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. 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.
How is the Inverted Hammer candlestick pattern formed?
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 downtrend 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 can we use the Inverted Hammer pattern in trading?
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.
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.