The Inverted Hammer is a candlestick chart pattern which signals a potential reversal in the market. In this article we will show you how to identify it in the right market position with real chart examples. We also include a link to a free MT4 indicator download.
The Inverted Hammer Candle Pattern is a one candle pattern which signals a reversal in the market. The Pattern is Bullish and should be identified as a signal when occurring in an down-trending market or at the bottom of a range.
Inverted Hammer Candle Pattern Criteria:
- A small real body formed at the lower end of the trading range. The real body colour is not important, can be red or green.
- A long upper shadow at least twice the height of the real body.
- It should have a very short or no lower shadow.
- It occurs in an down-trending market or at the bottom of a range.
Ideally followed by a new candle whose real body gaps away from the prior real body. Nonetheless, a gap is not always necessary.
- This is not a major reversal signal and is best traded with bullish confirmation.
- Verification is ideally in the form of a gapped opening on the following trading session (for daily candles) but a green candle with higher prices could also be suitable confirmation.
Quick Reference Guide – Candlestick Basics. If you need a reminder of what candlesticks are have a look at our free PDF – Candlesticks Explained.
The criteria and examples above are just the technical definitions of this pattern. However patterns are only useful with context and with real chart examples.
No pattern will ever exactly match the criteria and in order to be a useful signal must occur in the correct place in a trend. Let’s start by looking at the the classification table for this pattern.
Inverted Hammer Candle Pattern Classification Table
|Number of Candles In Pattern||1|
|Market Conditions: Range, Down-trend, Up-trend||Down-trend, Ranging|
|Position: Top, Bottom, Range||Bottom|
What Price Action Does The Inverted Hammer Pattern Represent?
All candlestick patterns are formed by price action. But the popular ones represent price action that may have significance in signalling the direction of the market.
The Inverted Hammer pattern forms when the market opens near its low, then strongly rallies and finally backs off to close near the opening. This creates the long upper shadow and relatively small real body.
When this happens in a downtrend or at the bottom of a range, the Inverted Hammer Candle Pattern can be seen as a reversal signal in the market. This may mean that the market is more likely to reverse.
The Inverted Hammer Pattern indicates that the session’s rally could not be sustained which is why it is a weak signal that requires further confirmation on the following session.
A gap up on the following day is a particularly good confirmation for this pattern, the larger the gap the better. If there is no gap, a green candle with a higher price may be a suitable signal especially if it occurs in an area of significant support.
Inverted Hammer Pattern Example With Confirmation
In the example below of the FTSE100, the market was down-trending and then the Inverted Hammer Candle Pattern formed in the downtrend.
There was no significant gap, but the following candle was green with strong price action to a higher price. In addition, the pattern coincided with a key area of resistance as it happened on the pivot point level.
This confirmation can help the trader to feel more confident in the signal and the potential for a good trade.
In What Market Conditions Does The Inverted Hammer Pattern Become A Signal?
The Inverted Hammer Candle Pattern can be seen as a potential signal when it occurs in an down-trending market or in a ranging market if it occurs at the bottom of trading range and it is followed by bullish confirmation.
Let’s look at a couple of real chart examples.
Inverted Hammer Candle Pattern In A Ranging Market
A ranging market is one where the price action moves up and down between two sets of support and resistance. This is also known as a sideways or horizontal market. In essence the price action is struggling to break out of the range decisively either on the upside or downside.
As you can see in this example of the FTSE100 the market was ranging and an Inverted Hammer Candle Pattern occurred at the bottom of the range, followed by a strong bullish candle. This signaled the bottom of that leg down. The market reversed and moved back towards the top of the range.
Inverted Hammer Candle Pattern In A Down-Trending Market
As you can see in this FTSE100 example below, the market was down-trending and then the Inverted Hammer Candle Pattern occurred at the bottom of the trend, followed by a strong bullish candle. The market reversed and went higher.
Inverted Hammer Candle Pattern MT4 Indicator Download (free)
If you trade using MT4 then why not try out our free MT4 indicator? The indicator will scan the market based on the criteria shown in this article and identify them on the chart.
There is also an alternate version which can show the signal in a separate indicator window of the chart if that is your preference.
Important Information About Candlestick Patterns
Interpretation Of Candle Patterns:
It is important to note that these patterns were originally identified on the daily timeframes of index charts, which is still where they are the most useful. However, this does not mean that they cannot be used for other markets or time frames.
No signal is perfect and should never be used as such. Any patterns that you identify only signals a potential move based on the fact that history repeats itself and forms regular patterns in similar situations.
But past performance is no guarantee of future results! So always treat these patterns with care and think of these guidelines when using them.
Best practice guide for trading of candle patterns:
- No pattern is ever perfect. Be aware that patterns will form slightly differently each time and in different markets.
- Use them as consistently as possible. Even though you will never find patterns exactly the same, you should always implement a consistent ruleset when identifying and using patterns.
- It is never a guarantee, only an indication.
- Make sure you are using it in the right context. For example if it is a continuation pattern then don’t use it to trade reversals!
- Use multiple signals (confirmations) to have more confidence in your trading.
Hammer Candle Pattern
More About Candlestick Patterns
If you are interested in reading more about candlestick patterns you can find our articles on this topic here: https://www.nothardtrading.com/category/candle-patterns/ or choose a pattern below to read more.