Trading Guides Technical Analysis

What is an Inverted Hammer Candlestick Pattern?

By Stefano Treviso, Updated on: Apr 07 2023.

The inverted hammer candlestick is a single candle pattern that signals a potential bullish reversal. Inverted Hammers can usually be found after a downtrend and can be identified by their hammer-like shape where the body of the candle is approximately one third of the upper wick's length and there is little to no wick at the bottom.

Before we start talking about the inverted hammer and looking at some real life scenarios, let's give you some very important information about this candlestick pattern (in case you're a fast reader):

• Inverted Hammers are a bullish reversal signal regardless of the colour (red or green) of the candle
• Just because they are considered a bullish reversal signal it doesn't mean that it will happen (as you'll see later on using a failed example)
• Inverted Hammers are best used with the strongest form of technical analysis (price action) along with support and resistance lines
• If you're looking at a candle that has the exact same shape of body and wick as an inverted hammer but the candle is right at the top of an uptrend, you're looking at a "shooting star" pattern so don't confuse it with the inverted hammer

Inverted Hammer Candlestick Pattern Explained

One of the most beautiful disciplines in technical analysis is the study of "price action". In simple terms, nothing more than understanding why prices behaved as they did and what clues are trading charts telling us that can help us make better decisions to forecast future potential price behaviour and use it to our advantage.

Having said this, let's try to analyse first what the Inverted Hammer candle is telling us and later on put it to use inside a trading chart. 

If you pay close attention to the abstract candle examples above, you'll notice the following:

• The green candle has a small body and a very long upper wick right? Well, that can be attributed to the fact that in that period of time the candle represents, buyers managed to push the price of an asset all the way up to the limit shown in the candle's wick but in the end, sellers managed to drive it down to the closing point of the candle (which is still higher than the open and that's why the candle is green). In simple terms, there is a lot of buying pressure accumulated.
• The red candle has also got the same description as the green candle with the only difference being that sellers managed to push the price lower than the open price (in the candle's period).

Now that we understand what the standalone candles are telling us, let's try putting them context:

If right after a downtrend you spot that a massive candle (whether red or green) is showing a lot of buy pressure. What do you think is likely to happen next?

If you answered that most likely there is an upcoming bullish price reversal well, congratulations! You're right!

Inverted Hammer Candlesticks play their role in the technical analysts handbook only when placed in the correct context. Here's the logic behind it:

• During a downtrend, we should be seeing continuous sell pressure, meaning that candles should signal that bears (sellers) are winning the battle.
• If we spot that an Inverted Hammer appears, that's when we understand the potential reversal is coming.

Green Inverted Hammer Candlestick Pattern Example

Now that we understand the logic behind the inverted hammer, let's take a look at two examples using red and green inverted hammers.

In the below chart, after a very noticeable downtrend some small buyer pressure begins to build up but it's not until you see the inverted hammer that you fully notice the accumulated buying pressure.

Red Inverted Hammer Candlestick Pattern Example

The confusion with the colours of the Inverted Hammer is quite strong. The reason is that people tend to give importance to the colour of the candle when in reality there are only three important aspects to identify when looking for an inverted hammer pattern:

• The size of the candlestick's body
• The size of the candlestick's wick proportional to the body
• The position of the candle with regards to the overall direction of the price (meaning whether you're looking at an uptrend or a downtrend).

Green Vs. Red Inverted Hammer Candlestick

The main difference between a green and a red Inverted Hammer candle is that on the green one, buyers still won the battle and managed prices to close above the open price whereas in the red candle, sellers managed to push the price below the open price making the candle red. In both cases regardless of who won, due to the either very small lower wick or no wick at all it's evident that the buyer pressure was there which is why the candle is interpreted as a reversal signal.

How to spot an Inverted Hammer Candlestick Pattern

The best exercise we can recommend for spotting Inverted Hammers is to pick one particular asset's chart (eg: EUR/USD) and focus on detecting past trends first. The main rules of trends are the following:

• For an uptrend you must seek higher highs and higher lows
• For a downtrend you must seek lower highs and lower lows

Once you start detecting several downtrends you can proceed to look at the moment where the trend started reversing and look amongst all the available candles which one looks like an inverted hammer and this brings us to the next point. 

