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Understanding Inverted Hammer Candlestick: Types, Benefits and it’s limitations

Inverted hammer candlestick

Financial markets like forex, stock, etc, are volatile and have constant price fluctuations. That is when technical analysis tools like candlestick charts are required to perform secure trading. These tools analyse the price highs and lows, which keeps the traders updated on the market trends and helps them make informed decisions. 

An inverted hammer candlestick is a type of candlestick pattern that indicates price fluctuations in the market. Use this article as your guide to understand market fluctuations better and learn how to read inverted hammer candlestick charts.

What is an Inverted Hammer Candlestick?

An Inverted Hammer Candlestick is a technical analysis tool shaped like an upside-down hammer, indicating a trend reversal in the market. The shape is formed when the market price hits a high and drastically falls close to the opening price. The pattern can be seen in two colours, red and green; here is what each colour indicates:

Red Inverted Hammer Candlestick 

The red hammer candlestick indicates that the closing price is lower than the opening price. When the pattern is formed on the analysis chart, wait for the next hammer sign. If the red sign means the price will fall further down, indicating that traders should not trade on that stock or currency. Sensibull broker provides a great platform to use candlestick analysis charts and a wide range of stocks or assets for traders to buy or sell.

Inverted hammer candlestick

Green Inverted Hammer Candlestick

Contrary to the red, the green inverted hammer indicates that the closing price is higher than the opening price. When the candlestick pattern emerges as green, the price will move higher.

Inverted Hammer Candlestick Patterns

The inverted hammer candlestick patterns are easy to identify because it is divided into three parts:

Inverted hammer candlestick
  • Small body: The candle pattern has a small body, which means the closing and opening prices are close. 
  • Upper wick or shadow: The inverted hammer candlestick pattern should have a long upper wick, indicating a drastic drop in the stock price. A wick is a long vertical line that extends over the body. 
  • Lower wick or shadow: The pattern should have little or non-existent lower wick or shadow. To understand the patterns better, benefit from educational resources on market analysis or technical analysis tools in trading provided by Vault Markets broker.

Bullish and Bearish Inverted Hammer Candlestick

A bullish pattern means the inverted hammer candlestick is in an uptrend in the market, and a bullish reversal, also known as the inverted hammer candlestick, represents a downtrend. 

Bullish reversal, also called the bearish pattern, represents the market downtrend with an inverted hammer pattern. A bullish pattern is an upward hammer sign, also known as the inverted hammer shooting star candlestick. 

In the Bullish pattern, the candle’s body is on top, followed by a long wick or shadow; the bearish pattern is vice versa. Check out the image below for a better understanding:

bearish and bullish hammer in Inverted hammer candlestick

How to Read Inverted Hammer Pattern?

Reading the inverted hammer pattern is possible with a complete understanding of the pattern and how it works. Follow the below steps to read the patterns correctly:

  • Spot the patterns: The first step of using the technical analysis tool is to spot the candlestick patterns forming on the charts. 
  • Confirm the patterns: Once you spot a candlestick pattern, confirm by matching it with the ideal stock candlestick pattern. It should have a small body, a long wick or shadow on top and a small wick or shadow at the bottom of the body. The pattern should represent the sudden drop from bullish to bearish. 
Inverted hammer candlestick
  • Trade Volume: Keeping track of the trading volume is crucial as it determines the buying demand for the stock, which means the higher the volume, the higher the stock’s buying value. 
  • Risk Management: Finding suitable risk management strategies to manage the risks associated with stock trading. In the inverted hammer candlestick chart, traders can add a stop order at the end of the candle body to reduce or minimise risks. Learn helpful risk management strategies through the resources provided by Botbro broker
  • Price Action: Keep a close eye on the price movements and look for bullish candlestick signs to ensure more people buy the particular asset or stock.

Benefits of Using Inverted Hammer Candlestick Charts

  • Easy to Identify: The pattern has a very identical figure with a small body and a long upper wick, which makes it easier for traders to locate it in the charts. 
  • Entry and Exit points: It acts as a great market indicator for deciding entry and exit points in the trading market. 
Understanding Inverted hammer candlestick
  • User-friendly: To analyse a candlestick chart, traders do not require any difficult calculations or application of formulas. All you must do is keep an eye on the chart and track the candlestick patterns, making it easier for novice traders to use this technical analysis tool. 
  • Reverse Indicator: The candlestick charts can help you analyse when the market is headed for a bullish reversal, meaning a market in a downtrend is converting into a market uptrend. This indicator can help traders to buy the stock and reduce selling pressure. 
  • Market Behaviour: The change in market behaviour from bearish to bullish is indicated through the candlestick analysis chart, ensuring that the traders know the market movement. 

Limitations of Inverted Hammer Candlestick Charts

Limitations of Inverted hammer candlestick
  • Fake Signals: The candlestick pattern can show up by mistake and send false signals, potentially misleading the traders. So, this analysis tool can only be trusted with a grain of salt because traders can lose their money if the signal is false. 
  • Various Factors: The hammer candlestick chart is unreliable to a certain extent because it relies on multiple external factors like timeframe, market trend and market conditions. Use tools like economic calendar and other market analysis tools to get a second opinion on the market situation before starting trading.

Read also: Vested vs. INDmoney

  • Not a Fixed Indicator: This market analysis tool is subjective, which creates multiple interpretations and opinions. Therefore, the usage of this tool varies from person to person and does not have a fixed conclusion. 

Conclusion 

Overall, the inverted hammer candlestick chart is a remarkable technical analysis tool for stock and CFD trading as it is easy to read and recognisable on the chart. Moreover, it does not require traders to do complicated math problems, it only requires careful observation of the market and appearance of the candlestick pattern. 

Therefore, this analysis tool is suitable for novice and experienced traders but comes with risks. The patterns can not be wholly relied upon because they can be false and mislead traders into making wrong decisions in a rush. We would recommend you to use multiple analytical tools to ensure your price prediction before buying or selling an asset, stock, etc. 

FAQs

What is a Bullish Reversal?

The bullish reversal means the start of an uptrend market following a downtrend, also known as an inverted hammer candlestick. Bullish reversal indicates that the market prefers buying rather than selling the stock. 

What is an Inverted Hammer Candlestick?

An inverted hammer candlestick means an inverted hammer candlestick pattern—an upside-down hammer pattern formed as an indicator for market price drop from bullish to bearish. Bullish candlestick is also known as shooting star inverted hammer candlestick. 

How to trade Inverted Hammer Candlestick?

By carefully observing the chart, you can trade stocks and CFDs through invested hammer candlestick analysis. Once the candlestick patterns show up, look for signs that predict a reversal of the chart from bearish to bullish, and you should trade only if a reversal is possible. 

What does an Inverted Hammer Candlestick mean?

It is a technical analysis tool used in stock and CFD trading to calculate stock prices, price highs and lows and identify entry and exit points in the market. 

What does a Red Inverted Hammer Candlestick mean?

An inverted red hammer candlestick pattern means the market price is lower than the opening price.

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Karla brings over 16+ years of experience in the online brokerage industry. She is a finance graduate from Birmingham University, UK, and a forex market enthusiast. Being a true writing fanatic, she pens research-backed reviews for traders to analyse trading strategies and indicators. She has also authored a wide range of educational articles covering the forex industry. Karla is quite interested in checking brokerage companies and studying their performance and growth. Her aim is to describe complex investment mechanisms in an accessible way for traders of any level. Apart from finance, her interests mainly include reading books, fitness, and writing in her journal. Karla believes in the power of writing and wants to write for every layman who knows nothing about finance.
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