The inverted hammer candle has a small real body, a protracted upper wick, and little or no lower wick. It appears at the lowest of a downtrend and signals a possible bullish reversal. The extended upper wick suggests that the bulls are looking to increase the price. The validation of this movement will be confirmed or rejected through price action.
The inverted hammer should not be confused with the hammer. shooting star. Both candles have similar arrivals but have very different meanings. The shooting star is a bearish signal and seems at the top of an uptrend, while the inverted hammer is a bullish signal at the bottom of a downtrend
Advantages and limitations of the inverted hammer candle
Like all candlestick patterns, there are advantages and disadvantages to using the inverted hammer in a trading strategy:
- Favorable entry points: If the inverted hammer candle directly triggers the new uptrend, traders can enter the market at the beginning of the trend and capitalize on the full uptrend.
- Easy to identify: The inverted hammer candlestick is easy to identify on a table.
- Overconfidence in a single candlestick: The inverted hammer is a single candlestick, which represents price action. Completely relying on a single candle to reverse market momentum, disregarding additional supporting tests/indicators, can result in suboptimal results.
- Short duration retracement: The inverted hammer candle may indicate a momentary increase in bullish price action that fails to turn into a longer-term trend reversal. This can happen if buyers are unable to maintain buying pressure amid a dominant downtrend.
Using the inverted hammer candlestick pattern in trading
Trading the inverted hammer candle involves much more than simply identifying the candle. Stock price and hammer candle location, when viewed within the existing trend, are the two crucial validating factors for this candlestick.
Trading the inverted hammer candlestick near a support line
Below is a GBP / USD Chart showing a downtrend consolidating at support. The appearance of the inverted hammer candle near the support provides the basis for the bullish reversal. Traders can place stops below the support line to limit downside risk in the event that the market moves in the opposite direction.
Targets can be placed at previous levels of resistance that result in a positive risk/reward ratio. Then the inverted hammer candle often signals a setback in the trend, and trends can persist for a long time, traders often identify multiple target levels or simply use an endpoint.
Further reading on trading Japanese candlestick patterns
- The inverted hammer candlestick pattern is just one of many candlestick patterns that traders need to know about. Increase your trading knowledge by learning the Top 10 candlestick patterns.
- Other bullish reversal patterns include bullish morning star, reverse head, and shoulders, and double bottom.
- If you are starting your forex trading journey, understanding is essential. how to read a candlestick chart
- To get acquainted with the basics of forex trading, take a look at our New to Forex guide.
For more information, visit https://finmaxbo.com/en/strategy/3810-hammer-candlestick-how-it-works.html.