What Is an Inverted Hammer Candlestick & How to Trade These Candlesticks?
Inverted hammer candlesticks are found at the base of downtrends. They look like an upside down hammer and have a longer upper wick, small to medium size body, and no lower shadow. They signal a reversal to the upside. These candles are either green or white on stock charts. Look for a break above candle to confirm reversal. Watch our video on how to identify and trade inverted hammer candlesticks.
What Is An Inverted Hammer Candlestick Pattern & How to Identify These Candlesticks?
Inverted hammer candlesticks are bullish candlesticks patterns that form at the bottom of a downtrend which signals a potential reversal. The inverted hammer candlestick and shooting star patterns look exactly alike but are found in different areas. Watch our video above to learn how to identify inverted hammers on stock charts. Nevertheless they mean something different because of price action. The 17th entry Japanese began using Japanese candlesticks patterns thanks to fellow rice trader Homma. When he saw the way emotions affected price he developed a way to track it.
To this day. we’re still using the methods he developed in our stock trading. We may not be trading rice but the sentiment is still the same. Greed and fear will always move markets.
Basics Of Inverted Hammer Candlesticks
Inverted hammer candlesticks have small real bodies with long upper wicks and almost nonexistent lower wicks. The long upper wick should be at least two times the length of the short real body.
Although, sometimes it isn’t exact. If you’ve watched our video or read our post on hammer candlesticks, you’ll see what they look alike. While they look the same, it’s important to know what they mean.
Doji candlesticks are indecision candlesticks. Because the inverted hammer forms at the bottom of a downtrend it represents a reversal. A trend reversal may not happen right when you see this candlestick.It’s important to know other indicators like the technical analysis basics so make sure to use this in conjunction with these candlesticks. Take our free online courses for more help.
A big part of trading is support and resistance. As we delve deeper into our candlesticks course with patterns, you’ll see that.
The real bodies and wicks of candlesticks help to form those levels. You can also pair them with the simple moving average formula and the VWAP trading strategy.
What are those moving averages telling you? Are they confirming the reversal of the inverted hammer candlesticks? It’s important to use these indicators with candlesticks.
You’re getting confirmation. And we like confirmation of potential moves and reversals.
What Does the Inverted Hammer Indicate & Is It Bullish?
An inverted hammer candlestick is usually found at the top of up trends or near resistance levels. This usually means that the trend is about to reverse and either create a new downtrend, temporary reversal, or a minor pullback.
By now we know that the inverted hammer candle forms at the bottom of a downtrend to signal a reversal. But what does the candle itself tell us?
After the stock has been in a decline the long upper wick shows buying pressure. The bulls are coming back in. However, they couldn’t sustain for the day. Price closed far below the high of day.
Having inverted hammer candlesticks form isn’t enough to be a reversal in an of itself. You need bullish confirmation in order for the reversal to be in effect.
Confirmation is given by either a gap up or a big bullish candle. If you look at the chart above, you’ll see the inverted hammer and the big green candlestick.
The bullish reversal was confirmed. It continued up about a week and half. Which could have made for a good swing trade.We teach how to trade inverted candlesticks on our live daily streams. Check out our trading service to learn more.
Inverted hammer candlesticks can look a lot like other dojis such as gravestone doji candlesticks, high wave candlesticks or even hanging man candlesticks. While it may not look like a dragonfly doji candlesticks or long legged doji candlesticks it’s important to know what they tell you.
Look at the pattern that they’re apart of. Getting weighed down in the exact shape of a candlestick or pattern can cause you to miss moves. Many of times, they can mean the same thing. Learn how to start investing in stocks.
Just know what they mean and how they’re being implemented in trading. Other traders are looking at the same things you are. They see the patterns and the candlesticks.
Don’t spend too much time trying to figure out the exact shape and meaning. This is where practicing can come in handy. So you’re not taking up too much time figuring out the meaning of the candlestick and pattern. Download our candlesticks charts free e-book.
How to Trade Inverted Hammer Candlesticks
- Knowing how to trade inverted hammer candlesticks is quite simple:
- Traders take a short at the break of the low and use a candlestick close above high as a stop.
- Some may take a long position when price breaks above the high of the candlestick.
- Then use a candlestick close below the low as a stop level.
Inverted hammer candlesticks can be found on pretty much any chart time frame. It’s important to know what they mean whether you’re using penny stock trading strategies or day trading options for income.
Open a Thinkorswim account or an Interactive Brokers account so you can practice trading in a simulated account. Making hundreds of paper trades before using real money is super important.
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This allows you to work out the kinks and fix your mistakes. While you may not be successful 100% of the time, you’re going to have a better handle on keeping your losses small and letting your runners go. Take our candlesticks patterns course.