Dear Readers. We better understand the importance of technical and fundamental analysis when trading in financial markets. Financial trading should be based on specific analysis methods rather than being impulsive and emotional. Candlestick analysis can simplify and facilitate our trading activities. In today's article, I will discuss the "Inverted Hammer" candlestick pattern.
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| Inverted Hammer |
- Topic: Inverted Hammer
- Type: bullish
- Trend direction: reversal
- Opposite pattern: Hanging Man
What is the Inverted Hammer Candlestick Pattern?
The Inverted Hammer is a bullish candlestick pattern that consists of a single candlestick. It occurs in a downtrend and signals a possible reversal to an uptrend. Therefore, it is known as a bullish reversal candlestick formation.
This pattern is often used by traders in forex, crypto, and
stock markets to identify anticipated turning points in price action. The
Inverted Hammer appears after a prolonged bearish movement, indicating that
buyers are starting to gain strength even though sellers were previously in
control.
Where does the name come from?
The name of the Inverted Hammer pattern is determined
based on its appearance, especially recognized for its resemblance to a hammer,
albeit in reverse, pointing upwards. This candlestick pattern, with a long
upper shadow, appears like a hammer turned upside down. The long upper shadow
represents the hammer's handle, while the short body represents the hammer's
head.
This unique structure visually communicates a market contest between buyers and sellers. During the candle's formation, prices initially rise sharply (forming the long upper shadow), but then sellers push the price back down, leaving a small real body near the bottom of the range. The central insight is that, despite selling force, buyers were able to test higher price levels, signaling that bearish drive might be weakening.
In simple terms, the Inverted Hammer's shape tells a story of rejection of lower prices, suggesting that bulls could soon take control. This is why it's one of the most powerful candlestick reversal signals for traders analyzing charts in forex, and stock markets.
How the Inverted Hammer Forms
The Inverted Hammer candlestick pattern can indicate a decrease in selling activity and the entry of buyers into the market. At a point where the price is in a downtrend, after sellers push the price downward, buyers step in and push the price back up. This process culminates with a close near the upper part of the candlestick's body. Inverted Hammer pattern generally occurs at the end of a bearish trend and indicates a possible trend reversal. Therefore, the Inverted Hammer pattern is interpreted as a reversal signal in a downtrend.
When we look at the structure of the Inverted Hammer candlestick pattern, we see that it consists of a single candlestick. The pattern has a long upper shadow (wick) and a short body. The candle body can be of any color.
How to Trade Using the Inverted Hammer Pattern
The presence of the Inverted Hammer pattern gives the
impression that the price will rise while in a downtrend. Particularly, the
location where this pattern forms is highly important because when it forms at
support levels, the upward movement of prices is considered more reliable.
Traders often look for the Inverted Hammer pattern on lower timeframes such as the 1-hour or 4-hour chart to identify likely short-term reversals. However, when it appears on higher timeframes like the daily or weekly chart, it may indicate a stronger and more sustained bullish reversal. Combining this candlestick with other technical tools, such as trendlines, moving averages, or volume analysis, can greatly enhance the precision of trading decisions. By confirming the Inverted Hammer with signals from broader market structure or price action behavior, traders can filter out weak setups and avoid entering during false reversals.
Additionally, like every candlestick pattern, the Inverted Hammer pattern is a formation that needs confirmation. Confirmation for the Inverted Hammer pattern usually involves being validated by a following bullish candle, which can enhance the pattern's reliability. When all these conditions are met, we can consider opening a long position with confidence.
- Long (Buy): For entry (Buy), one may expect the following candlestick to also move upward and close above its opening price.
- Stop Loss: The stop-loss order can be placed below the lowest point of the Inverted Hammer's body or below support levels.
- Take Profit: When determining the take-profit point, risk-reward ratios, resistance levels, or previous highs can be considered.
The image below shows a trading example based on the
Inverted Hammer pattern on the British Pound/US Dollar currency pair chart. The
pattern clearly shows the price reversing from a downtrend to an uptrend in the
example trade:
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| Inverted Hammer on GBP/USD Chart |
Always Remember: Using Japanese candlestick patterns alone does not guarantee their success, and there are always risks in the Forex market. The Inverted Hammer candlestick pattern can sometimes give false signals. Therefore, it is necessary to reduce risks by conducting fundamental and technical analysis before trading.