How to trade using the inverted hammer candlestick pattern
Knowing how to spot possible reversals when trading can help you maximise your opportunities. The inverted hammer candlestick pattern is one such a signal that can help you identify new trends. Learn more about it in this guide.
What is the inverted hammer candlestick pattern?
The inverted hammer candlestick pattern (or inverse hammer) is a candlestick that appears on a chart when there is pressure from buyers to push an asset’s price up. It often appears at the bottom of a downtrend, signalling potential bullish reversal.
The inverted hammer pattern gets its name from its shape – it looks like an upside-down hammer. To identify an inverted hammer candle, look out for a long upper wick, a short lower wick and a small body.
How is an inverted hammer candlestick formed?
An inverted hammer candlestick is formed when bullish traders start to gain confidence. The top part of the wick is formed when bulls push the price up as far as they can, while the lower part of the wick is caused by bears (or short-sellers) trying to resist the higher price. However, the bullish trend is too strong, and the market settles at a higher price.
What does an inverted hammer tell traders?
An inverted hammer tells traders that buyers are putting pressure on the market. It warns that there could be a price reversal following a bearish trend. It’s important to remember that the inverted hammer candlestick shouldn’t be viewed in isolation – always confirm any possible signals with additional formations or technical indicators. Lastly, consult your trading plan before acting on the inverted hammer.
Inverted hammer chart pattern example
Let’s say you’re following Facebook’s share price, which is on a downtrend, last closing on $160.06. The next day, it opens at $160.91, with an intra-day low of $160.52 and a high of $163.80. Facebook’s share price closes at $161.38, creating an inverted hammer pattern, as seen below. Over the next two days, the share price increases to $166.55, confirming that the inverted hammer signalled bullish reversal.
How to trade when you see the inverted hammer candlestick pattern
To trade when you see the inverted hammer candlestick pattern, start by looking for other signals that confirm the possible reversal. If you believe that it will occur, you can trade via CFDs. These are derivative products, which mean you can trade on both rising and falling prices.
To trade an uptrend, you can ‘buy’ (go long). If you think that the signal is not strong enough and the downtrend will continue, you can ‘sell’ (go short).
If you have a live IG trading account, you can follow these steps to trade when you see the inverted hammer candlestick pattern:
- Log in to your trading account
- Search the asset you want to trade in the ‘finder’ panel
- Input your position size
- Choose ‘buy’ or ‘sell’ in the deal ticket
- Confirm the trade
You can also practice finding the inverted hammer and placing trades on a risk-free IG demo account.
Inverted hammer candlestick pattern summed up
- The inverted hammer candlestick appears on a chart when there is pressure from buyers, signalling a possible bullish reversal
- To identify an inverted hammer candle, look out for a long upper wick, a short lower wick and a small body
- An inverted hammer tells traders that buyers are gaining confidence in the market
- When you spot the inverted hammer chart pattern, you can trade using derivatives such as CFDs
- With derivatives, you can trade rising or falling prices because you do not own the underlying asset
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This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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