How To Use An Inverted Hammer Candlestick Pattern In Technical Analysis

This post covers some important single candle Candlestick Chart Patterns that are important to identify trend reversals. While the Inverted Hammer pattern is a valuable tool, it should not be used in isolation. Market context, trendlines, and technical or fundamental analysis should be taken into account for a comprehensive analysis. The bearish version of the Inverted Hammer is the Shooting Star formation that occurs after an uptrend. The RSI is a popular trend reversal indicator that finds areas of overdemand or oversupply and may indicate a possible reversal.

TrendSpider is the best software for trading candlestick patterns due to its integrated candle backtesting and pattern recognition. If you value a large global community of traders sharing ideas and strategies, then TradingView is a great alternative. There are two types of Hammer candles, the Hammer and the Inverted Hammer. The Hammer is a low-probability trade and one of the poorest-performing candlestick patterns we have tested.

Use of Hammer Candlesticks Has Its Limits

But the Inverted Hammer is the opposite; it is the best candlestick pattern with the highest win rate and profit per trade. This is the first signal of a potential reversal, indicating the stock might rise. If the green candle goes above the inverted hammer high, it is a buying opportunity with a stop-loss order. In case it is a red candle difference between hammer and inverted hammer and the price declines below the inverted hammer, avoid taking any trade as the pattern fails. A hanging man is a type of bearish reversal pattern, made up of just one candle, found in an uptrend and can act as a warning of a potential reversal downward. Both patterns require confirmation for effective use in trading strategies.

When there is no such upper wick or shadow, this indicates that the price at which the asset opened or closed is the highest traded price. The wick is the line that extends from the top to the bottom of the body of a candlestick. Within the interval, the body informs you of the opening and closing prices of the market. In fact, most traders do it so badly that they burn out their accounts. Looking at this candlestick chart, the hammer candlestick is shown at the end of an small downward trend.

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Which indicated that there was a reversal and the price of the stock rose about 3 dollars above it. However, a trader can’t be fully sure the bullish trend will occur even after a confirmation candlestick. After conducting 1,702 trades on 588 years of data, we confirm the Inverted Hammer profit per trade to be 1.12%. A 1.12% win rate means that trading an Inverted Hammer long will net you an average of 1.12% profit per trade if you sell after ten days. Conversely, short-selling an Inverted Hammer, you should expect to lose 1.12% per trade.

• As seen in the chart, the inverted hammer candle occurs around the Fibonacci 38.2% level.
• For example, the share price of XYZ Enterprises has been experiencing a continuous decline.
• If the price is going aggressively upward during the confirmation candle, a stop loss is put below the hammer’s low, or perhaps just below the hammer’s true body.
• The percentage of Inverted Hammer winning trades was 60% versus 40% losing trades, significantly higher than the 55.8% average performance across all candlestick types.
• For Hammers, it’s a bullish confirmation candle, and for Inverted Hammers, it’s a bullish candle with further strength.

If you flip the Hammer candlestick on its head, the result becomes the Inverted Hammer candlestick pattern. Like the Hammer, the Inverted Hammer occurs after a downtrend, and it also has one long shadow and one nonexistent shadow. Plus, they’re both bullish reversal patterns formed with just one candle! The key to identifying a Hammer versus an Inverted Hammer is the location of the long shadow.

Tips for Traders: Key Points About the Hammer Candlestick Pattern

A long-shadowed hammer and a strong confirmation candle may push the price quite high within two periods. This may not be an ideal spot to buy as the stop loss may be a great distance away from the entry point, exposing the trader to risk which doesn’t justify the potential reward. Trading the inverted hammer candlestick pattern requires a trader to identify the pattern at the end of a downtrend and enter a long position.

Cory is an expert on stock, forex and futures price action trading strategies. To some traders, this confirmation candle, plus the fact that the downward trendline resistance was broken, gave them a potential signal to go long. You can either risk more and open the trade as soon as the inverted hammer is created, or wait for the bullish confirmation. A hammer is a bullish reversal pattern that consists of only one candlestick. The candlestick is easily identified because it has a small body and a long lower shadow that exceeds the body by at least double. High and opening/closing prices are almost the same, which is why the candlestick either doesn’t have an upper shadow or has an upper shadow that is too small.

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An Inverted Hammer candle is a lesser-known pattern in Japanese candlestick analysis, but according to our testing, it should be used more often by traders. Trusted by over 1.5 crore clients, Angel One is one of India’s leading

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False signals can occur, leading to drawdowns if used without careful analysis. HowToTrade.com helps traders of all levels learn how to trade the financial markets. The high of the hanging man acts as the stop loss price for the trade. The hammer is a bullish pattern, and one should look at buying opportunities when it appears.

Hammer and Hanging Man Candlesticks

The hammer has a long lower shadow, while the inverted hammer has a long upper shadow. The hammer’s signal is considered stronger if the hammer is closed below the previous candlestick. Still, if it’s closed within the early candlestick, the signal is also workable. However, the hammer doesn’t work if a new high is set when the candlestick finishes forming. Also, the hammer pattern fails if the following candlestick sets a new low.

• It suggests a potential shift in market sentiment from sellers to buyers.
• Also, there is a long upper shadow which should be at least twice the length of the real body.
• It means for every $100 you risk on a trade with the Inverted Hammer pattern you make $18.2 on average.
• There are other key factors, such as price action or the inverted hammer candle position, to consider when assessing a position.
• A bullish belt hold is a pattern of declining prices, followed by a trading period of significant gains.

Next, observe the presence of a long upper wick, at least twice the size of the body, resembling an upside-down hammer. Yes, an Inverted Hammer is one of the most accurate candle patterns to trade; it results in 60% of trades winning and 40% losing. Using TrendSpider for trade identification https://g-markets.net/ and execution gives fast and precise results. To evaluate candlestick patterns and strategies independently, follow the instructions below and check out the screenshot for reference. The Hammer pattern is created when the open, high, and close are such that the real body is small.