Inverted Hammer Candlestick: How to Trade With Examples

This strategy requires a basic understanding of support and resistance charting, and aims to capitalise on large swings that may occur from support zones. Now we’ve tackled the basic approach to trading the inverted hammer, what are some general strategies that can be applied? When trading the inverted hammer, it is important to consider the trading range within which the asset is fluctuating, as this can impact the effectiveness of the pattern.

• In the above chart, we see every common indicator we’re about to get an Inverted Hammer driven bullish reversal right?
• A strict stop loss is set at the bottom price of the ‘inverted hammer’ – as clearly illustrated in the above image.
• The Inverted Hammer Candlestick Pattern is a chart pattern used in technical analysis to find  trend reversals.
• It features a small body near the low of the trading range, a long upper shadow (at least twice the body length), and little to no lower shadow.

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To see more detailed statistics, for other markets and periodicity inverted hammer candlestick try our CandleScanner software. Hundreds of markets all in one place – Apple, Bitcoin, Gold, Watches, NFTs, Sneakers and so much more. Once you’re comfortable with the basics of the inverted hammer, these advanced techniques can help you fine-tune your trading approach. For even better results, advanced trading tools can help refine your strategy. While spotting good entry points is essential, managing risk with a proper stop loss is equally important to limit potential losses.

• On every trade detail page, where you used to see your selected price charts, there are now two tabs – “Price Action” and “Running P&L”.
• In conclusion, mastering the language of candlestick patterns is a skill that can try to lead to more informed and potential trading decisions.
• The White Spinning Top basic candle, being the second line of the Turn Up pattern confirms the Inverted Hammer.
• The indicator is mostly used to identify a bullish reversal pattern, which indicates the conclusion of a downtrend.

Three Black Crows Pattern

The inverted hammer is supposed to be a bullish reversal candlestick,but it really acts as a bearish continuation 65% of the time. The overall performance ranks it 6 out of 103 candles, meaning the trend after the candle often results in a good sized move. The bullish engulfing pattern and the ascending triangle pattern are considered among the most favorable candlestick patterns. As with other forms of technical analysis, it is important to look for bullish confirmation and understand that there are no guaranteed results. Additionally, LuxAlgo’s Oscillator Matrix helps verify reversal signals, making it easier to execute trades based on the inverted hammer pattern.

The trader chooses to open a long position while limiting risk by setting a stop-loss order below the pattern’s bottom. Based on local resistance levels or a favourable risk-reward ratio, they also determine a profit objective. The trader’s trade hits the profit objective, resulting in a profitable conclusion, as the price rises in consecutive trading sessions, confirming the bullish reversal. The Inverted Hammer Candlestick Pattern suggests a potential trend reversal from bearish to bullish. It directly indicates that bulls are starting to step in and are pushing the price up from the previous downtrend.

To steer clear of misleading signals, look for confirmation through factors like higher-than-average volume, gap-up openings, clear downtrends, and key support levels. One of the most beautiful disciplines in technical analysis is the study of „price action“. Now, let’s say the next candlestick closes higher, forming a strong green candle. At this point, a trader might enter a buy trade, expecting the price to reverse and start moving upward.

The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. However, you should always wait for the next trading session to confirm the inverted hammer signal. We see the inverted hammer on the Microsoft (MSFT) October 11th, 2021, daily chart.

What Is an Inverted Hammer Candlestick?

Its long upper shadow reflects a surge in buying activity in the market, suggesting a price increase is expected. Unlike the inverted hammer, the hanging man has a small candle body near the top extremes of the candlestick, and comes with a large lower wick. Though this lower wick can be interpreted as buying pressure, it’s also a sign that the market is interested in actively shorting the asset. While both candlesticks look identical, they forecast completely different scenarios. The shooting star implies a bearish move down is coming soon, while the inverted hammer implies a bullish market move is on the horizon. To differentiate them, simply understand that an inverted hammer forms when the price moves down, while the shooting star forms when the price moves up.

Differences between Shooting Star and Inverted Hammer

During that session, buyers tried to push the price higher, but it closed near the opening level. That tells us buyers are starting to fight back, even if they didn’t win just yet. This structure indicates that buyers tried to push prices higher but were only partially successful, suggesting a potential reversal. Of course, there are other types of candlesticks that you should learn about.

Confirmation may arise from the candlestick that follows the Inverted Hammer. The inverted hammer, aka inverse hammer, signifies that the bulls are taking control of the bears. Here are the key takeaways you need to consider when using the inverted hammer candlestick pattern. As seen in the chart, the inverted hammer candle occurs around the Fibonacci 38.2% level. When you add the RSI indicator to your charting platforms, you’ll be looking for a crossover around the 30 level and at the same time, the inverted hammer candlestick appears. For that purpose, we want to focus on two technical analysis tools that will help you validate a potential trend reversal and find entry and exit levels.

Investors should use candlestick charts like any other technical analysis tool (i.e., to study the psychology of market participants in the context of stock trading). They provide an extra layer of analysis on top of the fundamental analysis that forms the basis for trading decisions. Second, the upper shadow must be at least two times the size of the real body. Third, the lower shadow should either not exist or be very, very small. Fourth, the real body should be located at the lower end of the trading range. The color of this small body isn’t important, though (as you’ll see below) the color can suggest slightly more bullish or bearish implications.

Step 1: Identify the Pattern in a Downtrend

Setting appropriate stop-loss orders to limit potential losses and implementing proper position sizing techniques can help potentially mitigate risks and protect trading capital. To effectively assess the impact of this pattern, traders must pay attention to what happens the day after it occurs. Even yet, a red inverted hammer candlestick pattern is considered bullish. The shooting star candlestick pattern is a one-bar bearish reversal pattern with a long upper wick and little to no lower shadow. The prevailing trend is the only difference between the shooting star and the inverted hammer.

Finally, on the 17th of June, we can spot an inverted hammer pattern and await confirmation. The next candle gives us the confirmation we need, and the Choppiness Index seems to be flat, with the Chop Zone showing a red sign, indicating that the trend has stopped for the last few days. At this time, we only have the indication that the trend might be over and a not-so-perfect inverted hammer pattern, so having a stop loss in place is very important.

Who first identified the Inverted Hammer Candlestick pattern?

Its reliability improves when it appears near major support levels, especially on daily or weekly charts where market noise is less of an issue. By focusing on these elements, traders can fine-tune their strategies to make the most of the inverted hammer. Focus on daily and weekly charts to get more dependable inverted hammer signals. These timeframes help cut through market noise and show clearer sentiment, especially when the pattern appears near major support levels after a downtrend. However, its reliability depends on the context in which it appears and whether it is confirmed by other technical indicators or price action. While it can strongly indicate a trend change, traders should not rely solely on the inverted hammer pattern.

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However, when an inverted hammer appears, it signals that buyers are starting to test the waters, pushing prices higher before sellers can push them back down. By looking at the history of the chart, you can identify how price action played out around prior inverted hammer candles (or patterns that included them). Moreover, you can compare historical structures in price and your other tools to current price action. HowToTrade.com takes no responsibility for loss incurred as a result of the content provided inside our Trading Academy. By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets.