How to interpret the inverted hammer candlestick pattern?

Japanese candlestick charts are pure gold for those of us trading in the market. And although there are too many pattern variations that can be dizzying, understanding them is crucial if you want to survive in this wild world. I'll tell you how I read that famous inverted hammer and how you can leverage it for your own strategies.

The inverted hammer is basically a signal that the bearish trend may be coming to an end. As an experienced trader, I can tell you that this pattern appears when the bears have already punished the price enough and the bulls start to awaken. Its characteristic shape makes it unmistakable on any chart.

This pattern is a variation of the normal hammer. Although it is usually easy to identify, I have seen many beginners confuse it with the shooting star. They look so similar that it’s scary: both have a small body and a long upper shadow. The difference lies in what they signify: while one marks the end of the decline, the other anticipates a drop. That is why it is crucial to know their peculiarities.

Anatomy of an Inverted Hammer

The inverted hammer has three elements: a small body and two shadows ( or wicks ). The body is short like a lying rectangle. The upper wick must be at least twice as long as the body, while the lower one is tiny or nonexistent. It literally looks like a hammer turned upside down, hence its name.

How is this pattern formed

This pattern forms when the opening, low, and closing prices are almost identical. It appears at the end of a downtrend, signaling that bulls may want to take control after bears have crushed the price. The long upper wick shows that buyers tried to push the price up but were unable to hold it above.

The inverted hammer can have a red body (bearish) or green (bullish), but that's the least important thing. The important thing is that it appears after a bearish trend, anticipating a possible upward reversal.

How to trade with the inverted hammer

I'm telling you directly: no pattern alone is going to make you rich. Seeing an inverted hammer and rushing to buy is like jumping into a pool without checking if it has water.

There are other crucial factors such as price action or the location of the candle that you should consider. If you believe you have correctly identified the pattern, look for other signals that confirm the possible reversal. It is not a definitive signal to buy, just a warning that something could change.

The inverted hammer works especially well when combined with other technical patterns:

Double bottom

This is one of the most powerful reversal patterns there is. It forms a "W" with two almost equal low points and a peak in the middle.

If you see an inverted hammer on the second floor of this pattern, it's like a double confirmation. I would wait for the price to close above the maximum of the inverted hammer before going long.

V Fund

This V-shaped pattern appears when the price quickly shifts from aggressive selling to aggressive buying.

The inverted hammer often forms just before the ideal moment to enter. When I see the market closing above the high of the inverted hammer, that's when I hit the buy button. I always trade these patterns near support levels, where the price tends to bounce.

Rules for Trading

If you want to incorporate this pattern into your strategy, keep these considerations in mind:

Identify potential turning points on the chart. They can be support, resistance, trend lines... That's where the magic usually happens.

To enter, wait for the confirmation candle. It reduces risk but also potential profit, because you will enter at a higher price.

Stop loss. I usually set it 2 or 3 pips below the minimum of the inverted hammer. Follow this stop strictly because trading with candle patterns is never 100% reliable.

Important things to consider:

• The longer the upper wick, the more likely the reversal.
• The color of the candle matters less, although a green one gives more confidence than a red one.
• Look at the confirmation candle: the bigger it is, the stronger the reversal signal.

Pros and cons of the inverted hammer

There is no perfect pattern, and this is no exception. Its advantages are:

• It's very easy to identify. You can't confuse it with other patterns.
• The probability of winning is relatively high.

But it also has its drawbacks. The main one: it can fail for no apparent reason, even when you have identified it correctly.

Sometimes it only indicates a temporary bounce, not a lasting trend change. And if you wait for additional confirmation, you might miss out on some of the profits.

Beginners often confuse this pattern with the shooting star, missing obvious opportunities.

Differences between inverted hammer and shooting star

The shape of both candles is identical: small body, long upper wick, and tiny lower wick. The only difference is where they appear.

The inverted hammer appears at the end of a bearish trend, while the shooting star forms at the top of an uptrend, anticipating a possible decline. Same shape, opposite signals.

Conclusion

Candlestick charts are a fundamental part of technical analysis. Your success will depend on how well you know these patterns and how you use them.

An isolated candle is never enough of a signal. You need a complete view of the market to correctly interpret what you are seeing.

The "trend reversal" does not mean that the price will definitely change direction. It only indicates a change in market sentiment. The inverted hammer can be a powerful tool if you know how to combine it with other signals and do not take it as an absolute truth.