The inverted hammer candlestick pattern signals a potential bullish reversal after a downtrend. It forms when buyers push prices higher during the session but fail to sustain gains, resulting in a long upper wick. An inverted hammer candle is a Japanese candlestick charting pattern used by technical traders to signal a market reversal from a downtrend to an uptrend. It is a bullish reversal pattern that signals a weakening downtrend, and leads to a possible change in the price’s trending direction from down to up. An inverted hammer is a candlestick pattern that appears at the end of a downtrend, typically signalling a potential bullish reversal. It has a distinct shape—a small body at the lower end of the candle and a long upper wick that is at least twice the size of the body.
If followed by a strong bullish candle, it confirms a potential trend reversal and upward momentum. A hammer pattern is most effective when used with other technical indicators like volume, support levels, or moving averages. The inverted hammer, a variation, appears similarly but has a long upper wick instead. Both patterns help traders identify entry points for potential long positions.
Importance of Hammer Pattern
The Inverted Hammer signals a potential shift in trend direction, which could be highly profitable if identified correctly. The pattern can be used on various timeframes, and is applicable in different market conditions. The Inverted Hammer provides clear signals for entering and exiting trades, which makes it easier to implement a disciplined trading strategy. The Inverted Hammer candlestick pattern indicates a possible reversal of a current trend.
By mastering these specific reversal patterns, you develop skills that transfer to all aspects of technical trading, creating a foundation for consistent long-term performance. Pattern trading seems simple on the difference between hammer and inverted hammer surface – spot the formation, place the trade, collect profits. Many traders fall into predictable traps when trading Inverted Hammer and Shooting Star patterns, often because they overlook key principles covered in our previous sections.
How reliable is an inverted hammer candlestick pattern?
There is no clear record of who exactly identified the inverted hammer candlestick pattern. However, it is widely considered that the founder of the Japanese candlestick charting system is Munehisa Homma, a Japanese rice trader. While there is no official documentation on the frequency at which an inverted hammer appears, many traders have noted that the inverted hammer candlestick tends to occur more at lower timeframes. 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. There there are more than 15 Japanese candlestick patterns that are commonly followed by traders.
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However, the context of where they appear within the trend is what makes them different. Adding support levels as a confluence lends credibility to how strong the bullish reversal signal is from an inverted hammer, and can better prepare you for a swing long position. Whilst the inverted hammer has its suite of benefits, there are also downsides to using this candlestick pattern. Traditional chart patterns like a double bottom tend to experience bullish divergence with an oscillator like the RSI. Therefore, if you spot an inverted hammer with bullish RSI divergence, it might also suggest a double bottom pattern is developing.
Confirmation (orange) occurred on the next candle, which gapped higher before being bid up to a close far above the hammer’s closing price. Traders generally enter the market to purchase during the confirmation candle. If the price is going aggressively upward during the confirmation candle, a stop loss is put below the hammer’s low, or perhaps just below the hammer’s true body. In an uptrend, an inverted hammer isn’t generally considered significant because it’s primarily a reversal signal in a downtrend. A trader could implement a more conservative approach and wait for at least a few candles to form in the uptrend direction. However, as the pattern was formed at the 5-minute chart, a trader could enter the market too late or with a poor risk-reward ratio.
Milan Cutkovic has over eight years of experience in trading and market analysis across forex, indices, commodities, and stocks. He was one of the first traders accepted into the Axi Select program which identifies highly talented traders and assists them with professional development. Traders wait for confirmation (the next candle closing above the inverted hammer), then enter a long position with a stop-loss below the inverted hammer’s low. Others will seek additional confirmation; for example, did the inverted hammer appear near a key support level?
It has a longer upper shadow (wick) at least twice the body’s length, with little or no shadow. Visually, it resembles an upside-down hammer, usually indicating that buyers briefly drove prices higher but sellers pushed them back down toward the open. Inverted hammers are used by traders as a part of their candlestick analysis, which is basically a technical analysis of the price action. Hammer indicates that the price might start going up, making it a powerful bullish signal.
Step 4: Look for Confirmation Signals
There are several criteria to detect the inverted hammer and it is not only about the candle itself. There should be a prior downtrend and an inverted hammer candle must appear after at least two consecutive loser closes, which confirms a bearish swing. Another important aspect is the small body, meaning the open and close are close together, located at the lower end of the candle. During an inverted hammer session, initial buyer strength drives the price up, creating the long wick. The pattern is often followed by bullish candles, meaning bulls are gaining momentum, overpowering bears. However, the inverted hammer is not a guaranteed signal and requires confirmation.
Trading the Inverted Hammer Candlestick Pattern: Real-Market Examples
- A red inverted hammer does not invalidate the signal but shows that sellers managed to regain some control towards the end of the trading session.
- The Hammer pattern consists of a single candlestick with distinct characteristics
- Also, the Hull MA is prioritizing short-term trends, which are actually showing to be flattening out, potentially indicating a reversal.
- Meanwhile, the inverted hammer shows that the momentum was there initially, but prices got pushed lower again, with the session ending slightly above the low.
For example, it would be a positive sign if the RSI indicator is in oversold territory, but leaves it just as the inverted hammer is formed. There is no rule for where to place the take-profit order when trading an inverted hammer. It is important to wait for a confirmation of the signal in either case, but particularly so for the inverted hammer. The hammer is generally considered to be a stronger signal, as bulls were able to push price higher and the session ended near the high. Meanwhile, the inverted hammer shows that the momentum was there initially, but prices got pushed lower again, with the session ending slightly above the low. The inverted hammer can be traded on its own, but most traders combine it with other tools and indicators to improve its reliability.
The Inverted Hammer pattern typically appears after a downtrend or a prolonged period of bearish movement, signaling that the market could be poised for a reversal. Moreover, the formation of this pattern in a downtrend could signal that selling pressure remains dominant, but the long upper shadow suggests a potential exhaustion of the bears’ strength. The “green” color refers to a bullish candlestick, meaning the price closed higher than it opened, signaling that buyers were able to push the price higher, despite initial selling pressure.
- Traders should place stop-loss orders slightly below the pattern’s low to limit potential losses.
- A hammer pattern is most effective when used with other technical indicators like volume, support levels, or moving averages.
- The following price action, marked by a blue arrow, confirms the index moved higher.
- Eventually, this could snowball into a rally, and the bears will have to retreat.
Quick Reminder About Trends
Although this pattern may not be the strongest, both indicators show that it might be worth a try as the momentum may be slowing down, and a reversal could be imminent. In general successful trading with candle charts requires an understanding not only of the candle patterns but also of where the candle pattern appears and in the context of risk/reward analysis. The Inverted Hammer pattern tries to signify a tussle between buyers and sellers, capturing a moment when buyers rallied to overcome initial selling pressure. This battle is depicted by the long upper shadow and the small body of the candle. Antonio Di Giacomo studied at the Bessières School of Accounting in Paris, France, as well as at the Instituto Tecnológico Autónomo de México (ITAM). He has experience in technical analysis of financial markets, focusing on price action and fundamental analysis.