Inverted hammer

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Inverted hammer
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Inverted hammer is a bottom reversal signal characterized by a single candlestick which has a really long upper shadow and a small real body at the lower end of the trading range. While the color of the real body is not significant, a white real body is perceived to have slightly more bullish implications than a black real body. An inverted hammer's upper shadow should be at least twice the actual body size. A small real body and long upper shadow suggest that the bulls started to step in and they were also able to take the price higher during the session. Following an inverted hammer, a bullish confirmation in the form of an open or a close above the inverted hammer's real body is suggested strongly (V. Quseynov 2013, p. 68).

The Inverted hammer has a long wick on the top and the candle occupies a small part of the bottom of the entire candlestick. The body may be white or black and that is because the high is way above the rest of the candlestick, you can see that most of the trading activity occurs in a small area near the low. The low serves as a support level for upcoming days (R. Rhoads 2011, p.134).

Criteria of a shape

Inverted hammer has specific criteria's of shape (V. Quseynov 2013, p. 69):

  • There is a downtrend in progress.
  • We can see a candlestick with a small real body at the lower end of the trading range, also the real body of this candlestick must be white or black.
  • The upper shadow of the candlestick is at least twice as big as the real body.
  • The lower shadow is either missing or it is very small.

Psychological aspects

In a market where the mood is considered bearish, a bullish inverted hammer occurs. The market opens near its lows. Immediately, the bulls enter the market and push the prices higher. However, the bulls prove to be unable to sustain the rally until the end of the session. The price then goes back and the bears manage to have a close near the lows of the day. This fact or a sudden bull attack and the rally (even if temporary) caused by it shows that the bears are not as strong as they seem to be (M. Thomsett 2010, p. 53).

Like many bullish patterns, the bullish Inverted hammer is predicted by some sort of downtrend. The setup day is a down day-a continuation of the present downtrend. The inverted hammer is the signal day. It's just a different version of the hammer pattern (R. Rhoads 2011, p.134).

Key point

The Inverted hammer is a valuable double-stick move, but it occurs very rarely. As a consequence, it is easy to don't notice, the main rule about the hammer candlestick is that it appears as a sign that price action was strong on one side of the trade; when it appears as the signal day in double-stick pattern, it is even stronger. As with all formations, the movement in price is more important than what any single day reveals (M. Thomsett 2010, p. 54).

References

Author: Szymon Olejniczak