What is Inverted Hammer Candlestick Pattern?

Inverted hammer candlestick, in the spectrum of trades, appears when the prices of a certain asset open at a given level just before rising sharply. Then, the price reaches a certain level or a peak and drops nearly to its opening.

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Significance of the Inverted Hammer Candlestick Pattern

The inverted hammer candlestick pattern is a key technical indicator that signals a potential reversal from a bearish to a bullish trend. It suggests weakening selling pressure and growing buyer interest, often appearing at the bottom of a downtrend to indicate an upcoming market recovery.

This pattern reflects moments when traders start buying at lower prices, pushing the stock upward by the close. For example, if a stock drops to INR 480 and rebounds to INR 510, it may form an inverted hammer, signalling renewed optimism among buyers.

However, traders should confirm its validity before acting. If the candle forms a new high but fails to sustain momentum, the reversal signal may be weak. Hence, pairing the inverted hammer with other indicators like RSI or moving averages enhances accuracy and helps validate the trend change effectively.

Example of Inverted Hammer Candlestick and Strategies to Trade

An example of the inverted hammer candlestick pattern will help you understand its concept. A trading strategy when this pattern forms might help in making informed investment decisions:

1. Example of an Inverted Hammer Chart Pattern

   Before strategising to trade with an inverted hammer candlestick, here is a brief example of it:

   • Suppose you are closely monitoring your preferred company stock and see it declining and dropping, and closing at INR 150 in a day.
   • However, on the following day, it opens at INR 150.70 and reaches a peak of INR 155.70 and records a low of INR 150.60. It closes at INR 151.70.
   • For the following couple of days, the stock price reached a peak of INR 156.80, which confirms that the inverted hammer is signifying a bullish movement.

2. Strategy for Trading With the Inverted Hammer Candlestick Pattern

   To trade and make a possible optimised gain using the inverted hammer candlestick, you must follow a strategic approach. Here is a breakdown:

   • To confirm the trend reversal, take a look at the inverted hammer at the bottom of the stock’s downtrend. This might be a potential reversal sign.
   • Now you might want to wait for the bullish candle to form next to the inverted hammer candlestick, if you are planning to enter a long position.
   • Be mindful to use the inverted hammer together with the support level. This indicates a stronger signal.
   • For volume analysis, look for the high volume that accompanies the inverted hammer.

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Demerits of an Inverted Hammer Candlestick Pattern

Even after an inverted hammer candle forms, it is limited due to factors such as the buyer’s action, the strength of the market trend:

• Typically, after an inverted hammer candlestick forms, there is a chance of an upward reversal. However, it comes with no guarantee that this upward reversal will last for a longer period.
• It is one of the different candlesticks used to predict market moves. Solely relying on it might be risky. For example, a bullish hammer at INR 600 might look promising, but it can still drop to INR 570 if the trend is weak and the trade volume is low.
• Additionally, in a low-volume market, an inverted hammer pattern may generate false signals, misleading traders.

Conclusion

An inverted hammer candlestick typically acts as an effective technical analysis tool to provide clues about potential market changes to traders. As a trader, you must not solely rely on it to identify a bullish trend. Rather, combine it with support points, trading volume and other technical tools to increase its usability.

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FAQs on Hammer Candlestick Pattern

1. What is an inverted hammer candlestick pattern in trading?

An inverted hammer might appear at the end of a downtrend in the price of a certain asset. It can indicate a potential reversal of the stock prices. Thus, it indicates that the bearish momentum might end and the price might move upwards.

2. How do you identify an Inverted Hammer on a chart?

As the name suggests, the shape of this candlestick resembles an upside-down hammer. You can easily identify it as it has a long upper wick, a small body and a small lower wick.

3. Is the inverted hammer pattern bullish or bearish?

Usually, an inverted hammer candlestick represents a bullish reversal market trend. Thus, it usually suggests that downtrend pressure is weakened, buyers are taking action, which leads to a potential price increase of an asset.

4. How reliable is the inverted hammer candlestick for traders?

You must not consider an inverted hammer as an accurate predictor of upward price reversal. However, you can use it as a potentially reliable indicator for market entry. Use insights from other patterns, observing market events on a trading day, etc.