How to Trade With Inverted Hammer Candlestick Pattern?

How to Trade With Inverted Hammer Candlestick Pattern? - logo android 150x150

By PrimeXBT

Reviewed by Dirk Hartig

September 1, 2022
Reading Time: 5 min
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In technical analysis, candlestick patterns are the basis for a lot of trading. The inverted hammer candlestick is one of the most widely followed candlesticks, as it is easily identifiable, and many traders understand that it gives a clear indication of what has happened during that day, hour, or whatever timeframe it represents. Because of this, it’s crucial to understand the various signals it can fire off. 

What is the Inverted Hammer Candlestick Pattern? 

Many people pay close attention to the inverted hammer candlestick pattern is a relatively common candlestick. It is an upside-down hammer, without a better description for those aware of the hammer candlestick pattern

The inverted hammer suggests that sellers are starting to flex their muscles and can give buyers some issues. However, what happens after the candlestick truly sets up the next trade? 

How is an Inverted Hammer Candlestick Formed? 

An inverted hammer is formed when buyers step into a market and try to push it higher but fail to hang on to gains. Furthermore, the candlestick’s body is concise, as the overall range between the opening and the close is relatively tight. This suggests that buyers have been repudiated and that sellers may be trying to pick up momentum.

What Does an Inverted Hammer Candlestick Look Like? 

An inverted hammer has a long wick with a tiny body on the top. The real body can be either color, but the main takeaway is that the inverted hammer suggests that buyers cannot hang on to gains and could indicate that sellers are about to overwhelm buyers.

Green vs. Red Inverted Hammer

Green inverted hammer, PrimeXBT platform

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Red inverted hammer, PrimeXBT platform

The body of the inverted hammer can be either green or red, and at the end of the day does not make a huge difference. However, it’s probably worth noting that depending on where the inverted hammer forms have more influence. 

For example, it could be at a significant support or resistance level or be an inverted hammer known as a “shooting star” after a big run higher. If the candlestick is red after that happens, it suggests even more weakness. Just as if an inverted hammer forms after a drop and has a green body, it shows that the buyers are becoming aggressive once it breaks to the upside. The color does not matter too much. 

What Does an Inverted Hammer Candlestick Pattern tell you? 

Depending on where an inverted hammer candlestick pattern shows up, it can tell you a couple of things. An inverted hammer suggests that the buyers are running out of momentum. This is valuable information, especially after the next candlestick is formed.

If the inverted hammer candlestick is formed after a big move higher, it could be a warning that the trend is about to go negative. After all, this shows that the market is running out of upward momentum, and if the market does break below the candlestick, all those buyers are losing money and need to sell their positions to protect their accounts. 

On the other hand, if the market breaks above the top of that inverted hammer, it suggests that there is resiliency by the bullish traders, and it should go much higher. 

If the inverted hammer forms lower after a big run, it could show a significant amount of downward pressure, as the attempt to recover has failed. It’s what happens in the next candlestick that is truly important. If the market breaks above the top of that candlestick, then that shows resiliency by the bullish traders, and a trend reversal could be in play. On the other hand, if an inverted candlestick forms after a significant drop, then it’s possible that we could see a break below that candlestick as a sign of continuation and thereby quite a bit of bearish pressure.

How to trade when you see the inverted hammer candlestick pattern? Trading Strategies and Examples 

Traders can explore a couple of trading strategies to understand the importance of the inverted hammer candlestick pattern. Understanding how using one of these candlesticks in real life can go a long way to realizing profitability.

Inverted Hammer and Fibonacci Retracement 

Many traders like trading around Fibonacci levels, so inverted hammers formed around those levels should be watched. There is a certain amount of “self-fulfilling prophecy” regarding Fibonacci levels, so if the inverted hammer forms at one, this should add even more interest.

On a pullback, if an inverted hammer forms at the 38.2%, 50%, or 61.8% Fibonacci retracement levels, I break above the top of that candlestick could be thought of as an excellent buying opportunity because the buyers have become very resilient and pushed to the upside. On the other hand, if the inverted hammer is broken to the downside, it could lead to a move to the next Fibonacci level. 

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An inverted hammer at the 0.618 Fibonacci level, PrimeXBT platform

Hammer/Inverted Hammer Strategy 

An interesting strategy is when you have a hammer followed by an inverted hammer or vice versa. This suggests that perhaps there is a short-term range forming, so breaking above or below the inverted hammer could offer an excellent trade. This means that momentum has reentered the market, so the trader will follow that momentum and put their stop loss on the other side of the short-term range.

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Note the inverted hammer followed by the hammer. The third candle closed outside the implied range, setting up a great short. Shown on the PrimeXBT platform.

Moving Average and Inverted Hammer Strategy 

One of the most commonly followed technical indicators is the moving average, so Wayne and inverted hammer forms on a major moving average should attract a certain amount of attention. A pullback to a major moving average such as the 50-Day EMA or the 200-Day EMA suggests that perhaps a breakout could be coming. 

The next question, of course, is whether we break above the top of the inverted hammer or do we break down below it to show signs of continuation. Breaking it below the inverted hammer could indicate a significant technical indicator, perhaps a selling opportunity. However, breaking above the top of the inverted hammer could suggest that the indicator is providing support. 

You can ask the same questions in a downtrend, but obviously, the candlestick is pressing against resistance instead of support. In that scenario, breaking above a significant moving average suggests a trend change, as if you were breaking below it on a pullback.

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Inverted hammer, or “Shooting star,” at a moving average. In this case, the 50 EMA. PrimeXBT platform.

FAQ: Frequently Asked Questions

What does an inverted hammer mean?

It can mean a host of things, but during that period, the buyers have run out of momentum, and the sellers are starting to get aggressive. The following candlestick is crucial because it can give you an idea of where the markets will go for a more significant move.

What does an inverted hammer indicate?

It indicates that there are plenty of sellers in that general vicinity, or at the very least that buyers are running out of conviction and momentum.

Is an inverted hammer bullish?

It can be if the market breaks above the top of the long shadow/wick, as it shows resiliency by bullish traders. You can think of the market initially selling off, only to see buyers return and press the issue.

How reliable is the inverted hammer?

It is relatively reliable, and many people pay close attention to these candlesticks. Because of this, it is something that should catch your attention. If it occurs at support or resistance levels, as well as other technical indicators, that can make it even more reliable.

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