Enter the trade when the next candle closes above the Inverse hammer’s high. The Inverted Hammer Candlestick Pattern occurs much more frequently for shorter time frames as compared to longer timeframes. This happens because the occurrence of a continuous downtrend is more common in shorter time frames, such as intraday charts, as compared to daily and weekly charts. The Red Inverted Hammer’s upper shadow is very long, signifying the peak price of the asset during that particular period. It demonstrates that despite buyers’ best efforts, sellers ultimately took charge and pushed the price back down.

Enhancing your trading performance with the Inverted Hammer pattern

• This is why we recommend backtesting so you don’t trade blindly.
• That confirmation can give you the green light to start thinking about buying.
• It tends to form after a sharp decline or a series of bearish candles, suggesting that sellers may be losing momentum and that buyers are beginning to regain control.
• Candlesticks have an extremely long history in technical analysis, all the way back to Japanese rice traders.

The hammer is formed by a candle with a small body and an elongated lower shadow. This shape shows that at first, sellers were pushing the price down during the trading time. But then, buyers came in strong, pushed the price back up, and made it close near the top price of the day. First, find a clear downtrend and wait for an inverted hammer candle to form at a support level. Now, wait for confirmation with the next bullish candle close above the high of the Inverse Hammer weak.

Not Using a Wide Enough Stop Loss

If you see it during an uptrend, it can be misleading or give a false inverted hammer signal. Volume tells you how many people are buying or selling in the market. A strong inverted hammer signal is usually more reliable when the volume is higher. High volume shows that many buyers are joining in, which makes a price rise more likely. A stop-loss is a safety tool that protects you if the trade goes the wrong way. For an inverted hammer trade, place the stop-loss just below the lowest point of the pattern.

The body is observed in various sizes, but it is generally small in relation to the overall candlestick. In our inverted hammer explanation, we have covered the main criteria for the candle and setup. However, finding one on the chart is not an easy task for inexperienced traders.

Inverted Hammer vs Shooting Star

Because of its rarity, traders often treat it as a very strong bullish reversal. Its gap-driven nature reflects a complete shift in market psychology. Rising three indicates temporary consolidation before the trend resumes upward. Three White Soldiers is a bullish continuation or reversal pattern made up of three long bullish candles that close progressively higher. Each candle opens within the body of the previous one and closes near its high, showing sustained buying. Japanese traders considered the Doji variation a more powerful form of the Morning Star due to its psychological clarity.

Key Bearish Reversal Patterns: Identifying the Trend Peak

Western traders later recognized it as a more trustworthy variant of the Engulfing. Three Outside Up is a three-candle bullish reversal where a small bearish candle is followed by a large bullish candle that engulfs it, and then another bullish candle closing higher. The Abandoned Baby has been recognized in Japanese candlestick teaching for centuries. It became prominent in Western technical analysis in the 1990s as a highly reliable gap-based pattern.

So, let’s say the price begins to rise after the inverted hammer forms—this is when you can slowly add to your position, letting the momentum build. Once you’ve jumped into a trade after spotting the inverted hammer, you’re going to want to think about trailing stops. A trailing stop follows the price as it rises, locking in profits along the way. It’s like setting up a net to catch all the profits if the price keeps climbing.

The inverted hammer candlestick pattern offers clear signals for potential reversals but also comes with risks. Understanding its advantages and disadvantages helps traders use it more effectively. The inverted hammer candlestick is a single-candle charting pattern that signals a potential bullish reversal in a downtrend. It resembles an inverted hammer, with a small real body at the lower end and a long upper shadow.

According to a Bulkowski study, common bullish reversal patterns such as the Morning Star show accuracy rates between 60–70% when paired with trend confirmation. Ladder Bottom is a rare five-candle bullish reversal pattern beginning with three long bearish candles, followed by a small indecision candle, and completed with a strong bullish candle. Ladder Bottom marks exhaustion of selling pressure and a pivot to bullish control. It occurs when initial bearish sentiment fails to extend, and the market reopens at the same level only to be taken over by buyers. The pattern highlights strong conviction that the uptrend will continue. Matching Low is a two-candle bullish reversal pattern where the second candle closes at the same level as the first.

• In Japanese candlestick traditions, Matching Low was described as a “floor” being tested but not broken.
• Yes, like all technical analysis tools, the inverted hammer pattern can and does fail.
• There are many other candlestick chart patterns that traders should be aware of.

When it appears in a downtrend, it indicates that exit pressure is diminishing and bulls are starting to dominate. The inverted hammer is particularly significant when it appears after a sustained downtrend or near key support levels. It provides traders with a visual cue of a shift in market sentiment.

It simply consists of one candle with a small real body (the distance between opening and closing prices on a candle) at the lower end of its range. It has a longer upper shadow (wick) at least twice the body’s length, with little or no shadow. Visually, it resembles an upside-down hammer, usually indicating that buyers briefly drove prices higher but sellers pushed them back down toward the open.

How Is an Inverted Hammer Candlestick Pattern Formed?

Based on local resistance levels or a favourable risk-reward ratio, they also determine a profit objective. The trader’s trade hits the profit objective, resulting in a profitable conclusion, as the price rises in consecutive trading sessions, confirming the bullish reversal. Homma Munehisa observed that the price movements of assets were influenced by market emotions and public sentiments.

An inverted hammer on a daily stock chart, for example, often carries more weight than one on a frantic 5-minute forex chart, where market noise can easily throw you off. This infographic reminds you that an inverted hammer only counts after a clear downtrend and with the proper candle anatomy in place. That said, a red (or black) inverted hammer is still a valid signal. The most important part of the story—that long upper shadow showing buyers testing the waters—is still there regardless of the body’s color. Finding a true inverted hammer takes a bit more than just spotting a candle that looks like an upside-down ‘T’.

The inverted hammer pattern needs to be used correctly in order for it to work. When it appears after a downtrend, the inverted hammer signals a potential bullish reversal, suggesting that bulls are starting to regain control. In contrast, the shooting star indicates a potential bearish reversal when it emerges after an uptrend, indicating that bears are gaining strength and bulls are losing momentum.

Trading Platforms

Its reliability can swing wildly depending on the market you’re in, the timeframe you’re watching, and the asset you’re trading—from volatile crypto to major forex pairs. When using an inverted hammer, traders wait for confirmation in the next session, such as a gap-up or strong bullish candle. They usually open a buy position with a stop-loss below the low of the pattern inverted hammer candlestick to potentially manage risk and a take-profit level at the closest resistance level.