Inverted Hammer Candlestick Pattern Explained Trading Strategy and Backtest Definition & Meaning

Some traders believe that it is a reliable indicator of a potential reversal in the trend, while others believe that it is not as reliable as other patterns. An Inverted Hammer is a candlestick pattern that forms after a period of downtrend. It is characterized by a long lower shadow, a small body, and a small upper shadow. The inverted hammer candlestick is a single-candle charting pattern that signals a potential bullish reversal in a downtrend.

Cited in long-standing Japanese candlestick literature as “matching lows,” Tweezer Bottom has been used for centuries to signal potential bottoms. It forms as sellers lose strength and price action contracts, with buyers gently pushing but not overtaking. Bullish Harami comprises a small bullish candle entirely within the prior larger bearish body.

It’s crucial to remember that inverted hammer candlestick pattern an inverted hammer pattern by itself does not always ensure a bullish shift. Traders frequently seek out confirmation signals and weigh the significance of the pattern against those of other technical analysis tools and variables. These also include bullish candlestick patterns, breaks of significant resistance levels, or bullish indicators from other technical analysis instruments. The green candlestick pattern is the most commonly observed Inverted Hammer pattern; it implies a trend reversal from bearish to bullish.

Variations of the inverted hammer pattern

Sign up with TradingMoon today for access to cutting-edge tools and resources that empower your trading journey with CFDs. Furthermore, candlestick charts can provide traders with important information about market sentiment and volatility. Long-tailed candlesticks indicate that there was a significant price movement during the trading session, while doji candlesticks suggest that there was indecision in the market. It occurs when a long green candlestick is followed by a long candlestick that opens above the previous day’s closing price. This pattern suggests a potential reversal in the market as sellers are starting to gain control after a period of buying pressure. It’s characterised by a long candlestick followed by a long green candlestick that opens below the previous day’s closing price.

The hammer is formed by a candle with a small body and an elongated lower shadow. This shape shows that at first, sellers were pushing the price down during the trading time. But then, buyers came in strong, pushed the price back up, and made it close near the top price of the day. In our inverted hammer explanation, we have covered the main criteria for the candle and setup. However, finding one on the chart is not an easy task for inexperienced traders.

Bullish Spinning Top

• Without strict stop-loss rules, even strong patterns turn into losses during false reversals.
• Its long upper wick reflects buyers’ attempts to push the price upward.
• The difference lies in body color, wick length, and price direction.

This table neatly sums up what makes an inverted hammer a pattern worth watching. It shows sellers are losing control and buyers might take over. The lower shadow (the line below the body) should be tiny or missing. That tells us sellers didn’t push the price down much during that session. The tiny or missing lower shadow shows that sellers didn’t push the price down much.

Bearish Harami Candlestick Pattern

So, next time you see an inverted hammer, don’t just focus on the candlestick—check the volume. On the other hand, if the inverted hammer appears with high volume, that’s a big deal. High volume means the buyers are stepping up, like a loud crowd at a game. The more volume, the more likely the reversal could actually happen. More people buying in suggests the trend could be turning around. This means adding more to your position if the trade starts moving in your favor.

Traders enter a long position, gaining momentum from the upward. In the image below, you can look at the chart of “HCL Technologies Ltd” stock at a 15-minute timeframe on 3rd February 2025. You can see the buy signal generated using the Inverted Hammer candlestick pattern. Understanding the single candlestick patterns provides a clear understanding of finding optimal entry and exit points. The inverted hammer pattern is telling you that the bears are losing their grip. But you absolutely must wait for the next candle to prove that buyers are actually stepping in to take control before you risk any capital.

Key Takeaways

The red-arrow candlestick is an Inverted Hammer, with a small body at the bottom and a long upper wick. This is like the hammer’s head It shows buyers tried to push the price up, even though they couldn’t hold it there. Imagine a ball rolling downhill, the inverted hammer pattern only makes sense after prices have been falling.

VWAP meaning in trading

During such periods, prices often bounce back while trading volumes rise. An increase in trading volume during the formation of an Inverted Hammer signals growing interest in the asset and a possible bullish reversal. Homma understood that both market conditions and public sentiment influenced price fluctuations. Using Japanese candlesticks, he demonstrated the relationship between opening, closing, high, and low prices over a given period. This led to the creation of the Inverted Hammer and other candlestick patterns. Like many other candlestick patterns, the Inverted Hammer originated in the Japanese rice markets during the 17th-18th centuries.

Trend context

An inverted hammer candle is a Japanese candlestick charting pattern used by technical traders to signal a market reversal from a downtrend to an uptrend. It is a bullish reversal pattern that signals a weakening downtrend, and leads to a possible change in the price’s trending direction from down to up. Bullish candlestick patterns are vital tools for traders seeking to identify trend reversals and continuation signals in financial markets.

How to identify an Inverted Hammer pattern in trading?

• The confirmation candle confirms the reversal and suggests that prices will continue to rise.
• The pattern was called “Mat Hold” in Japanese analysis to symbolize a resting mat before continuation.
• And one indicator that does a fantastic job of quantifying this, is the RSI indicator.
• LiberatedStockTrader’s candlestick research shows Matching Low produces around 55–57% reversal accuracy.
• Traders can use the Inverted Hammer pattern for swing trading in an up-trending market.

Always wait for the next candle to close higher before entering a trade. Without this confirmation, the signal might be false and the price could continue falling. It’s important to spot the Inverted Hammer correctly so you don’t get confused with similar candlesticks. Knowing the differences, like hammer vs inverted hammer, inverted hammer vs shooting star, and the hammer candlestick pattern, helps you trade with confidence. After a reverse (or inverted) hammer candle, there may be a potential bullish reversal if confirmed by a strong bullish candle in the next session. However, without confirmation, the pattern alone does not guarantee a trend change.