What Is an Inverse Hammer Pattern?
The inverse hammer candle is the exact opposite of a hammer pattern and appears at the bottom of a downtrend and signals a potential bullish reversal. It indicates a buying pressure, followed by a selling pressure that was not strong enough to drive the market price down. A bullish pattern that suggests buyers will soon have control of the market.
Example of an Inverse Hammer
What Does the Inverse Hammer Signal?
The Inverse Hammer signals a bullish reversal and indicates buyers have control over the market.
How to spot an Inverse Hammer:
- Candle with a small body with 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)
Trading an Inverse Hammer Pattern
Trading the inverse hammer candle involves a lot more than just 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.
Looking at the YFII chart on a 4-hour time frame we see a downtrend followed by a reversal upwards. This reversal is signaled by an inverse hammer found shortly after the absolute bottom. The inverse hammer is a signal for a reversal upwards because the long wick up indicates that the bears weren’t strong enough to fully push the price down. Therefore, bulls regained control and continued the pump upwards.
Looking at this chart of REN on a 4-hour time frame we can identify two inverse hammer patterns. The 1st one appears shortly after REN reaches its local high of 0.42, signaling a potential short-term reversal upwards. After the singular inverse hammer candlestick, the price had a relief rally that was overturned by a bullish engulfing candle. The price keeps falling until the 2nd inverse hammer is found at the bottom of the downtrend, this time signaling a real reversal upwards. From here, REN finds itself out of the downtrend going up for the start of the next bull market cycle.
Similarities Between the Hammer and Inverse Hammer
The Hammer Candlestick and the Inverse Candlestick are both signs of a bullish reversal found at the bottom of a downtrend. Both candlesticks signal that bulls will soon have control over the market and that the dump is over. They both consist of large wicks that have short green candle bodies.
Differences Between the Hammer and Inverse Hammer
The difference between the hammer and inverse hammer is that the candles almost look like the exact opposite from one another. Although they both signal a bullish reversal at the bottom of a downtrend and have short green candle bodies, they look very different on the chart. A hammer candle has a large wick found at the bottom side of the candle, while an inverse hammer has a large wick found at the topside of the candle.
Limitations of Inverse Hammers
Inverse Hammers candles can be painted by market makers at the bottom of a downtrend to signal a potential lower price to come in the market. Buying solely off of an inverse hammer doesn’t necessarily mean that the dump is over or the downtrend is reversing right away. Always tread with caution and wait until the next candle until making your decision, as this candlestick pattern is very versatile and prone to moving in either direction.