Inverted Hammer Candlestick Pattern: What Is It, and How to Trade Using This Pattern?
It is possible for the trend to reverse spontaneously, going from bullish to bearish. However, if the price movement is turned upside down due to something unanticipated, an Inverted Hammer Candle is typically a candlestick pattern that shows what happened.
Here, we will discuss what the Inverted Hammer Candlestick pattern is, and how to use it to trade.
What is the Inverted Hammer Candlestick Pattern?
Inverted Hammer candlesticks occur primarily at the bottom of downtrends and can be an indication of a potential bullish trend reversal.
Inverted Hammers form when prices open at a certain level and then rise substantially. After reaching a high, the price plunges sharply to close near its opening.
It doesn't matter what color the candle is - it can be red or green.
The inverted hammer candlestick's name comes from its resemblance to an inverted hammer in the real world, with a very short lower shadow and a long upper shadow that is twice the size of its real body.
|The number of candle lines||1|
|Trend Prior to Pattern||Downtrend|
|Opposite Pattern||Shooting Star|
How to Spot an Inverted Hammer Candlestick Pattern?
Two candlesticks make up the inverted hammer pattern:
- The first creates a long body that represents indecision regarding whether to buy or sell. It implies that investors are uncertain about market direction.
- While a small body forms below the opening price in the second candlestick. Without a long wick or upper shadow, it indicates the stock price fell sharply in the early trading session but recovered later.
Besides this, it is easy to spot an inverted hammer pattern as
- It appears at the bottom of a downtrend
- Strong signals appear when the candle appears near support levels.
Green vs. Red Inverted Hammer
|Green Inverted Hammer||Inverted hammers that occur during a downtrend are called green or blooming inverted hammers due to their long upper shadows. Green inverted hammers mean prices made an inverted low before closing higher than the previous session's close, so they are bullish.|
|Red Inverted Hammer||Due to its small body, which resembles a Doji, it is called a red inverted hammer if it occurs during an uptrend. Red inverted hammers indicate a drop in prices the previous day, so it's bearish.|
How to Trade With the Inverted Hammer?
The traders should be aware that no pattern can be utterly informative when used or analyzed alone. It is not sufficient to identify the inverted hammer candle to trade successfully. In addition to keeping an eye out for the inverted hammer candlestick pattern, traders must also keep an eye out for other signals that could lead to a reversal.
It is possible to trade spread bets or CFDs if you are sure a change is going to occur. Both of these are offshoots products that offer investors the chance to trade on rising and falling prices.
One can choose between trading, going along, or buying. If the signal is not promising enough or the downward trend seems likely to continue, one can sell or opt for a short trade.
Candlesticks with an inverted hammer pattern indicate that selling pressure is fading and buying pressure is picking up. Even though the inverted hammer pattern may be a good indicator of consumer confidence in some instances, it is crucial to take into account other and follow certain basic principles when investing to avoid unfavorable outcomes.