Hammer Candlestick Pattern: Definition, Structure, Trading, and Example

The conventional method of trading the inverted hammer occurs when a bullish candle forms after the inverted hammer, then use that as confirmation to enter a long trade. Hammer Candlesticks enable traders to identify potential market reversal points, determine the ideal time to enter the market and place buy or sell orders accordingly. Our article will discuss everything you need to know about Hammer Candlesticks and how to use them for effective forex trading.

Hanging Man and Inverted Hammer candles are formed at the reversal points of a trend. This approach helps in making more informed trading decisions based on the broader context of market indicators. Generally speaking, the pattern should look like an upside down pin, and can sometimes be used interchangeably with the shooting star.

1. During the formation, a security opens lower and experiences extensive buying pressure, pushing prices upward, only to face selling pressure that brings the close near the open.
2. Dojis are most significant after an extended move when they signal exhaustion.
3. This often occurs right around a key support zone or Fibonacci retracement level.
4. Also, there is a long upper shadow which should be at least twice the length of the real body.

The small real body is a common feature between the shooting star and the paper umbrella. Going by the textbook definition, the shooting star should not have a lower shadow. However, a small lower shadow, as seen in the chart above, is considered alright. The shooting star is a bearish pattern; hence the prior trend should be bullish.

The inverted Hammer is the opposite structure of the Hammer, with a small body near the low and long upper shadow. Lastly, the dragonfly doji has the open, high, and close all at the same level, lacking the long lower tail of the Hammer. So, while similar in some aspects, the Hammer’s unique lower tail sets it apart from other single candle formations and accounts for its potency as a reversal indicator after downtrends. The bullish Hammer is a single candlestick pattern that forms after a decline in price. It has a small real body positioned at the top of the candlestick range and a long lower shadow that is at least twice the height of the real body.

If the following day, the stock closed lower, this helps to confirm the pattern. The high of the shooting star wasn’t surpassed, and the price moved lower in a sluggish downtrend for the next month. When trading this pattern, the trader might sell their long positions once the inverted hammer candlestick pattern confirmation candle or a lower close the day following the pattern is in place.

This article focuses on application and trading strategy of the inverted hammer candlestick pattern.

By mastering these powerful patterns, you too can position yourself to achieve significant gains in the market, just as I did. Before jumping into the specific trades, it’s essential to grasp why these patterns work so well. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. After a long downtrend, the formation of an Inverted Hammer is bullish because the decrease in price was limited staying near the open price. The bearish version of the Inverted Hammer is the Shooting Star formation that occurs after an uptrend.

What Does an Inverted Hammer Pattern Look Like?

Depending on the strength of the trend, different levels are more likely to work better with the Inverted Hammer pattern. Here you can learn more about the different Fibonacci retracement levels. To find a bullish RSI Divergence we want to see the price on a downtrend first, making lower lows and lower highs. Place a stop loss order below the low of the candle to protect against potential false breakouts or reversals. Another example of a Doji candle confirms that a Doji candle does not indicate any direction change in a trend. The supplementary educational materials about special candlesticks and suitable strategies, using these two beneficial candles, are available on PForex.com.

1. Similarly, the ADX, which quantifies the strength of a trend, aids in confirming whether the market condition is favorable for a reversal.
2. While shooting stars signal potential bearish reversals, hammers indicate possible bullish reversals.
3. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.
4. The hanging man is classified as a hanging man only if an uptrend precedes it.
5. While hammers sometimes appear at any time on the charts, they carry far more weight as potential reversal signals when they mark the end of a prolonged downtrend.
6. After a brief decline, the price could keep advancing in alignment with the longer-term uptrend.

Let’s now look into the market sentiment during the formation of the inverted hammer candle. During the downtrend sellers are in control of the market and continue to lower the prices. But, during the inverted hammer candle the sellers seems to lose control. Candlestick patterns form an integral part of technical analysis and chart analysis.

If you believe that it will occur, you can trade via CFDs or spread bets. These are derivative products, which mean you can trade on both rising and falling prices. An inverted hammer in a downtrend suggests a shift in market sentiment from bearish to bullish.

Prolonged selling pressure that hits support zones or trendlines sets up significant hammers. The long lower shadow shows that buyers initially pushed prices higher before sellers took control and drove prices back down to close near the open. The hammer pattern is most significant after a long downtrend as a sign of potential capitulation. This candlestick indicator informs traders of a high probability reversal situation when properly verified. Traders wait for confirmation that buyers have actually seized control before entering new bullish trades. The next candle should provide upside confirmation; otherwise, the Hammer could indicate a bearish reversal, commonly referred to as a shooting star.

The lower shadow is long, at least twice the real body, showing intense prior selling. So ultimately, the inverted hammer is a good signal which tells traders that bearish momentum is slowing down, and that it’s time to look for further confirmations for a long trade. We just have to keep in mind that the price could potentially drop lower, and have responsible risk management if the reversal signal is false. Algorithmic traders can effectively incorporate the inverted hammer pattern into their strategies through systematic programming and integration of technical analysis indicators. No technical analysis tool is 100% accurate, and this includes candlestick patterns.

Bearish Hammer

Now the market is in an overbought condition, and a bearish pin bar forms with a long upper shadow showing rejection from a strong supply zone or resistance zone. This indicates that sellers have taken control of the buyers, and buyers don’t have enough power to keep the price overbought. These three parameters will improve the accuracy of the inverted hammer candlestick pattern. Instead of entering the markets with a long trade after closing of the inverted hammer candle. Traders can wait for one more candle for confirmation of the reversal pattern. Effectively, traders go long once the candle next to pattern candle for additional confirmation.

What it takes to stop losing trading

Another important feature of this pattern is possibility to enter a trade with good Risk reward ratio. To trade when you see the inverted hammer candlestick pattern, start by looking for other signals that confirm the possible reversal. If you think that the signal is not strong enough and the downtrend will continue, you can ‘sell’ (go short). A shooting star is a reversal candlestick pattern that forms after an uptrend. It has a small body with a long upper shadow and little to no lower shadow, indicating a potential trend reversal because of strong selling pressure.

The inverted hammer candlestick pattern symbolizes the slowdown of the bearish trend. In simple words forex traders should look at the formation of the inverted candle as a potential bullish reversal signal and prepare a trade plan to go long. Since the forex traders could enter in the beginning of a potential uptrend. The Inverted Hammer candlestick pattern does provide valuable insights into potential bullish reversals, but it also has some disadvantages that traders should be aware of. Traders should know about the top four disadvantages of the Inverted Hammer Candlestick Patterns listed below.