We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Bullish
GBP/USD
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
USD/JPY
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Mixed
Oil - US Crude
Mixed
Bitcoin
Bullish
More View more
Real Time News
  • The Singapore Dollar is driven by the Monetary Authority of Singapore, which manages exchange rate instead of short-term interest rates. Learn more on the $SGD and how to trade it. Get your update from @ddubrovskyFX here: https://t.co/eWLM9XZs5Y https://t.co/OWuwGML4Ch
  • RT @FT: Huawei admits that US sanctions are hurting https://t.co/GIT4XSfszx
  • RT @WSJecon: Mexico’s inflation eased in September, coming in line with the Bank of Mexico’s 3% target for the first time in three years ht…
  • My phone's decided to give up the ghost and I've been phoneless for 24 hours. Not coincidentally, I've been a machine tackling errands around the house. What a time to be alive.
  • #Gold remains stuck in a range as a range of conflicting forces battle and fail to take control of price action. Get your $gld market update from @nickcawley1 here: https://t.co/pw7UjkUyqH $XAUUSD https://t.co/YD8L6knjhe
  • Geopolitical developments send oil prices soaring or falling. Get your market update here: https://t.co/0znHZPvPON https://t.co/s358dvMBeR
  • Currency markets may be battered by breakneck volatility if a slowdown in global economic growth triggers a collapse in the fragile market for collateralized loan obligations (CLOs). Get your market update from @ZabelinDimitri here:https://t.co/KfjjtaXs7b https://t.co/sWeSlv33pb
  • The #Dow Jones and #Nasdaq 100 will await key earnings from some of the world’s largest manufacturers and tech companies while the #DAX grapples with freshly-imposed tariffs. Get your equities market update from @PeterHanksFX Here: https://t.co/u2lG19JFt3 https://t.co/OHs4rQEH7T
  • Crude #oil prices are consolidating above a key support zone we’ve been tracking for more-than three months now. Get your market update from @MBForex here: https://t.co/XaACvEpLG4 #OOTT https://t.co/XjmjUt4Par
  • Why trade with Bollinger Bands®? Find out as a day trader, how you can use it to your advantage:https://t.co/dwODDDSsFi @WVenketas https://t.co/SYduJ5k9mL
Trading the Inverted Hammer Candle

Trading the Inverted Hammer Candle

2019-07-17 16:27:00
Richard Snow, Markets Writer
Share:

The Inverted Candlestick Pattern: Main Talking Points

The inverted hammer candlestick pattern is commonly observed in the forex market and provides important insight into market momentum. In particular, the inverted hammer can help to validate potential reversals.

The article will outline the following:

  • What is the Inverted Hammer?
  • Advantages and limitations
  • Using the Inverted Hammer Candlestick pattern in trading
  • Further reading on trading with candlestick patterns

What is an Inverted Hammer Candlestick?

The inverted hammer candle has a small real body, an extended upper wick and little or no lower wick. It appears at the bottom of a downtrend and signals a potential bullish reversal. The extended upper wick suggests that the bulls are looking to drive price upwards. Validation of this move will be confirmed or rejected through subsequent price action.

Inverted hammer candle explained

The inverted hammer should not be confused with the shooting star. Both candles have similar appearances but have very different meanings. The shooting star is a bearish signal and appears at the top of an uptrend, while the inverted hammer is a bullish signal at the bottom of a downtrend.

Inverted Hammer candlestick appearing at the bottom of a downtrend

How to spot an Inverted Hammer candlestick pattern:

  • Candle with a small real body, a long upper wick and little to no lower wick
  • Appears at the bottom of a downtrend
  • Stronger signals are produced when the candle appears near key levels of support

What does it indicate:

  • Trend reversal to the upside (bullish reversal)
  • Rejection of lower prices (sometimes at a key level)

Advantages and Limitations of the Inverted Hammer Candlestick

Like all candlestick patterns, there are pros and cons to using the inverted hammer in a trading strategy:

Advantages

  • Favorable entry points: If the inverted hammer candle immediately triggers the new uptrend, traders are able to enter the market at the beginning of the trend and capitalize on the full upward movement.
  • Easy to Identify: The Inverted Hammer Candlestick is easy to identify on a chart.

Limitations

  • Over-reliance on a single candlestick: The Inverted Hammer is a single candle, representing price action. Relying entirely on a single candle to overturn market momentum, without considering additional supporting evidence/indicators, can result in sub-optimal outcomes.
  • Short-lived retracement: The Inverted Hammer Candle may signal a momentary surge in bullish price action that fails to develop into a longer-term trend reversal. This can happen if buyers aren’t able to sustain buying pressure amidst a dominant downward trend.

Using the Inverted Hammer Candlestick Pattern in Trading

Trading the inverted hammer candle involves a lot more than simply identifying the candle. Price action and the location of the hammer candle, when viewed within the existing trend, are both crucial validating factors for this candlestick.

Trading the Inverted Hammer Candlestick near a Line of Support

Below, is a GBP/USD chart exhibiting a downtrend that consolidates at support. The appearance of the inverted hammer candle near support provides the basis for the bullish reversal. Traders can place stops below the support line to limit downside risk in the event the market moves in the opposite direction.

Targets can be placed at previous levels of resistance that result in a positive risk to reward ratio. Since the inverted hammer candle often signals a reversal in trend, and trends can persist for a long time, traders often identify multiple target levels or simply utilize a trailing stop.

Inverted hammer candle appearing near support

Inverted Hammer Technical Analysis: Fibonacci Retracement

The inverted hammer can also be used to identify retracements in the market. The EUR/USD chart below highlights the inverted hammer (in blue) which signals renewed bullish momentum. The Fibonacci retracement level of 38.2% presents a possible level of support before price regains its upward momentum.

Top traders will look for complementary signals on the chart in order to increase the probability of a successful trade. These will either support or invalidate the trade idea before it is placed. In this example, the appearance of the inverted hammer at the 38.2% level provides a stronger case for the bullish bias as price seems to resist a move lower at this level.

inverted hammer candle bouncing at the 38.2 Fibonacci retracement level

Further Reading on Trading with Candlestick Patterns

  • The inverted hammer candle pattern is just one of many candlestick patterns trades should know. Boost your trading knowledge by learning the Top 10 candlestick patterns.
  • Other bullish reversal patterns include: the bullish morning star, inverse head and shoulders pattern and double bottoms.
  • If you are just starting out on your forex trading journey it is essential to understand how to read a candlestick chart.
  • To get to grips with the basics of forex trading, take a look at our free New to Forex guide.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.