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 the candle to confirm the reversal.
What Are Inverted Hammer 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 identical, but are found in different areas.
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 is not exact. Watch our video and read our post on hammer candlesticks. To get a better understanding to see what they look like, although they look the same, it is important to know how they are different from one another.
Doji candlesticks are indecision candlesticks. Since the inverted hammer forms at the bottom of a downtrend, it represents a reversal. A trend reversal may not happen as soon as the candlestick forms. Knowing other indicators, like the basics of technical analysis, is important, so use this with these candlesticks.
An inverted hammer candlestick is usually found at the top of up trends or near resistance levels. This usually means the trend is about to reverse, creating a new downtrend, temporary reversal, or a minor pullback. Which can be ideal for short trades and options trading.
By now, we know that the inverted hammer candle forms at the bottom of a downtrend to signal a reversal.
After the stock has declined, the long upper wick shows buying pressure. The Bulls are coming back in. However, they could not sustain themselves for the day. Price closed far below the high of the day.
How to Trade Inverted Hammer Candlesticks
- Traders can enter at the break of the low and use a candlestick close above high as a stop.
- Some may take a long position when the price breaks above the candlestick’s high.
- Then use a candlestick close below the low as a stop level.
Having an inverted hammer candlesticks form is not enough to be a reversal by itself. It is best if have bullish confirmation for the reversal to be in effect.
Confirmation is given by either a gap-up or a big bullish candle. For example, in the chart above, notice the inverted hammer and the big green candlestick.
This confirmed the bullish reversal and continued for about 10days, which could have made for a good swing trade.