Candlestick patterns are a popular technical analysis tool used by traders of all levels to identify potential trading opportunities. Candlestick patterns help a trader understand the sentiment of the market. One such pattern is The inverted hammer candlestick pattern. An inverted hammer pattern is one of the most commonly used patterns and is seen as a bullish reversal signal. In this blog, we will look at what is an Inverted hammer candlestick pattern, how to identify it, and how to trade with it.
Table of Contents
What is an Inverted Hammer Candlestick?
The inverted hammer candlestick is a type of trend reversal candlestick pattern. The Inverted hammer has a long upper wick, very little or no lower wick, and a small body. The pattern is considered a bullish reversal signal, meaning that an Inverted hammer signals that the ongoing downtrend may end and the price may enter into a fresh uptrend.
How to Identify an Inverted Hammer Candlestick Pattern?
The inverted hammer candlestick pattern is a single candle pattern that is easily identifiable. Inverted hammers are typically found at the bottom of a downtrend. To identify this pattern, look for a single candle with a long upper wick at least twice the length of the body.
An inverted hammer is formed when buyers start gaining strength. The upper wick indicates that the buyers pushed prices upwards as high as they could, while the lower part of the wick and the body indicate that the sellers tried to resist the higher price.
How to Trade with Inverted Hammer Candlestick Pattern?
Once the inverted hammer candlestick pattern is identified, it can be used to predict a possible reversal of a trend. Traders will typically look to enter a long position once the price breaks above the high of the inverted hammer candle. It is important to remember that this indicates a possible reversal, not a guarantee. Therefore, traders should also use other technical analysis tools to confirm the reversal before entering any position.
Fibonacci Retracement levels, MACD cross-over, RSI divergence, and Support and resistance levels are some of the most reliable tools to confirm a bullish reversal indicated by an inverted hammer candle.
Conclusion
The inverted hammer candlestick pattern is a technical analysis charting pattern indicating a possible reversal of price trends. It is made up of one single candle that looks like an inverted hammer with a long wick above and a short body below. Once the inverted hammer candlestick pattern is identified, it can be used to predict a possible reversal of a trend. Traders should look to enter a long position once the price breaks above the high of the inverted hammer candle. It is important to remember no candlestick pattern is perfect. An inverted hammer does not guarantee a trend reversal. This is why it is strongly recommended to use it in conjunction with other Technical tools and Indicators.
