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By Admin
Posted on September 11, 2024
The inverted hammer is a bullish candle that can be identified by its small body and long upper shadow. This candlestick is exactly like the hammer, but reversed, which is why it is called the inverted hammer.
The inverted hammer is a bullish candle that forms at an important support or creates a new support. Because of this, a trend reversal occurs in the market. The formation of this candlestick occurs either after a slight retracement in an uptrend or in the middle of a downtrend at an important support level.
There is a lot of confusion among people regarding the color of the inverted hammer, so I want to clarify that in the inverted hammer candlestick pattern, color does not matter. What matters is the formation only its formation matters—whether its body is smaller than its wick. If the body size is one, then the upper shadow should be twice its size, exactly double.
So if you want to learn about the inverted hammer candlestick pattern today, let me tell you that I am going to explain everything about it—from its color to its formation scenarios, many people want to know about the green inverted hammer candlestick. When the inverted hammer forms in a downtrend, and when the inverted hammer forms at resistance, or in an uptrend, what does it signify? What is its meaning? Today, I will cover all these topics.
And most importantly, how can you trade using this candlestick? I will explain this as well as how you can trade this candlestick in different markets, such as forex, Indian stocks, and commodities.
First, let’s understand the psychology behind the formation of this candlestick. Once you grasp this, it will make it much easier to understand the rest. And as I mentioned earlier, since this is a bullish candlestick, you will find it at a support level or at a reversal zone.
What happens is that before the formation of the candlestick, the market is in a downtrend and then reaches a support level or a reversal zone, where it shows a slight buying interest. And after the buying interest, sellers become active again, pushing the price down. The candlestick then closes at a point where it forms an inverted hammer.
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Normally, if sellers are active above the candlestick, it would suggest that the candlestick should indicate a continuation of the downtrend rather than an uptrend, right?
The important movement in this context appears in the next candlestick, where buyers again become active. They cross the point where sellers had previously pushed them down, meaning they break above the high of the inverted hammer candlestick pattern. As soon as the high of the inverted hammer is broken, the buyers dominate over the sellers, and a reversal starts from this point.
In terms of trader psychology, as soon as they spot an inverted hammer candlestick pattern, they often start buying immediately. Because they believe that the market will move upward, they start buying with a small stop loss and a target at the next resistance level.
The inverted hammer is a bullish candlestick. Many people are confused by its name, but it is indeed a bullish candlestick. Its formation occurs at support, and this candlestick leads the market into an uptrend.
The inverted hammer green candle is important because the color of any candlestick indicates whether buyers or sellers are in control. The shadows also provide insight into the price action and the strength of buying or selling pressure.
The inverted green hammer candlestick meaning that buyers are active and ready to change the trend
In the case of the inverted hammer candlestick pattern, it has a long upper shadow and a small green body. Despite the green color indicating buying pressure, the long upper shadow shows that sellers were active and pushed the price down before the close. But still, there’s a mindset that if an inverted hammer forms at a support level or after a retracement in an uptrend, the market is likely to reverse from this point or move upward.
However, many traders avoid trading when they see a red inverted hammer candlestick, despite its potential implications, because they might perceive the red color as a sign of continued selling pressure rather than a reversal signal. But let me tell you from my experience, color does not matter in hammer and doji candlesticks.
An inverted hammer in a downtrend gives you a good opportunity to catch a reversal trade, right from the lowest point. But this doesn’t mean that as soon as an inverted hammer candlestick pattern forms, you should immediately enter the trade. You’ll have to wait for the next candle. Place the stop loss below the inverted hammer candlestick, and make sure to set it, because in a downtrend, there is a higher chance of sudden movement.
What happens if the inverted hammer is at resistance? Look, you know what an inverted hammer looks like. It has a small, narrow body and a long wick at the top. And a shooting star is a bearish candlestick, so more than just the candlestick itself, you need to pay attention to where it’s forming. An inverted hammer forms at support and indicates buying, making it a bullish candlestick pattern.
In an uptrend, there can be two scenarios for an inverted hammer. The first is that it forms at resistance, but if it forms at resistance, it will turn into a shooting star candlestick, and since it’s a bearish candle, the best scenario for an inverted hammer candlestick to form in an uptrend would be during a retracement. You can use Fibonacci for retracements, and if an inverted hammer forms at one of the Fibonacci levels, you can plan a trade accordingly.
Trading this candlestick is easy, but you need to pay attention to the scenarios. In candlestick trading, patterns form all over the place, but the most important part is to identify the right location for the candlestick. For example, if it’s a bullish candle, you won’t look for it at resistance. Similarly, this is a bullish candlestick, and everything I’ve mentioned earlier applies—what happens if it forms at resistance, what opportunities it can provide in a downtrend, and what scenario should be in an uptrend. If you’ve understood all these scenarios, now I’ll explain how you can trade with it.
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We’ll follow the most common scenario—after a retracement in an uptrend. The trading approach will be the same for all scenarios. When an inverted hammer forms at a support or buying zone, and I’ll remind you, the color doesn’t matter, you need to wait for the next candle’s movement. As soon as the next candle breaks the high of the inverted hammer’s body, you can enter the trade.
In this case, you can set multiple targets according to resistance levels, because one candlestick won’t give you all the targets at once. Each target will be achieved one by one. The price will move up and down, so you need to have patience. If your trading psychology is strong, you’ll handle it well. Most people, even when 80% of the target is reached, don’t start booking profits, and sometimes it reverses and hits their stop loss. That’s why I always recommend booking 50% of your position when the target reaches halfway.
You can set multiple targets and place your stop loss according to the market, not based on how much money you want to risk. You should adjust your position size so that if the stop loss is hit, you only lose the amount you’re comfortable with, like ₹500 or less, but no more. Once your first target (TP1) is reached, you should book some profits, then more at the second target (TP2), and finally close the rest at the third target (TP3).
You need to keep trading like this, and if the stop loss is hit, don’t panic. Stay focused on your trading setup. If you want to create your own trading strategy, I’ve also written an article about it, which you can read for guidance.
It’s equally important to understand candlesticks, so I’ve covered hammer, doji, tweezer top, and tweezer bottom. You can read about them and learn how to trade using these candlestick patterns.
So, that’s everything about the inverted hammer candlestick pattern. It’s a bullish candlestick that you can recognize by its small body and long shadow above. It’s a trend reversal candle, and trading with it is easy if you can catch the momentum properly.
If you have any inquiries or need help related to trading, Street Investment is always here for you. You can contact us using the form provided below. That’s all for today!
Best of luck to all new traders! In the end, I just want to say—don’t be afraid.
