How to read the inverted hammer candlestick pattern?

Japanese candlestick charts are the bread and butter for traders. The inverted hammer shines among so many patterns as a signal to detect market reversals. 🔍

It is basically a bullish signal that arises when a downtrend may be running out of steam. Its peculiar shape makes it quite recognizable in the sea of candles. 🚀

Anatomy of the Inverted Hammer

Has:

• Short little body
• Long upper mech (at least double the body)
• Almost no lower wick

It looks like an upside-down hammer, hence its name. ⚒️

How it is formed

It appears when the opening, minimum, and closing prices are close to each other. It is usually seen after the market has fallen quite a bit. It's as if buyers are trying to take control.

That long wick above shows the buyers' push. It doesn't matter so much if the body is green or red. What’s interesting is that it appears after a drop. Something is changing. 📈

Strategies with this pattern

Beware, no pattern works all the time. Seeing an inverted hammer is just the beginning, whether you are trading forex, stocks, or crypto.

To really be effective, combine it with other signals: 🔥

Double bottom

It's that "W" shaped pattern. If an inverted hammer appears in the second valley, things get interesting. Many enter when the price surpasses the hammer's high.

V Fund

It's like a quick recovery. The inverted hammer sometimes appears just before the bounce. The signal seems stronger when the market closes above the candle's high.

Both work better in support areas. It seems obvious. 🌕

Basic rules

To take advantage of:

1. Look for strong areas: Supports, resistances, important trend lines.

2. Don't rush in: Wait for a confirming candle, even if it takes you a bit longer.

3. Protect yourself: Place the stop 2-3 units below the hammer's minimum. Do not negotiate it.

4. Details that matter:

• Longer mecha on top, better signal
• A green candle gives more confidence, although it is not decisive.
• If the confirming candle is strong, even better

The good and the bad

The good:

• It is easy to see
• It can provide good profits

The bad thing:

• Sometimes it fails miserably
• It does not always start long trends.
• Needs confirmation, which cuts benefits
• It is confused with the shooting star

Inverted Hammer or Shooting Star?

They are twins in form, but very different in meaning:

• The hammer appears after drops, suggesting bounces
• The star appears after rises, warning of possible falls

To close

The inverted hammer is like a clue on the road, but not the complete map. The true trend change needs more signals to support it.

When you see it, something could be changing in the market sentiment. It's not a guarantee, but combined with other techniques, it can become a valuable part of your trading arsenal. 💎