Inverted Hammer Candlestick
 
The inverted hammer candlestick is a bullish reversal pattern that occurs after a downtrend, at the support, or during a pullback within an uptrend. It is characterized by a long upper shadow and a small real body, preceded by a long red (or black) real body. In order to be considered an inverted hammer, there are four criteria which must be met. First, the small real body must form near the bottom of the price range. Second, the upper shadow is usually two or more times the length of the body. Third, the lower shadow is small or nonexistent. Lastly, this signal must occur in a downtrend as mentioned above. Before studying the inverted hammer signal, it is wise to understand the candlestick hammer signal first.

The inverted hammer candlestick requires bullish confirmation before any action should be taken, and it can be confirmed by a “gap-up” or by a long white candlestick with heavy volume. Another factor to take into consideration with this signal is the “gap.” The larger the gap, the stronger the confirmation will be. In order to detect a “gap,” measure the distance between both real bodies, first measuring the higher of the open or the close for the inverted hammer and then by measuring the lower of the open or close for the previous session. A “gap” is present if the hammer’s higher value is less than the previous session’s lower value. Gaps should be used as strength indicators and they form in many places. The witnessing of a gap at the beginning of a new trend produces profitable opportunities however proceed with caution, because some are not so easy to see.

What does the inverted hammer signal indicate is happening in the markets?
This candlestick pattern is formed when the market opens at or near its low and it occurs in bearish conditions. Prices then change direction and the bulls are able to rally the prices up briefly but without the ability to sustain buying pressures. As a result prices close at or near the low of the day and the bears take the necessary actions to protect their gains. If the next day opens above the body of the inverted hammer, it means that those who shorted at the opening or closing of this signal lose money. The longer the market can hold above the inverted hammer’s real body, the more likely these shorts will attempt to cover their positions.

Japanese candlesticks more accurately and easily conveys investor sentiment in the markets than any other type of technical analysis chart. There are 12 major candlestick patterns and about 40 reversal and continuation patterns that are all indicative of future price movements. Some of which include the doji candlestick chart, bullish engulfing pattern, and the bearish engulfing pattern, in addition to the inverted hammer candlestick. Learn to increase your profit through candlestick trading online.

Continue your Japanese Candlestick education and read about the hanging man candle.