Inverted Hammer Candlestick Pattern: Learn How to Use
The trend may reverse spontaneously and turn from bearish to bullish or vice versa. However, when something not totally expected happens and the price movement is turned upside down, there is usually a candlestick pattern that displays what happened.
The Inverted Hammer Candle is one such pattern. It’s actually a sub-type of a more common Hammer Candle, and if you know how to use that indicator, you’ll have an easier time understanding this one.
Understanding Inverted Hammer
Inverted Hammer Candle is a short-term pattern, meaning that it can develop in a span of a single day, pretty much. That’s why it’s important to know to discern it. Otherwise, you can miss a very valuable hint.
This pattern is a lot like its older brother – Hammer Candlestick. Both happen at the bottom of the downward trend and result in a quick and strong trend reversal. If the patterns prove true, then that’s what happens. However, you’ll have to be absolutely sure that the pattern is developing.
Hammer happens after a strong and deep price drop, but it’s not necessary for the Inverted Hammer Candle. The latter is often a culmination of a mild and short bearish trend. Consequentially, the trend that opens up after the pattern may also be pretty short. Nonetheless, it depends very much on the characteristics of the Inverted Hammer.
How does it look?
When a generally stable negative trend is continuing for some time, it may reach the point of quick stabilization, and then a massive price surge. The pattern consists of three candlesticks:
- A long bearish candlestick
- A short bullish candlestick with an extremely longer top wick and a small bottom wick
- A long bullish candlestick similar in size to the first one.
This second candlestick (the second day of the pattern) is the most important part. It contains all the logic behind the reversal and is also where you have to look at it more carefully to determine whether you need to enter a market or not.
This middle candle is also the reason why the pattern is called the ‘Inverted Hammer’. Look closely and you’ll see a hammer hanging upside down – the upper wick being a handle and the candle body being a hammerhead.
Why does it happen?
Reversal patterns happen when something rapidly changes the mood of the market. It can be natural, but in this case, the reversal is often somewhat artificial, which is why it’s not the most common pattern in addition to being easy to miss.
Imagine a generally bearish (downward) trend that continues for some time. It’s even better if it’s not a freefall, but a milder descent. Assuming the situation is a true Inverted Hammer Candlestick, that’s what’s going to happen:
- The trend will proceed as usual, with the last candlestick being a comparatively long negative period.
- The next day will open up, but at some point during it, numerous more buyers will arrive and increase the volume and demand of the security.
- This new demand will create a short-lived increase in price throughout the day, although it will soon fade.
- The closing price will fall just slightly above the opening value.
- If the pattern is true, the next day would see an increased buying interest and volume of trade.
Basically, a short increase in purchases during this middle day should be enough to change the mood of the public to start buying the shares in question.
However, the effect must be extremely strong. The wicks, as you know, show the absolute extremes of the prices over the span of the day. Since the closing price needs to fall back for the pattern to be true, this effect must not last for too long. Still, whatever happens that day must have a very strong impact on the daily trades.
The top wick on the short middle candlestick should be much larger than the body itself. If it is, then it signifies that the buyers have grown in confidence. If everything goes well, the next day will see a continued positive trend.
Since the Inverted Hammer pattern relies on the residual effect of the purchasing mania, it can be risky. Therefore, it’s better to wait for confirmation on the third day before entering the market. If the third candle is about the same length as the first one, then it’s likely the Inverted Hammer has happened.
And remember: the top wick needs to be much longer than the body – the longer the better.Yes, I want access to free training