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Inverted hammer candlestick: features and how to trade

The inverted Hammer candlestick is a bullish reversal candlestick pattern, formed when the opening price and closing price are almost equal. So what is a Hammer candle, what are the characteristics of a Hammer candle, and how to trade with candlestick charts effectively? Let’s join Forex Trading to learn all about candlestick knowledge through the article below.

General introduction to inverted hammer candlestick

Inverted Hammer candlesticks can be used to identify trends and often appear on forex charts. Refer to the information below for details about this type of candle.

What is an inverted hammer candlestick?

An inverted Hammer candlestick is also known as the inverted hammer. This type of candle has the opposite shape of the Hammer candle. They often appear at the end of a trend and signal a price reversal from down to up. This candlestick pattern shows that the sellers initially control the market. But then, buyers stepped in and found ways to push prices higher. But this price increase cannot be maintained for long. This can lead to the closing price being close to the opening price at the end of the session.

Characteristics of the inverted Hammer model

To the naked eye, it is often easy to confuse different types of candles because of their similar shapes. In particular, the Hammer candlestick pattern is often mistaken for the Hanging Man candlestick pattern or the Dragonfly Doji candlestick pattern. Therefore, investors need to clearly understand some of the following important characteristics:

The inverted Hammer body is located at the top and is quite short in length. Because there is rarely a difference between the opening price and the closing price.
The candle shadow above is very short or absent.
The lower candle shadow is usually 2-3 times longer than the candle body. The longer this candle shadow is, the more likely it is to show a reversal signal in the future.
The color of the candle can be red or blue. Red candles usually represent bearish candles, while green candles represent bullish candles. In particular, the price trend reversal signal from green candles will often be stronger than red candles.

See more: Read candlestick charts: Basic & advanced material

Popular types of Hammer candles

Hammer candlesticks are often divided into 2 common types. Those are Bullish Hammer candles (increasing Hammer candles) and Bearish Hammer candles (downward Hammer candles).

Bullish Hammer candlestick:

Characteristic:

The candle’s body is short and can be green or red.
The upper candle shadow is long and at least twice as long as the candle body.
The lower candle shadow is often short or absent.

Meaning:

The potential signal shows that the trend may reverse from decreasing to increasing.
Selling pressure was strong but was pushed back by buyers.
Market psychology is hesitant among sellers and increasing among buyers.

Bearish Hammer Candle:

Characteristic:

Similar to the Bullish Hammer candlestick, but appears at the top of an uptrend.
The lower shadow of the candle is long and will be at least twice the length of the candle’s body.

Meaning:

Potential signal shows that the trend may reverse from increase to decrease.
The buying pressure was strong but was pushed back by sellers.
Market psychology is hesitant among buyers and increasing among sellers.

Hammer candlestick chart example

As shown in the chart above, before the inverted Hammer candlestick was formed, the market was in a downtrend. The candle before the inverted hammer candle is a type of green candle. While the hammer candlestick on the contrary has a closing price approximately equal to the opening price.

What’s worth noting here is that even though the inverted Hammer is complete. However, the inverted Hammer candlestick pattern has not yet been accurately confirmed. For this pattern to truly complete, the next candle must be a strong green candle as shown above. From there, the price will completely change direction and increase continuously.

What are the advantages and limitations of Hammer Candles?

Just like Japanese candlestick reversal patterns or other types of candles, inverted Hammer candlestick also have their own advantages and limitations.

Outstanding advantages of inverted Hammer candlestick

Easy to recognize: Characteristic candle structure with short candle body, long upper candle shadow, and short or absent lower candle shadow. This makes it easy for traders to spot on the price chart. Frequently appearing at the bottom of a downtrend is a potential location for a reversal.

Strong reversal signal: The long upper shadow of the Hammer candle shows strong selling pressure. But was pushed back by buying pressure, showing hesitation on the part of sellers and an increase on the part of buyers. Inverted hammer candlesticks often have increased trading volume, which helps reinforce the possibility of a trend reversal.

