The inverted hammer candlestick pattern is a great single candle pattern that is easily identifiable and can be evidence that a bearish trend may be reversing, meaning the price may soon head in the opposite direction. Candlestick patterns are a great, reliable form of technical analysis. When candlestick patterns are validated, they provide traders with a means to detect possible future price movement.
A candle pattern is a useful visual tool that can illustrate price action and market participation. The bars themselves tell us the opening price, and closing price, as well as the high and low of a financial instrument.
When a candlestick or series of candlesticks form a pattern, traders can combine the information with other technical indicators or trading strategies and develop possible trade entries and exits based on their information.
There are many candlestick patterns out there that support trend continuations and reversals. The key is to recognize the pattern, seek confirmation, and then use them to your trading advantage.
What Does an Inverted Hammer Candlestick Pattern Look Like?
The inverted hammer is a single candlestick pattern that looks like a hammer but inverted, or upside down.
The candle can also be referred to as an inverse hammer. The candle pattern is only one candle, rather than a group or series of bars, but has very significant attributes.
The inverted candlestick pattern contains these components:
1) A Long Upper Shadow
The inverted hammer has a long upper wick or shadow. This long shadow must be twice as long as the candle’s real body. Anything shorter may invalidate the candle.
2) A Small Body
The body of the inverted hammer must be modest in size. This means the opening price, low price, and closing value of the candle are all relatively close in value.
The candle can be either a bullish candlestick or a bearish candlestick. If the candle body is green, the price closed higher than the opening price. If the candle body is red, the price closed lower than the opening value.
It is important to note that the inverted hammer should have a small body, otherwise it can be compared to a Doji hinting at market indecision.
3) An Absent or Very Small Lower Shadow
The inverted hammer pattern should have an absent or very small lower wick containing the low price.
This lower price should be near or at the closing price if the candle body is red, or bearish. If the candlestick is bullish, the lower wick should be closer to or equal to the opening price. No wick is best.
What Does an Inverted Hammer Candlestick Pattern Mean?
The inverted hammer candle is a bullish reversal candlestick pattern. The inverted hammer occurs specifically after a downtrend, signaling a possible turn to the upside.
The sentiment being conveyed in the inverted hammer candlestick is that the seller’s attempt to push the market lower has been met with significant buying pressure.
Specifically, a green inverted hammer, or bullish candle, may carry more weight since it illustrates that there is buying participation after the candle opens and then selling pressure, but not enough to bring the final price below the opening value. The candle has volume because both the bulls and bears show up for battle, but the bulls stampede the bears!
The small candle body of the inverted hammer candlestick pattern tells us that there is now possible price support, or a close agreement between the bears and bulls since the open price, closing price and low are all near the same price values.
The inverted hammer candle pattern is one of many potential bullish reversal patterns that exist. Other trend reversal patterns such as morning star candlestick patterns, bullish engulfing candlestick patterns, and the three white soldiers, for example, all demonstrate a possible price incline as well.
How to Trade the Inverted Hammer Candlestick Pattern
Candlestick formations are known as lagging indicators. This means that a candle or series of candlesticks must complete or close to accurately decipher their information. Although lagging, they prove to be useful technical analysis tools that day traders, swing traders, and long-term investors utilize.
When a trader sees an inverted hammer pattern form after a bearish trend, the one candle possible bullish reversal pattern alone does not offer enough confluence to open a trade position. Traders should also seek confirmation from the next candle, proceeding candles, other indicators, and their trading strategy when trading the inverted hammer candlestick pattern.
For instance, when an inverted hammer forms near a support level or a demand zone, it has higher reliability. A candle hitting support, or a demand zone has a higher probability of rejection and price reversal.
When an inverted hammer candlestick pattern forms, hinting at a possible reversal, the proceeding candles can validate the move. The next candle after the inverted hammer ideally should be a green or bullish confirmation candle. It should gap up and open above the small real body of the inverted hammer.
Also, using other forms of technical indicators such as the MACD which is a trend following momentum indicator, or the RSI which detects overbought and oversold market conditions, can invalidate the possible uptrend or substantiate the bullish reversal and hint higher prices are to follow.
If you are looking to take a trade, the potential bullish candlestick pattern can signal a long trade or option call set up, taking advantage of the forthcoming bullish trend to the upside. If you are currently in a short position or option put trade expecting the price to decrease further, inverted hammers may warn you to vacate the trade to avoid a losing position due to price action potentially moving upwards.
The inverted hammer candlestick is a one candle bullish reversal indication on an asset’s chart. It appears after a downtrend and can be either a green or red candle. It is important to use other signals to validate the candle and the actual direction the market moves.
Trading involves significant risk. Practice identifying chart patterns and validating their information with other technical indicators and strategies to gauge their effectiveness when applied to your personal trading style.
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