Inverted Hammer Candlestick Pattern: Definition, Trading, Example, Strategy

The Inverted Hammer candlestick pattern is a bullish reversal that forms in a downward price swing. As the name implies, it has the appearance of an inverted hammer — a small body at the lower end and a long upper shadow. It shows that the buyers are gaining momentum against the sellers and might soon push the price higher. The pattern is widely used by traders to identify the beginning of a potential upswing so as to enter long positions.

Candlesticks are a popular charting technique used in the technical analysis of financial markets. The shape of the candlestick can provide insight into market sentiment and potential future price movements. One popular candlestick pattern that is commonly seen on price charts is the Inverted Hammer. What do you know about the Inverted Hammer candlestick pattern trading strategy?

In this post, we take a look at the Inverted Hammer candlestick pattern trading strategy.

Understanding the Inverted Hammer candlestick pattern

The Inverted Hammer candlestick pattern is a bullish reversal pattern that forms at the bottom of a downward price swing. As the name suggests, it resembles an inverted hammer, and it is characterized by a small real body located near the lower end of the candle, a little or no lower shadow, and a long upper shadow.

In an Inverted Hammer formation, the color of the real body is not as important as its position — it must form at the lower end of a downward price swing, otherwise, it could be called a shooting star if it forms at the top of an upward swing. A green or white real body is considered more bullish, while a red or black real body is considered less bullish. However, any Inverted Hammer pattern can still indicate a potential bullish reversal even if it has a red real body.

The pattern is formed when the price opens lower, rallies during the day, but closes near its opening price. The long upper shadow indicates that the bulls tried to push the price higher, but the bears fought back and brought the price down. But despite the late fightback by the bears, the bulls are gaining confidence.

The Inverted Hammer is a significant pattern because it shows that the bears are starting to lose control, and the bulls are gaining momentum. This can indicate that a reversal to an upswing is possible. However, it is important to note that this pattern is a single-candle formation and should be confirmed by other technical analysis tools and indicators.

Traders often use the Inverted Hammer pattern in combination with other signals, such as a trendline, a support level, moving averages, and momentum oscillators, to confirm a reversal and make trading decisions.

Inverted Hammer Candlestick Pattern Backtest

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In order to backtest candlestick patterns you need to set specific rules and definitions. That requires both time and effort, but don’t worry: it’s already done for you!

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