Inverted hammer candlesticks are found at the base of downtrends. They look like an upside-down hammer and have a longer upper wick, 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.
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Inverted Hammer Candlestick Meaning
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 two times 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 look the same, it is important 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 placed when a bearish candlestick closes below the inverted hammer.
Inverted hammers are the most effective at the bottom of a downtrend or 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.
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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, like the basics of technical analysis, is important, so use this with these candlesticks.
An inverted hammer candlestick is usually found at the top of up trends or near resistance levels. This usually means the trend is about to reverse, creating a new downtrend, temporary reversal, or a minor pullback, ideal for short 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. Price closed far below the high of the day.
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.
Inverse 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 looked similar to an inverse hammer; however, the large red volume bar showed selling pressure. Below the green inverse hammer was a nice volume bar that signaled the bulls were coming in after the strong push by the bears.
Inverse Hammer - $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, there was a regular hammer. The candles together form a rounded bottom pattern that is bullish. It signals that the bulls are holding support.
$ADBE Uptrend Example
The picture above is a daily chart of $ADBE. You’ll notice that the yellow shaded area looks like an inverted hammer but its found near resistance and 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 angular resistance of a falling wedge pattern. It signaled that the bears weren’t going to let the bulls break angular resistance and price rejected it. In this bearish scenario traders would look to enter into a short position or bearish options strategy and go short when price falls below the low of the candle. This trade would have been hard to make because there was a quick drop down.
Final Thoughts
Having an inverse hammer candlesticks form is not enough to be a reversal by itself. It is best to have bullish confirmation for the reversal to 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 about ten days, which could have made for a good swing trade.
Frequently Asked Questions
An inverted hammer is a bullish reversal candlestick found at the base of downtrends. It signals that the bearish trend is about to reverse.
The inverted hammer, aka inverse hammer, signifies that the bulls are taking control of 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 means that the buyers are purchasing the stock at lower prices and trying 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.