Once you become good enough at recognising several Inverted Hammers in the past, you can definitely start looking for them in present times. Here's how to do it:

• Check whether the asset you're looking at is on a downtrend or an uptrend. If the trend is bearish, you're on the right setting for potential Inverted Hammers to appear
• Once you're sure that you're on a downtrend, check for each candle forming in real time (the general consensus is that the greater the timeframe you use, the better. eg: 4 hours, 1 day).
• Wait for each candle to finish closing and the next one to start, if right after a candle finishes forming you notice that the looks are Inverted-Hammer like (meaning that the body is small, the upper wick is two or three times the size of the body and there is little or no lower wick) then you might be witnessing a potential bullish reversal.

Trading the Inverted Hammer Candlestick Pattern

To optimally trade an Inverted Hammer candlestick pattern, here's what you need to take into consideration:

• Inverted hammers are not a standalone successful signal that a reversal is coming
• Inverted hammers are best used when combined with other indicators or forms of analysis such as price action

The reason we start the trading-it section like this is that we don't want you to make the same mistake that many new traders do and go all-in on an inverted hammer just because many websites said it's nice and here's a clear example of why things are not what they seem like (especially when we change timeframes):

In the above chart, we see every common indicator we're about to get an Inverted Hammer driven bullish reversal right? We see the downtrend and the right type of candle yet prices fell right after the reversal started.

On the other hand, there is an indicator that didn't let us down here: support and resistance levels, the key psychological prices where traders believe that an asset can hold the line, bounce back up or go down again. Notice how the red line holds the price quite steadily regardless of the fluctuations.

A good trader and a good technical analyst would choose to take risks based on candlestick patterns with the companionship of proper risk assessments based on the support and resistance levels. Never rely on one pattern or indicator.

To mix things up, here's a game-changing perspective on the same chart we saw above. Our first chart was the price of the EUR/USD using a 1-hour per candlestick chart. The chart below is from the same asset (EUR/USD) but the timeframe is 4-hours per candle.

Notice something?

That same candle we thought was an Inverted Hammer, was just a regular hammer signalling a bearish change on the 4-hour timeframe.

Summary

Inverted Hammers are nothing more than a hammer-looking candle that has a very long upper wick (approximately two or three times the size of the candle's body) and little to no lower wick. They serve as a clue of potential future bullish price reversals thanks to the language spoken by candlesticks psychology and price action.

The main clue that Inverted Hammers leave us is that a lot of buying pressure has accumulated and it didn't manage to materialise yet.

The colour of an Inverted Hammer candle won't play a major role on the upcoming forecast. The really important thing to keep into consideration is if the candlestick is actually an Inverted Hammer and the position of the candlestick in relation to the overall price behaviour (whether it's an uptrend or a downtrend).

If there is one thing we would like you to always remember about this guide is that Inverted Hammers are just one more piece of the puzzle when it comes to forecasting price movements and are NEVER to be considered a standalone tool to make decisions. Always use other forms of technical analysis or indicators to complement your decision making process along with proper risk management strategies.

Frequently Asked Questions

Is the inverted Hammer Candlestick Pattern Reliable?

Statistically speaking, the Inverted Hammer cannot be considered a reliable technical analysis pattern. The only reliable information that it provides is the presence of accumulated buying pressure. The main problem with the Inverted Hammer candlestick pattern is that traders tend to mistake its presence in a short time frame chart for a certain signal of a potential reversal and fail to see how prices are really behaving on a larger scale.

What are the differences between the hammer and the inverted hammer patterns?

The regular Hammer pattern is also used as a potential signal of a future reversal but the difference is that the longer wick is now on the bottom and there is little to no wick on the upper side. The body size proportion stays the same as in the inverted hammer. Both the Inverted Hammer and the regular Hammer can be found after downtrends.

Is the inverted hammer and the hanging man the same pattern?

The inverted Hammer and the Hanging Man are not the same pattern. Both the looks of the candles and the positions are completely different. The Inverted Hammer has little to no lower wick and an upper wick sized approximately two or three times the size of the candle whereas the Hanging Man has little to no upper wick and a lower wick sized with the same proportions as the Inverted Hammer as well. Another crucial difference is that an Inverted Hammer can be found right after a downtrend whereas a Hanging Man can be found right after uptrends.

What are the differences between the inverted hammer and shooting star patterns?

The main difference between both patterns is on where they are located in the trading chart (meaning right after an uptrend or a downtrend). While both look the same, the Inverted Hammer can be found usually after downtrends whereas the Shooting Star can be found usually after uptrends.