Inverted Hammer

An Inverted Hammer is a single Japanese candlestick pattern that indicates a bullish reversal. It typically appears during a downtrend, where the price opens lower, trades higher, but ultimately closes near the opening price. This candlestick pattern features either a black or white body positioned like an upside-down hammer. The bearish counterpart to the Inverted Hammer is the Shooting Star, which occurs following an uptrend.

When an Inverted Hammer forms after a prolonged downtrend, it suggests bullish sentiment because the price decline was limited, remaining close to the opening price. Although the price increased, sellers returned to push it back down near the open. The significant rise in price indicates buying pressure. The subsequent candlestick following the Inverted Hammer pattern is crucial for traders, as it provides insight into whether the price will continue to rise.

To recognize an Inverted Hammer candlestick pattern, look for the following criteria:

• The candle must appear after a downtrend.
• The upper shadow should be at least twice the height of the candle's body.
• The lower shadow should either be very small or nonexistent.
• The body should be positioned at the lower end of the trading range.
• The color of the small body is not critical, although it can indicate a slightly more bullish or bearish bias.

In summary, the Inverted Hammer emerges during a downtrend, characterized by a long upper shadow that signifies an attempt to reach higher prices, and a small real body at the lower end of the range, indicating a developing balance between buyers and sellers as sellers lose some control. This pattern may suggest that the price has hit a bottom and is poised to rise.

The Inverted Hammer candlestick formation primarily occurs at the bottom of downtrends and can signal a potential trend reversal. A longer upper shadow increases the likelihood of a reversal. A gap down from the previous candle's close enhances the strength of the reversal. High trading volume during the session when the Inverted Hammer appears raises the probability that a blowoff top has occurred. A white body indicates a more bullish bias, while a black body suggests a more bearish bias. It is important to note that this pattern serves as a warning of potential price change rather than a definitive buy signal on its own.