What is the inverted hammer candlestick pattern?

Last Updated: 19 Jun 2024

An inverted hammer candlestick pattern is depicted as an inverse hammer with the body of the candlestick being small, and the upper wick of the candlestick being over twice as large as the body of the candlestick itself with little to no wick at the bottom.

An Inverted Hammer candlestick often occurs at the end of a downtrend which signifies a possible bullish turn in the market. The long upper wick suggests that buyers are now pushing the prices of the commodity back up and the market may see a bullish price reversal.

Although an inverted hammer candlestick pattern is a popular pattern used within technical analysis, it is not a perfect market predictor or a definitive investment signal. The inverted hammer candlestick pattern has similar limitations to its inverse counterpart, the shooting star candlestick pattern. These two are not to be mistaken for one another as the shooting star candlestick pattern often occurs after an uptrend.

To accurately gauge the effect of an inverted hammer candlestick pattern, traders must focus on what happens on the day after its occurrence. If an inverted hammer candlestick pattern is green in color (the opening price of the commodity is lower than the closing price) it is regarded as a stronger bullish signal as compared to a red inverted hammer candlestick pattern (the closing price of the commodity is lower than the opening price). A red inverted hammer candlestick pattern is still considered bullish nonetheless.

To qualify as an inverted hammer candlestick pattern a candlestick must meet 3 basic requirements:

• It occurs at the end of a downtrend
• The real body can be either bullish or bearish (better yet if bullish)
• The upper wick is at least twice as long as the real body of the candlestick

Advantages of inverted hammer candlestick pattern

Here are a few of the biggest advantages of this form of candlestick pattern:

1. Easily identified

   Due to the length of the upper wick compared to the body of the candle itself and its occurrence near the end of an on-running downtrend, it is quite easily recognizable. This trait makes it easier for even relatively newer technical traders to reap the benefits of the inverted hammer candlestick pattern.

2. Market entry point

   Although an Inverted hammer candlestick alone is not an absolute predictor of oncoming market trends, it can be a really good indicator of entry into the market paired along with other patterns and through witnessing the events of the day following the inverted hammer candlestick. Early entry after an inverted hammer candlestick pattern occurs could lead to a trader benefitting from the bullish market reversal

3. Require less research

   As compared to other technical analysis patterns or fundamental analysis equations, inverted hammer candlestick patterns require a keen eye and market knowledge and can be capitalized on by even a novice technical analyst.

Importance of inverted hammer candlestick pattern

An inverted hammer candlestick pattern can be extremely effective in taking a short position in the market and predicting a change in market trends from bearish to bullish. When faced with an inverted hammer candlestick, a trader must remember that this candlestick is an alert that the market could potentially shift from a downtrend to an uptrend and that it should be paired with other indicators such as a trendline break or confirmation candle. This should be observed for an additional trading day to see the movement in the market and whether it breaks the trend.

An inverted hammer candlestick confirms that the bulls and bears in the market are locked in a battle, and the bulls are overtaking the bears with their buying power as compared to the bears’ selling power using a share market app. If you wish to learn more about candlesticks as predictors of changes in market trends, check out IIFLs blog on shooting star candlesticks.

Frequently Asked Questions

1. What does an inverted hammer signify?

An inverted hammer candlestick most often occurs after a continued downtrend and signifies a possible oncoming bullish market reversal. It is not an absolute predictor of market direction but when paired with other indicators such as a trendline break or confirmation candlestick, an inverted hammer candlestick pattern can be an easily identifiable market direction indicator.

2. Is a red inverted hammer candlestick bullish?

A green inverted hammer candlestick occurs when the opening price for the trading day is lower than the closing price and is considered to be a stronger sign of bullish reversal as compared to a red inverted hammer candlestick. A red inverted hammer candlestick occurs when the opening price is greater than the closing price. Regardless, this is still a bullish market reversal indicator, not as strong as the green inverted hammer candlestick.