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Successful trading isn’t just about luck, it’s about spotting the right signals at the right time. One of the most trusted tools traders use to understand price action is candlestick patterns. These patterns reflect market psychology and help traders anticipate future price movements.
Among them, Inverted Hammer is a pattern of a trend reversal after a downtrend. It might look simple, but when used correctly, it can offer timely insights into a possible shift in market momentum.
This article will explain what is inverted hammer candlestick is, how it forms and how traders use it in real market conditions to improve their entries and exits.
What is Inverted Hammer Candlestick Pattern?
Inverted hammer is a single candlestick pattern that appears at the end of a downtrend and signals a possible bullish reversal. It looks like an upside-down hammer and is often confused with the shooting star pattern, though they appear in different market conditions.
This candlestick suggests selling pressure is weakening and buyers are beginning to step in. While the session opens and trades lower, strong buying during the day pushes the price higher, though it closes below the high. This indicates a possible shift in momentum from bearish to bullish.
Characteristics of the Inverted Hammer Pattern:
- Small real body (can be green or red).
- Long upper shadow, at least twice the size of the real body.
- Little or no lower shadow.
Traders view this pattern as an early signal to consider a long position, especially when it is confirmed by higher volume or the next candlestick closing higher.
Types of Inverted Hammer Candlestick Patterns
Inverted Hammer is a single candle pattern that often signals a reversal after a downtrend. It appears in two variations, based on the colour of the candle body, red and green. Both versions have the same shape: a small body at the bottom with a long upper wick, showing buyers attempted to push prices up during the session.
Red Inverted Hammer
- Type: Red Hammer Candlestick
- Colour: Red
- Signal: Cautious Reversal
Red inverted hammer forms when the closing price is slightly lower than the opening price. This suggests that buyers tried to take control but sellers held the upper hand by the close. It reflects weakness but still hints at a possible bullish reversal if followed by a strong confirmation candle.
Green Inverted Hammer
- Type: Type: Green Hammer Candlestick
- Colour: Green
- Signal: Bullish Reversal Signal
Green inverted hammer appears when closing price is higher than the opening price. It indicates buyers had enough strength to end the session despite bearish pressure. This variation is considered more bullish than the red version.
When Does Inverted Hammer Candlestick Pattern Occur and How to Identify It?
Inverted hammer candlestick usually forms at the bottom of a downtrend, indicating a possible trend reversal. It suggests selling pressure may be weakening and buyers are beginning to step in.
This pattern becomes relevant in the following situations:
- After a prolonged downtrend
If the market has been falling consistently and this pattern may signal a possible shift in direction.
- During market uncertainty:
When traders are unsure about the next move, inverted hammer hints a bullish reversal could be on the horizon.
How to Identify Inverted Hammer
To confirm an inverted hammer on the chart, check for these key features:
- Long upper shadow: Upper wick must be at least twice the length of the real body. This shows buyers tried to push the price higher during the session.
- Small real body near the bottom: Body should be positioned close to the session’s low. It can be red or green colour, doesn’t matter. What matters is the location.
- Little to no lower shadow: This pattern ideally has no lower wick or it’s barely visible. This gives the candle its distinct ‘inverted’ shape.
How Do Hammer and Inverted Hammer Candles Work?
Both the Hammer and Inverted Hammer candlestick patterns are signals of a possible trend reversal, usually forming after a sustained downtrend. These patterns help traders identify possible entry points when supported by additional confirmation signals.
- Hammer Candlestick Pattern
- Appearance: Forms at the bottom of a downtrend.
- Structure: Features a small real body near the top of the candle and a long lower shadow (wick). Upper wick is either very short or absent.
- Indication: Sellers pushed prices lower during the session, but buyers stepped in and drove the price back up, showing buying interest.
- Confirmation: A strong bullish candle closing above the Hammer confirms the reversal and strengthens the signal.
- Inverted Hammer Candlestick Pattern
- Appearance: Also appears after a downtrend.
- Structure: Has a small body at the bottom and a long upper wick. The lower wick is minimal or missing.
