Inverted Hammer Candle Pattern Explained (real chart examples)

Inverted Hammer Candle Pattern Explained (real chart examples)
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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.
Inverted Hammer Candle Pattern GREEN
Inverted Hammer Candle Pattern GREEN
Inverted Hammer Candle Pattern RED
Inverted Hammer Candle Pattern RED

Additional notes:

  • 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
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bullish
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.

Hint: It is always good practice to look for confirmation for any signal that you are looking to trade.

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.

Bullish Inverted Hammer Candle Pattern Example on a Key Level
Bullish Inverted Hammer Candle Pattern Example on a Key Level

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.

Ranging Market Example
Ranging Market Example

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.

Bullish Inverted Hammer Candle Pattern Example in Ranging Market
Bullish Inverted Hammer Candle Pattern Example in Ranging Market

Inverted Hammer Candle Pattern In A Down-Trending Market

Down-trending Market Example
Down-trending Market Example

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.

Bullish Inverted Hammer Candle Pattern Example in Down-trending Market
Bullish Inverted Hammer Candle Pattern Example in Down-trending Market

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.

To download either or both, follow this link to the Inverted Hammer MT4 Indicator.

Important Information About Candlestick Patterns

Attribution:

All of the candlestick patterns that we explain on NothardTrading.com must be attributed to Steve Nison and his books on candle charting, the most famous of which was Japanese Candlestick Charting Techniques (Amazon). You can also find out more at his website here.

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.

Related Patterns

Hammer Candle Pattern

As the name suggests this pattern is related to the Hammer Candle Pattern. In terms of its shape it is the reverse of the Hammer Pattern but both are bullish reversal patterns. The Hammer Candle Pattern however is a stronger bullish signal than the Inverted Hammer Pattern . 

For the full rundown see the article here: 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. 

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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