Candlestick Pattern - Inverted Hammer

Inverted Hammer as defined by Wikipedia

“The inverted hammer is a type of candlestick pattern found after a downtrend and is usually taken to be a trend-reversal signal. The inverted hammer looks like an upside down version of the hammer candlestick pattern, and when it appears in an uptrend is called a shooting star.”

Inverted Hammer in my words

When a candle is formed having no or little lower shadow, small real body and longer upper shadow – it is called Inverted Hammer. It is usually formed at the downtrend and can be considered as the reversal pattern. If the next candle opens above the current close, it is good to treat as trend reversal.

                  

Features:

• Appears at the bottom of downtrend
• Can be an indication of potential reversal pattern
• It in itself is not an indication to buy. We should wait for next candle as a confirmation and then took a trade
• It is an indication that bulls are coming in picture but still the selling is in full force.
• Color of the body is not very important in this pattern. Though white body indicates more confirmation of positive opening the following day.

Identification of Inverted Hammer

• Open, Low and Close almost same.
• Upper shadow (high) should be atleast twice as compared to real body length.
• Without a lower shadow or very small lower shadow
• Real body is at the lower end of the trading period

Signal Enhancements

• Today’s opening is lower than previous day’s closing
• The longer the upper shadow, higher the possibility of reversal
• Open of tomorrow is higher than today’s closing
• Today’s Volumes are much higher as compared to previous days volumes

How to Trade with Inverted Hammer

• Today’s open and low is same – Strong Bullish Sign
• Today’s close and low is same – Bullish Sign
• Tomorrow open is higher than today’s close – Go for it and buy