- Indication: Buyers tried to push prices higher, facing resistance from sellers. Although the close is below the high, buying pressure signals a possible shift in momentum.
- Confirmation: A bullish candle following the pattern adds credibility to the reversal.
Advantages and Limitations of the Inverted Hammer Pattern
Now let’s understand Inverted Hammer benefits and challenges.
| Advantages | Limitations |
|---|---|
|
Easy to identify due to its unique candlestick structure. |
Not reliable when used alone, needs confirmation from the next candle. |
|
Acts as an early signal of a possible bullish reversal. |
Can generate false signals especially in low-volume or volatile markets. |
|
Works better when combined with indicators like RSI, MACD |
Does not guarantee a trend reversal, only suggests a possibility |
|
Useful for spotting entry points after a downtrend. |
Effectiveness reduces in sideways or choppy market conditions. |
Different Types of Candlestick Patterns Other than Inverted Hammer
Besides Inverted Hammer, traders use several other candlestick patterns to analyse market trends. These patterns fall into three main categories: bullish, bearish and continuation.
- Bullish Candlestick Patterns: These patterns usually signal a potential upward reversal in price:
- Hammer: Appears after a downtrend. It has a small body and a long lower shadow, suggesting buyers are stepping in.
- Bullish Engulfing: A larger green (bullish) candle fully covers the previous red (bearish) candle. It indicates a possible shift to an uptrend.
- Morning Star: A three candle pattern that starts with a bearish candle, followed by a small bodied candle (indecision) and ends with a strong bullish candle. It signals trend reversal from bearish to bullish.
- Piercing Line: A bullish pattern where the green candle opens lower but closes above the midpoint of the previous red candle.
- Bearish Candlestick Patterns: These patterns suggest the price might reverse downward:
- Shooting Star: Appears after an uptrend. It has a small body and a long upper wick, showing rejection of higher prices.
- Bearish Engulfing: A big red candle engulfs a smaller green one. It indicates selling pressure and a possible trend reversal.
- Evening Star: Opposite of the Morning Star. It shows a shift from bullish to bearish with a three candle setup.
- Dark Cloud Cover: A bearish reversal pattern where a red candle opens higher but closes below the midpoint of the previous green candle.
- Continuation Candlestick Patterns: These patterns indicate the current trend might continue:
- Doji: Open and close prices are nearly the same. It reflects indecision in the market.
- Spinning Top: Small body with long upper and lower shadows. It also suggests uncertainty among traders.
- Three White Soldiers: 3 consecutive bullish candles with higher closes. It signals strong bullish momentum.
- Three Black Crows: 3 consecutive bearish candles with lower closes. It confirms bearish strength.
Final Words
Inverted Hammer candlestick pattern can be a valuable signal for traders especially when spotting potential reversals in a downtrend. However it should not be used in isolation. Its effectiveness improves when combined with volume analysis, support/resistance levels and other technical indicators. By understanding how to identify and interpret this pattern correctly, traders can make more informed decisions and navigate market trends with greater confidence.
Frequently Asked Questions
Is an inverted hammer bullish or bearish?
Inverted Hammer is a bullish reversal pattern that appears after a downtrend, suggesting potential buying interest and a possible shift in market direction.
How can traders use Inverted Hammer effectively?
To use it well, traders should look for confirmation, ideally a strong bullish candle right after the Inverted Hammer. It’s also smart to check for support zones, rising volume or other indicators before taking a position.
How does an Inverted Hammer indicate a trend reversal?
Inverted Hammer appears after a downtrend and hints at a possible shift from selling pressure to buying interest. It shows buyers tried to push prices higher, signaling a potential bullish reversal if confirmed by the next candle.
What’s the difference between an Inverted Hammer and a Shooting Star?
Though they look similar, their context matters. Inverted Hammer forms after a downtrend and suggests a bullish reversal. Shooting Star appears after an uptrend and often signals that the bullish momentum is weakening, pointing to a possible bearish reversal.
What does a green Inverted Hammer mean?
Green (bullish) Inverted Hammer shows stronger buying interest than a red one. It suggests buyers were able to close the candle above its opening price, reinforcing the chance of a trend reversal.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
