Introduction
A bullish trend reversal pattern that contains only the candlestick with a tiny body at the base and a huge upper shadow is known as a bullish inverted hammer candlestick pattern. A long shadow is usually formed in the area of the preceding candlestick.
Retail traders use inverted hammer candlesticks to predict the trend, which is the reversal in the trade. An inverted hammer is a symbol of assembling purchasing orders in a market. Through this, buyers set foot in the market and start a bullish trend reversal.
Inverted Hammer Candlestick
An inverted hammer candlestick is formed, particularly at the bottom of the drop-off. It warns about a bullish reversal design. Traders can figure out whether the prices will go high or not on the next day of the inverted hammer pattern.
Inverted Hammer Appearance
An inverted hammer is made when open, low, and close have almost the same price. A large upper shadow appears, which is double the real body’s length.
Inverted Hammer Candlestick Bearish or Bullish
After a huge drop-off, the making of the inverted hammer is bullish. Because prices pause to proceed downward in the daytime. Sellers easily push back the prices to the point of opening.
Colours of Inverted Hammer
A bullish green inverted hammer is made when open and low become the same. This is a strong bullish sign. The red inverted hammer is made when close and low are the same.
Finding the Inverted Hammer Candlestick
Due to confusion in a market chart, it is not easy to deal with candlestick patterns to get high profits. New rules have been added to recognize good patterns. The following parameters can help to get a more accurate inverted hammer candlestick pattern.
- Structure
- Prior trend
- Location
Structure
The structure of the inverted hammer pattern contains the following two things:
- Area of shadows/wicks
- The body of the candlestick shadow is large and present on the upper side, while a tiny body is present at the base.
Overall, a candlestick has 20% of the body and 80% of the shadow.
Prior Trend to Inverted Hammer Candlestick Pattern
Before the generation of an inverted hammer candlestick pattern, the trend should be bearish. Because chances of domination will decrease if it makes after a bullish trend. The formation of three or above bearish candlesticks is good before the inverted hammer pattern.
Location
The first criterion is that an inverted hammer pattern should not be made with the area of candlesticks. Because the recognition of a pattern replaces as the location is changed, for instance, if the formation of an inverted hammer candlestick occurs succeeding the bullish trend, it will behave as a bearish trend reversal contrary to the bullish trend. Because it has similarities with the bearish pin bar. So, the development of an inverted hammer succeeding the drop-off is the ideal location. All big shadows should be in the area of the preceding candlestick.
Trading through an Inverted Hammer Candlestick
An inverted pattern is usually a warning that there is a possibility of a price change. It’s not a gesture itself to refrain from buying. Confirmation candles and trendline breaks are usually used to develop a potential buy signal.
Instructions for Inverted Hammer pattern to Retail Traders
It plays a very crucial role in technical analysis. Relying on the name ‘candlestick’ is a mistake. However, activity happening at the back is very important. For instance, a bullish trend is always there before the bearish pin bar. Hence, that bullish trend symbolizes that buyers have been overpowered and are trying to increase the market.
Afterward, the market becomes overburdened and the formation of a bearish pin bar occurs with a large upper shadow. It indicates rejection from the resistance zone or supply zone. This shows sellers have won over buyers. From here, sellers enter and start a bearish trend. Meanwhile, these factors show that the bearish trend is about to start.
- Overbought
- Large upper shadow indicating a false breakout.
- Resistance rejection
The above three factors show the activity of the market during the generation of a bearish pin bar. The same is the way a trader’s activity during the generation of an inverted hammer candlestick pattern indicates that a bullish trend reversal will be taking place.
Price Chart of Market Activity
According to the market activity’s price chart during inverted hammer candle generation, before the candlestick pattern, the trend was bearish. It indicates oversold conditions. Sellers are continuously putting efforts into lowering the price in the market. But succeeding in the development of an inverted hammer pattern at the zone of support, there starts a bullish trend reversal.
Because it became difficult for sellers to hold on to the price in the bearish trend, on the other hand, buyers pushed up the price and took over 60 to 70% section of the preceding bearish candlestick. It indicates that the bearish trend slowed down at the zone of resistance and is overvalued. This makes buyers start a new bullish trend by increasing the price. Therefore, the inverted hammer candlestick pattern is the symbol of the slowing down of the bearish trend.
Intraday Trading Strategy for Inverted Hammer Candlestick
A candlestick pattern is used in trading with the help of technical tools like technical indicators, the Fibonacci level, and the support zone. The main disadvantage of the inverted hammer pattern is that it doesn’t inform traders about the levels of the target. Rather, it only gives him chance to see the order opening level and stop loss level with the formation of the inverted candle on the price chart.
Inverted Hammer at Support Zone
According to technical analysis, the support zone is the symbol of a bullish trend reversal. While an inverted hammer candlestick also indicates the same analysis. So, the formation of two technical patterns simultaneously increases the possibility of a trend reversal.
Open Buy Order
After the formation of the inverted hammer pattern, the trader waits for the upcoming candlestick. If the formation of a bullish candlestick occurs after this pattern, a trader should do the following two steps:
1- He should open a buy order immediately
2- Set the stop loss below the support zone. The trader should select the lowest one while modifying the stop-loss. If the formation of a bullish candlestick doesn’t occur after an inverted hammer pattern, he shouldn’t open a buy trade.
Conclusion
Knowledge of candlestick patterns is very crucial to learn for technical analysis. Understanding the pattern in the correct way is very important. The practice of predicting activity behind candlestick patterns makes a trader a winning trader.
