Knowing how to spot possible reversals when trading can help you maximise your opportunities. The inverted hammer candlestick pattern is one such a signal that can help you identify new trends.

What is the inverted hammer candlestick pattern?

The inverted hammer candle has a small real body, an extended upper wick and little or no lower wick. It appears at the bottom of a downtrend and signals a potential bullish reversal. The extended upper wick suggests that the bulls are looking to drive price upwards.

The inverted hammer pattern gets its name from its shape – it looks like an upside-down hammer. To identify an inverted hammer candle, look out for a long upper wick, a short lower wick and a small body.

 

How is an inverted hammer candlestick formed?

 

The Inverted Hammer formation is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow which should be at least twice the length of the real body.
An inverted hammer candlestick is formed when bullish traders start to gain confidence. The top part of the wick is formed when bulls push the price up as far as they can, while the lower part of the wick is caused by bears (or short-sellers) trying to resist the higher price. However, the bullish trend is too strong, and the market settles at a higher price.

When the low and the open are the same, a bullish, green Inverted Hammer candlestick is formed and it is considered a stronger bullish sign than when the low and close are the same (a red Inverted Hammer).

What does an inverted hammer tell traders?

The Inverted Hammer is a signal of bullish reversal after a downtrend.

It tells the traders that the bulls are now willing to buy the stock at the fallen prices. After the downtrend, there is pressure from the buyers in the market to raise the stock prices.

It tells the sellers in the market to exit as they may be a bullish reversal and tells the buyers to enter their buying position as the bullish trend is about to start.

It’s important to remember that the inverted hammer candlestick shouldn’t be viewed in isolation – always confirm any possible signals with additional formations or technical indicators.

Key Takeaways:

  • Inverted Hammer reversal candlestick pattern which appears at the bottom of a downtrend and signals a potential bullish reversal.
  • An inverted hammer tells traders that buyers are gaining confidence in the market
  • This candlestick pattern has a long shadow at the top and there is no shadow at the bottom.
  • The volume should be high on the day of the formation of Inverted Hammer candlestick pattern
  • Confirm this signal with other technical indicators as it may sometimes fall signals.

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