Inverted hammer

The inverted hammer is a type of candlestick pattern found after a downtrend and is usually taken to be a trend-reversal signal. The inverted hammer looks like an upside down version of the Inverted * symbol pattern, and when it appears in an uptrend is called a shooting star.

This pattern is characterized by a single candlestick that resembles an upside-down version of the hammer, and it is considered a bullish reversal pattern.

Pattern

The pattern is made up of a candle with a small lower body and a long upper wick which is at least two times as large as the short lower body. The body of the candle should be at the low end of the trading range and there should be little or no lower wick in the candle.

The long upper wick of the candlestick pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed, but encountered selling pressure which drove prices back down to close near to where they opened. When encountering an inverted hammer, traders often check for a higher open and close on the next period to validate it as a bullish signal.

Formation

The Inverted Hammer is formed when the following conditions are met:

1. Market Downtrend: The market should be in a downtrend, indicating that sellers are in control.
2. Small Real Body: The candlestick has a small real body (the difference between the open and close prices) near the bottom of the trading range.
3. Long Upper Shadow: The candlestick has a long upper shadow, which is at least two times the length of the real body. The upper shadow represents the session's high, and the lower shadow is relatively short or nonexistent.
4. No Lower Shadow (or very small): The lower shadow, if present, is small or nonexistent.

Interpretation

The Inverted Hammer pattern suggests a potential reversal of the current downtrend. It indicates that despite significant selling pressure during the session, buyers managed to push the price back up, leading to a close near or at the session's high.

Traders and analysts interpret the Inverted Hammer as a sign that the bears (sellers) may be losing control, and there could be a shift in momentum towards the bulls (buyers). However, it is crucial to consider the confirmation of the pattern through subsequent price action.

Confirmation

While the Inverted Hammer alone can signal a potential reversal, traders often wait for confirmation before making trading decisions. Confirmation may come in the form of a higher close on the next trading day or a bullish candlestick pattern.

See also

• Shooting star — Inverted hammer pattern found in an uptrend

External links

• Inverted hammer at onlinetradingconcepts.com
• Inverted Hammer Candlestick Pattern at Prathameshtawde.com
• Inverted Hammer Information at candlecharts.com

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