Inverted Hammer Candlestick Pattern-An Important Trend Reversal Signal

There are many candlestick trend reversal and trend continuation patterns. These candlestick patterns can help you confirm a trend reversal or a trend continuation. Inverted Hammer Candlestick Pattern is an important trend reversal pattern that can give accurate signal on trend reversal. However, this pattern occurs rarely but when it does, it means that the trend will reverse itself soon.

The first day is a usual bearish candle in the downtrend. On the second day or what you call the signal day you find the inverted hammer something quite rare as the price action required to produce such a pattern seldom takes place.

How to identify an Inverted Hammer? An Inverted Hammer has a very small body at the bottom of the candle with a long wick on the upside. It looks just like an inverted hammer! What this means is the high of the trading day is way above the body. So most of the trading took place close to the small area near the low. Now, this low serves as the support for the coming days.

But before trading on an inverted hammer signal, you need for the confirmation on the following day. Now, if you find the open of the next day higher than the low of the previous day, the inverted hammer pattern formed last day was a true pattern. You can now trade this inverted hammer pattern by placing a stop close to the open of the day.

Now, when an inverted hammer is formed in an uptrend, it means that the uptrend is about to reverse itself into a downtrend. On the first day, you will find the usual bullish candle signalling that the bulls are in control of the market. This is followed by a gap opening and more buying.

But at some time, the bears take hold of the market. The bears start to push the prices lower. The close is equal to or very close to the low of the day. When you spot a bearish inverted hammer, you can sell or go short by placing the stop close to the open of the second or the signal day.

Placing a stop loss is very important in trading risk management. Once, you have placed the stop, you have limited your risk. In case, the market moves in the direction as anticipated, you make a nice profit. But if the subsequent price movements do not confirm the inverted hammer, the stop loss comes into action and takes you out of the market at an acceptable loss. If you are an aggressive trader, you can place the stop loss close to the high of the inverted hammer.