also use other technical tools, such as price action patterns and technical indicators, to confirm an inverted hammer candlestick. For example, the relative strength index (RSI), moving average convergence divergence (MACD), and oscillators can give you a good feeling of the market’s momentum and sentiment.
Hammer vs. Inverted Hammer
Hammer and inverted hammer candlestick patterns are both bullish reversal signals that occur in downtrends. As their names suggest, an inverted hammer is just like a hammer but upside down. So, while inverted hammer patterns have a long upper shadow, a small body at the bottom of the candle, and a short or absent lower shadow, a hammer candlestick has a small or absent upper shadow, a small body at its top, and a long lower shadow that’s at least twice the size of the body. They can both be red or green, but they both offer a warning for a potential bullish reversal.
Inverted Hammer vs. Shooting Star
An inverted hammer and a shooting star are also very similar, but there’s one key difference between them. We usually see an inverted hammer in a downtrend, signaling that the bear’s rule should be coming to an end. On the other hand, a shooting star is an inverted hammer candlestick in an uptrend, which signals a potential bearish reversal. So, a shooting star and an inverted hammer candlestick have the same appearance, the same long upper shadow, small body, and short lower wick, but one forms at the bottom of downtrends and the other at the top of uptrends, and they provide the opposite signals.
Bottom Line
Inverted hammer candlestick patterns form at the bottom of prolonged downtrends and represent a potential bullish reversal in the market. They have a small body that’s located at the bottom end of the candle, a long upper shadow that is twice the size of the candle’s body or larger, and a small to non-existent lower shadow. Whether you face a bearish inverted hammer candlestick or an inverted green hammer candlestick, they both provide the same warning, a trend reversal from down to up.
To confirm these candles, you need to look at the candles that follow them, as well as other technical indicators. Some candle features (like the length of their upper shadow) also make inverted hammers stronger or weaker.
If you’re new to the world of trading and are looking to quickly and efficiently familiarize yourself with the nitty-gritty details about forex, leverage, risk management, and trading tips, you should head over to our blog at ITBFX. We cover a vast majority of topics in literature, provide videos for better visual demonstration, and keep you up to date on the latest market news on our Instagram, Twitter, and Facebook.
An inverted hammer is a widely used candlestick pattern that occurs at the bottom of prolonged downtrends and offers a potential bullish reversal signal. It has a long upper wick, a small body at the bottom end of the candle, and a short lower shadow.
An inverted hammer pattern signals a potential bullish reversal in the near future. It shows how the price hits support, and the bulls enter the market and increase it, only for the bears to return and drag the price back down.
To confirm an inverted hammer candle, look for bullish candlestick (patterns) that form after it. Check the market sentiment and momentum using indicators such as RSI, MACD, and oscillators.
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