How to read the candlestick pattern "Inverted Hammer"?

Candlestick charts are a true treasure for a trader. Among the many candlestick patterns, the inverted hammer holds a special place. Let's take a closer look at it.

The inverted hammer signals a possible trend reversal. It usually appears at the end of a price decline. It has a specific shape. It is easy to identify.

It's almost like a regular hammer, only upside down. Sometimes it's confused with a shooting star. They look similar - a small body, a long upper shadow. The difference is critical. A shooting star heralds a fall. It's easy to get confused, but it's worth being attentive.

What does an "Inverted Hammer" candle look like?

The body is short. It lies like a rectangle on its side. The upper wick is long - at least twice the length of the body. The lower wick is tiny or completely absent. The name speaks for itself - a hammer, only upside down.

How is an inverted hammer formed?

It occurs when the opening, minimum, and closing prices are almost the same. It is born after a price drop. It seems that the bulls are gaining courage. The upper shadow shows their attempts to raise the price. The short lower shadow indicates the bears' resistance.

The color of the body is not that important. It can be red or green. In any case, it hints at the end of the fall.

Trading with the Inverted Hammer

No model works in a vacuum. Just seeing an inverted hammer is not enough. You shouldn't rush to buy right away.

Context is needed. Where did the pattern appear? What is the price action around it? The hammer is a warning. Like an alarm clock in the morning. Woke up, but haven't gotten up yet.

The hammer works best with other patterns. Here are a couple of examples.

Double bottom

Reliable reversal model. It resembles the letter "W" - two minima at the same level with a rise between them.

If an inverted hammer forms at the second minimum - it's a good sign. We wait for the close above the hammer's maximum and open a long position.

V-shaped bottom

Another interesting formation. A sharp decline is followed by an equally sharp rise.

The hammer is often formed just before a reversal. A close above its high can be a buy signal. Important: always consider support levels.

By the way, this pattern can also help during corrections in an uptrend. It's a kind of entry ticket after a pullback.

Trading Rules

To use this model profitably, please note:

Turning points. Look for them on the chart - support levels, resistance levels, trend lines.

Entering a trade. Better after the confirmation candle. Safer, although more expensive.

Stop-loss. Set it 2-3 points below the hammer's minimum. No trade without a stop.

Important nuances:

• A long upper shadow is a good sign.
• The color of the candle is not decisive, although green looks more vibrant than red.
• A large confirmation candle body is a sign of strength.

Pros and Cons of the "Inverted Hammer" Candle

There are no perfect patterns. The hammer has its strengths:

• Recognized instantly. The shape catches the eye.
• A decent probability of profit with the correct reading.

There are also disadvantages. The main one is that even a correctly recognized pattern may not work.

Sometimes it's just a short-term spike, not the beginning of a trend. Often confirmation is needed, and by that time part of the move has already been missed.

Beginners often mistake it for a shooting star. It's disappointing to miss a good signal due to such an error.

Differences Between the Inverted Hammer and the Shooting Star

They look like twins: a short body, a long upper shadow, and a short lower one. Both talk about a reversal. But where exactly they appear is what matters.

The hammer comes after the fall. The star shines at the top. The hammer calls up. The star beckons down. One form - opposite meaning.

Conclusion

Candles are an integral part of technical analysis. Knowing patterns is important, but a single candle rarely makes all the decisions. A complete picture is needed.

The market operates under complex laws. The appearance of an inverted hammer does not guarantee a reversal, but it hints at a change in sentiment. Be prepared to look for additional confirmations.

The inverted hammer can be an excellent tool in a trader's arsenal. Especially when used wisely and in combination with other signals.