Inverted hammer candlesticks are found at the base of downtrends. They resemble an upside-down hammer and feature a longer upper wick, a small to medium-sized 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 Is an Inverted Hammer Candlestick?
Inverted hammer candlesticks are bullish candlestick patterns that form at the bottom of a downtrend, which signals a potential reversal. The inverse 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 twice the length of the short real body.
Although sometimes, it is not exact. Watch our video and read our post on hammer candlesticks. To better understand what they look like, although they may appear the same, it is essential to know how they differ.
This is an example of an inverted hammer candlestick. They look like upside-down hammers. Traders enter a long position when the bullish candlestick breaks above the inverse hammer. Stop losses would be placed when a bearish candlestick closes below the inverted hammer.
They are the most effective at the bottom of a downtrend or a previous support level. The long upper wick signals that the bears are trying to take control of the bulls and push the price down. This reversal pattern is so effective that the bulls came in and held the price at support.
Inverted Hammer Candlestick Basics
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, such as the basics of technical analysis, is important, so use this knowledge in conjunction with these candlesticks.
An inverted hammer candlestick is typically found at the top of an uptrend or near a resistance level. This typically indicates that the trend is about to reverse, creating a new downtrend, a temporary reversal, or a minor pullback, which is ideal for short-term trades and options trading.
By now, we know that the inverse 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. The price closed far below the day’s high.
Inverted Hammer Candlestick Trading Strategy
- Traders can enter at the break of the low and use a candlestick close above the 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.
Inverted Hammer Candlestick Example
This is an inverse hammer candlestick example on a daily chart of $HON. This pattern is set up at the base of a falling wedge pattern. It completed a morning star pattern to confirm the reversal and continued into a rising wedge pattern.
You’ll notice that the red candlestick before the inverted hammer resembles an inverse hammer; however, the large red volume bar indicates selling pressure. Below the green inverse hammer was a nice volume bar, signaling that the bulls were coming in after the strong push by the bears.
$SMTC Chart
This is an example of an inverted hammer on a daily chart of $SMTC. The pattern took place below the moving average lines near support. Once the price moved into the moving average lines, it created a bull flag breakout. The bigger pattern overall was a cup and handle.
Preceding the green inverted hammer, there was a red one that was bearish. However, there wasn’t a lot of selling volume. After the bullish inverse hammer formed, a regular hammer appeared. The candles together form a rounded bottom pattern that is bullish. It indicates that the bulls are maintaining their support.
$ADBE Inverted Hammer Uptrend Example
The picture above is a daily chart of $ADBE. You’ll notice that the yellow shaded area resembles an inverted hammer, but it’s found near resistance, not support. This is called a shooting star pattern, which is a bearish reversal pattern. Typically, stars are either red, black, or orange on a chart; however, this was a bullish one, but still signaled the same warning.
This star pattern formed at the angular resistance of a falling wedge pattern. It signaled that the bears wouldn’t let the bulls break through angular resistance, and the price rejected it. In this bearish scenario, traders would look to enter into a short position or bearish options strategy and go short when the price falls below the low of the candle. This trade would have been difficult to execute because there was a sudden drop.
Final Thoughts on Inverted Hammer Candlesticks
Having an inverse hammer candlestick form is not enough to be a reversal by itself. It is best to have bullish confirmation for the reversal to take effect.
Confirmation is given by either a gap-up or a big bullish candle. For example, in the chart above, notice the inverse hammer and the big green candlestick. This confirmed the bullish reversal and continued for approximately ten days, which could have made for a potentially profitable swing trade. Please ensure that you use proper risk management techniques when trading an inverted hammer candlestick.
Frequently Asked Questions
An inverted hammer is a bullish reversal candlestick pattern found at the base of a downtrend. It signals that the bearish trend is about to reverse.
The inverted hammer, also known as an inverse hammer, signifies that the bulls are taking control from the bears. They are found at support levels, signifying a bullish reversal.
Traders enter into a long position when the price breaks above the inverted hammer. They place their stop loss below the inverse hammer.
A green inverted hammer indicates that buyers are purchasing the stock at lower prices and attempting to prevent further decline in the stock. It's a bullish reversal signal.
The psychology behind the inverted hammer signals a probable bullish reversal after a downtrend. The bulls are purchasing the stock at support levels.
