The pattern offers a general idea about the strength of bullish or bearish tendencies. As we have seen, an actionable hammer pattern generally emerges in the context of a downtrend, or when the chart is showing a sequence of lower highs and lower lows. The appearance of the hammer suggests that more bullish investors are taking positions in the stock and that a reversal in the downward price movement may be imminent. Another strategy that can use the Inverted Hammer pattern is mean reversion.
Generally, the inverted hammer is red, but if formed in an uptrend, it looks like an inverted red hammer candlestick. The market opens at the bottom of the trading range on the day the inverted hammer candle appears. The second trading technique to combine with the inverted hammer pattern is Fibonacci retracement levels. Below, we used the same chart from the first example but this time, with Fibonacci levels drawn from the lowest to the highest level. The inverted hammer can also be used to identify retracements in the market. The EUR/USD chart below highlights the inverted hammer (in blue) which signals renewed bullish momentum.
How to Identify and Use the Inverted Hammer Candlestick Pattern in Forex Trading?
To explain this more clearly, we have taken only the three candles from the above chart and marked the inverted hammer trading strategy. If that is green, the stock should be bought when the price goes above the ‘high’ of the ‘inverted hammer’. After a big fall on the previous day, the stock opens below, rises high and then closes slightly above the opening price. On the chart, since the candle looks like a hammer turned upside down – it’s called a ‘inverted hammer’. Inverted Hammer is a single candle which appears when a stock is in a downtrend. It’s an important candle because it can potentially reverse the entire trend – from downtrend to uptrend.
- To enter a trade, we’ll require that we have an RSI reading of 30 or less.
- If you invest in stocks regularly, you must know how to trade using an inverted hammer.
- However, as there’s a high risk of entering a position at the end of a trend, it is also important to confirm the pattern with other technical indicators.
That said, the patterns themselves do not guarantee that the trend will reverse. Investors should always confirm reversal by the subsequent price action before initiating a trade. A bullish belt hold is a pattern of declining prices, followed by a trading period of significant gains.
Is inverted hammer bullish?
However, the bulls try to regain strength the next day, and the price increases as the bears are unable to exercise the required resistance. When this price maintains its strength even on the following day, it indicates the signal confirmation for the inverted hammer. The final aspect of the inverted hammer signal is the level of volume on the day when the inverted hammer signal occurs.
The body of an inverted hammer is narrow while its shadow is long, giving it an upside-down appearance. Like traditional hammers, inverted hammers indicate that there may be some bullish momentum starting to build up within the market. The main difference is the market precedence when these patterns occur. Hammer occurs during a downtrend or a retracement during a prevalent uptrend indicating a bullish reversal , whereas a hanging man occurs at the end of an uptrend indicating a bearish reversal.
Limitations of Inverted Hammer Candlestick Pattern:
However, when it appears at the top, an uptrend ends, and a downtrend begins. A Hammer candlestick is a strong signal, and when it appears, it is highly possible that the trend will reverse. Therefore, the hammer formation is a good reason to open long trades. A green inverted hammer is considered a more bullish indicator than its red counterpart, although both are considered bullish. While there are some ways to predict markets, technical analysis is not always a perfect indication of performance.
What does hammer candlestick pattern mean?
Under these circumstances, the signal you’re keeping an eye out for is a hammer-shaped candlestick with a lower shadow that is at least twice the size of the real body. The closing price may be slightly above or below the opening price, although the close should be near the open, meaning that the candlestick’s real body remains small. The Inverted Hammer candlestick pattern is very common on price charts. Here are two example trades on the Meta Platforms, Inc. stock chart.
For the best performance from this candle, trade it only in a downward retracement of the primary uptrend. Price breaks out upward from the candle pattern, and the existing current pulls price along to higher ground. You want to avoid depending on this candle acting as a reversal of the primary downtrend, because there the chances are that price will move up but not for long.
This article represents the opinion of the Companies operating under the FXOpen brand only. This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article. Now that you know what an inverted hammer is, let’s take an example to understand what creates an inverted hammer.
Key Factors to Consider Before Using the Inverted Hammer Pattern
However, with an inverted hammer actually materializing, the buying pressure overpowers the bears, and the price settles at a higher level. Conversely, a red (bearish) inverted hammer candlestick forms when the closing price is lower than the opening price and there is a long extended upper wick. A green (bullish) inverted hammer candlestick forms when the closing price is higher than the opening price and there is a long extended upper wick.
Now, before you trade any pattern or strategy, it’s important to validate the strategy. Most traders don’t do this, and end inverted hammer meaning up as losing traders because of it. One key concept used by many traders in the equities markets, is mean reversion.