The Inverted Hammer candlestick pattern is a bullish reversal signal pattern that forms at the bottom of a downtrend in crypto, forex, and stock markets. It indicates a strong shift from a bearish to a bullish market trend, as buyers try to push prices higher after a strong downtrend. Traders use this inverted hammer alongside with support levels and technical indicators to confirm trend reversals and get exact entry and exit trading points. In this guide, we will discuss how to identify and trade inverted hammer candlestick Pattern.
How to Identify Inverted Hammer Candlestick Pattern
To spot a inverted hammer pattern, look for the following characteristics:
The inverted hammer is a unique single-candle pattern that often shows up after a downtrend. To identify this inverted hammer candlestick, look for a small real body at the bottom and a long upper wick — usually twice the size of the body. The inverted hammer tells a story: sellers were in control, but buyers stepped in and pushed prices higher before the candle closed. There’s little to no lower wick. If the candle is green or red, the market and candle structure matter most — though a green inverted hammer candle usually gives a stronger bullish reversal signal.
What Does the Inverted Hammer Candlestick Indicate?
When you see a hammer inverted pattern after a price drop, it’s a great signal in market price action. The long upper wick shows buying pressure, meaning buyers tried to take control. Even though the sellers pushed prices down, they couldn’t keep it there, which shows weak selling power. That’s why the inverted hammer candlestick is seen as a possible sign of a trend reversal. While it’s not guaranteed, that this candle will start trend reversal 100%. Traders often compare the hammer and inverted hammer patterns together to spot key turning points in the market.
Difference Between an Inverted Hammer and a Shooting Star Candlestick
Many traders confuse the Inverted Hammer candlestick with the Shooting Star pattern. Here’s how they differ:
| Feature | Inverted Hammer pattern | Shooting Star pattern |
|---|---|---|
| Trend Placement | Appears in a downtrend | Appears in an uptrend |
| Signal Type | Bullish Reversal | Bearish Reversal |
| Wick Length | Long upper wick, small body | Long upper wick, small body |
How to Trade the Candlestick Inverted Hammer Pattern
To trade an inverted hammer you need to focus on the following things.
1. Wait for Confirmation
Since the Inverted Hammer pattern alone is not enough to confirm a trend reversal, look for:
- A strong bullish candle after the pattern.
- Increased trading volume.
- Target a key resistance level or Fibonacci retracement zone for profit-taking.
2. Entry Strategy
- Enter a trade after a bullish confirmation candle.
- Place a stop-loss below the low of the inverted bullish hammer.
- Target a key resistance level or Fibonacci retracement zone for profit-taking.
3. Example Trade Setup
- Scenario: Inverted Hammer candlestick pattern forms at strong support after a downtrend.
- Confirmation: The next candle is a bullish engulfing.
- Entry Point: Buy at the opening of the next candle
- Stop-Loss: Below the Inverted Hammer low.
- Take-Profit: Near the next resistance level.
Key Tips for Trading the Inverted Hammer Candlestick pattern
- Always wait for confirmation before entering a trade of an inverted hammer.
- Use additional indicators like RSI or MACD for confluence.
- Monitor trading volume, as a high volume strengthens the reversal signal.
- Avoid trading in choppy markets, as false signals are common.
Frequently Asked Questions (FAQs)
What is an Inverted Hammer candlestick pattern?
The Inverted Hammer is a bullish reversal pattern that appears at the bottom of a downtrend, signaling a potential price reversal.
How do you identify an Inverted Hammer?
It has a small real body at the bottom, a long upper wick, and little to no lower wick, indicating buyer pressure.
What does the Inverted Hammer signal in trading?
It suggests that buyers are attempting to push the price up after a downtrend, but confirmation from the next candle is needed.
How to trade the Inverted Hammer pattern?
Wait for confirmation with a bullish candle and enter a trade with a stop-loss below the pattern's low.
Conclusion
The Inverted Hammer candlestick pattern is a powerful candlestick trading strategy for spotting strong bullish reversals. However, it should not be traded in consolidation. Combining it with confirmation signals and risk management strategies can improve your trading success ratio. Whether you’re a beginner or an experienced trader, mastering this pattern can improve your technical analysis skills and decision-making.
By following the Inverted Hammer trading strategies, you can effectively identify market reversals. Keep refining your strategy and use real-time market analysis to boost your trading performance.
“Trade with Confidence, Trade with Heist!” Heist Trader Academy wishing you Happy-trading!