Candlestick patterns are one of the important tools in technical analysis, used by many investors to predict future price trends. Among candlestick patterns, the Inverted hammer candle pattern is one of the most notable patterns, with the ability to provide trend reversal signals from bearish to bullish. In the following article, let’s learn about the inverted hammer candle pattern with Forex Trading.
Learn about what is inverted hammer candle pattern.
The hammer reversal candlestick pattern is considered an important tool. Especially for investors who wish to gain a deeper understanding of price behavior and seek profitable trading opportunities. This pattern is not simply a regular candlestick chart. It also contains important signs of a shift in price trends, from the dominance of one side to the other.
Identifying and understanding the hammer reversal candlestick pattern is an important step. It identifies entry and exit points into the market. By using this model, investors can grasp the shift in market sentiment and make smart trading decisions. Let’s learn about this inverted hammer candlestick below.
Concept of hammer candlestick
Inverted hammer candlestick, also known as Inverted Hammer in English. It is one of the reversal candlestick patterns that often appear in downtrends. This is considered a signal that there will be a strong reversal. You will see a downtrend turn to an uptrend. The structure of this pattern includes a candle with a short body and a long upward shadow. It’s shaped like an inverted hammer.
This pattern usually appears frequently on forex charts. Favored by many investors due to high trading efficiency. However, it is often confused with the Shooting Star candlestick pattern. Because they have similar characteristics and shapes. However, inverted hammer candlesticks often appear at the end of a downtrend. While candlestick reversals often occur at the top of an uptrend. Besides, the inverted hammer candlestick is also a reversed version of the Hanging Man pattern.
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Meaning of inverted hammer
The inverted hammer candlestick pattern, or Inverted Hammer, also has some important meanings. Similar to other bullish reversal candlestick patterns on the market. Understanding these meanings will help investors use this model more effectively.
The Inverted Hammer usually shows that the market is starting to explore higher price levels. With the expectation that prices will continue to rise. In the next trading session, if the price closes near the body of the inverted hammer candlestick. This shows that investors sold at the closing and opening prices of the pattern, and are losing profits.
The upper shadow of the Inverted Hammer is usually very long. It shows that the power of buyers is increasing and is creating pressure to push prices up after a period of being suppressed by sellers. In short, the appearance of the Inverted Hammer pattern is often a buying signal for investors.
Characteristics of hammer reversal candlestick
Despite its simple shape, many investors often have difficulty distinguishing the inverted hammer candlestick pattern from other similar candlestick patterns. To avoid unnecessary mistakes, investors need to remember some important characteristics to identify the inverted hammer candlestick pattern.
- Inverted hammer candlesticks usually have small and short bodies.
- The lower wick of the Inverted Hammer is often very short or absent. Meanwhile, the upper candle’s wick is very long, usually twice as long as the candle’s body.
- The pattern can be a green candle (bullish) or a red candle (bearish), as this does not matter. However, green candles often give stronger and safer bullish reversal signals.
- Usually appears in a downtrend, signaling a reversal to an uptrend. However, to increase reliability, the inverted hammer candlestick pattern needs to be confirmed by the following candlesticks. If the next candle after Inverted Hammer is a strong bullish candle. Or there is the appearance of a rising GAP gap between two candles. This will be a confirmation of the reversal of the inverted hammer candlestick pattern.
Instructions on how to trade with hammer reversal candlesticks
For most investors, especially those who like to make trades. According to the price action school, the best advice is to combine the use of multiple technical analysis indicators at the same time to increase the accuracy of trading orders.
Therefore, in this part of the article, we will introduce investors to two methods of combining transactions. Use the inverted hammer candlestick pattern along with resistance and Fibonacci retracement. These two methods have proven to be extremely effective in optimizing trading results.
Trade the inverted hammer at the support zone
Inverted Hammer candlestick pattern, or Inverted Hammer. Usually gives more effective results when appearing at strong support areas. This is because the support line also often signals a price reversal to the upside. Therefore, when trading at such a price range, the risk is usually very low. Specifically:
- When the price is correcting in a downtrend and an inverted hammer candlestick pattern appears at the support area, investors can open a buy order (BUY) at the closing price of the inverted hammer candlestick, especially if this is a candlestick. green candle.
- Place stop loss below the support line a certain pips. Take profit target is set at the nearest resistance level. As long as the risk/reward ratio (R:R) reaches 1:1 or 1:2.
Trade the inverted hammer candle pattern Fibonacci retracement level
This is a combination method that many experienced investors often apply. However, it should be noted that the inverted hammer Japanese candlestick pattern needs to be formed at the end of a downtrend. Here is how investors can execute trading orders:
When the market drops and hits the Fibonacci retracement level of about 32.2%. The appearance of the inverted hammer candle pattern is an ideal time to place a pending buy order. This pending buy order is usually placed a few pips above the top of the pattern. When the price increases, the order will automatically activate. In case the price continues to decrease, the order will automatically be canceled to minimize risk.
- The stop loss point is usually placed about 2-3 pips below the bottom of the inverted hammer candlestick.
- The take profit point can be placed at a strong resistance area that is either double or triple the stop loss level.
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Analyze the difference between the inverted hammer candle pattern and the shooting star
These two types of candles have exactly the same shape. Their short stems combine a long wick at the top and a small wick at the bottom (or no bottom wick). Both can be seen as a signal for a possible trend reversal. However, the only difference between them is the location on the chart.
The inverted hammer candle pattern often appears as the final sign of a downtrend. On the contrary, comets often appear at the beginning of a trend and are a sign of possible downward price movement. In short, these two patterns have similar shapes but give different signals to traders.
summary
In short, above is all the important knowledge about the Inverted hammer candle pattern, or Inverted Hammer. Forex Trading hopes that, through the content of this article, you will have a clearer view of this concept and can apply this candlestick pattern in investing safely and effectively!
FAQs
When did the inverted hammer candle pattern appear?
This candlestick often appears at the end of a downtrend, when the price has dropped sharply and shows signs of reversing up.
Distinguish inverted hammer candle pattern from other candlestick patterns?
Common point:
- Inverted hammer candles have short candle bodies, usually green (bullish) or red (bearish).
- The lower shadow is long, at least twice as long as the candle’s body
- The upper shadow is short or absent
How to trade with an inverted hammer candle pattern?
How to trade:
- Enter a buy order when the price surpasses the high of the inverted hammer candlestick
- Take profit at the nearest resistance level when making a trade
- Stop loss below the low of the inverted hammer candlestick