High probability of confirmation: Hammer candles are more effective than other common Hammer candlestick patterns. Because the lower candle shadow is short or absent, it limits the possibility of creating false signals.

Provides a potential buy entry point: You should buy when the price surpasses the top of the Hammer candlestick. This is a potential entry point to start a new uptrend. Placing stop-loss below the bottom of the Hammer candle helps limit risk.

Diverse applications: This type of candlestick can be applied to many types of assets such as stocks, foreign exchange, commodities… Effective in short-term to medium-term trading time frames.

Limitations of Hammer candles

Besides the advantages, this type of candlestick also has some limitations that need to be kept in mind to avoid making trading decisions such as:

False signals: Hammer reversal candles are not perfect signals and can cause false signals. A reversal is not guaranteed, the price may continue to move in the old trend.

Difficult confirmation: This candlestick needs to be confirmed by other technical indicators or price in the next trading session. Confirmation can take a long time and result in missed trading opportunities.

Risks during trading: Traders may lose if the price does not move according to the Hammer candle signal prediction.

Need to combine technical analysis: Looking at candlestick charts is only part of the technical analysis process. It is necessary to combine technical indicators, price models, market news, and trading experience.

How to trade the inverted Hammer candlestick

This is a potential bullish reversal candlestick pattern. So to trade effectively with this model, you need to follow these steps:

Step 1: Identify inverted Hammer candlestick

Look for an Inverted Hammer based on candlestick charts to ensure the following characteristics are met:

The candle body is short and can be green or red.
The upper shadow of the candle is long or at least twice as long as the candle’s body.
The shadow on the lower candlestick is short or absent.

When seeing these characteristics, it should be confirmed by increased trading volume during the candle formation session.

Step 2: Wait for the buy order entry point

To wait for the ideal buy order entry point, you need to meet the following requirements:

When the price surpasses the peak of the inverted Hammer.
Confirmed by other technical indicators such as RSI, MACD, Stochastic,…

However, avoid rushing into a buy order as soon as it appears. Wait for confirmation to increase reliability.

Step 3: Place a Stop-loss order:

The stop-loss position is below the bottom of the inverted Hammer candlestick. You should place far away from the current price to limit risks.

Step 4: Take profit

Profit-taking can be done according to the desired profit or risk ratio. Monitor price fluctuations to adjust profit-taking points accordingly.

Monitor price fluctuations to take profits

Step 5: Risk management

Must always follow trading discipline: Cut losses when the price hits Stop-loss, do not remove orders while at a loss.

Control your investment capital appropriately: Only make transactions with the appropriate amount of capital, without affecting personal finances.

Use risk management tools such as Automatic stop-loss order, and reasonable margin ratio.

See more: Exness – Trade With The World’s Leading Broker Exness

Some notes when using inverted Hammer candlestick

Inverted Hammer candlestick should be combined with technical indicators such as RSI, MACD, and Stochastic… to help increase the reliability of the signal. Analyzing candlestick charts and evaluating technical indicators requires a certain understanding and experience.

Use reasonable entry and stop-loss points. Stop-loss should be set far from the current price to limit risks.

Always follow trading discipline such as cutting losses when the price hits Stop-loss, and not removing orders when at a loss. You should only trade with appropriate capital and do not affect your personal finances.

Note that you must be fully equipped with trading knowledge to better understand how this type of candlestick works. At the same time, you should regularly improve your practical trading skills.

Follow news and market fluctuations to have an accurate assessment of the possibility of a reversal. Analyze market sentiment to predict future price trends.

Avoid trading hastily or under emotional pressure. Always learn and improve your trading skills.

Conclude

Using an inverted Hammer candlestick wisely can help traders increase their chances of success and profits. However, you must always be careful, manage risks effectively, and combine experience to trade. In the above article, Forex Trading has told you clearly about this type of candle. Hopefully, through the above article, you can easily use candlestick charts to make transactions.

FAQS

Is an inverted Hammer candlestick highly reliable?

This type of candle is a potential signal, not a perfect signal. The possibility of a reversal can be influenced by the market and news. Needs confirmation with other technical indicators and effective risk management.