Inverted Hammer Candlestick Pattern is a trend reversal pattern. This pattern can be bullish as well as bearish and occurs rarely or what you can say not frequently.

An Inverted Hammer is a quite rare pattern as the price action needed to produce it does not takes place frequently. But if it does, it is an important signal that you shouldn’t ignore. Now an inverted hammer can get formed in a downtrend as well as an uptrend. In a downtrend, the first day is a bearish candle signalling that the bears are still in control of the market.

How to identify an Inverted Hammer? Identifying an Inverted Hammer is not difficult. It looks just like an inverted hammer! What this means is the high of the trading day is way above the body. So most of the trading took place close to the small area near the low. Now, this low serves as the support for the coming days. An Inverted Hammer has a very small body at the bottom of the candle with a long wick on the upside.

Now, you should wait for the confirmation the following day in order to trade this bullish inverted hammer pattern. If the open of the next day after the appearance of the inverted hammer pattern is higher than the low of the previous day, the inverted hammer pattern is a true pattern and you can trade it by putting the stop at the same level of the open of the day.

Now, when an inverted hammer is formed in an uptrend, it means that the uptrend is about to reverse itself into a downtrend. On the first day, you will find the usual bullish candle signalling that the bulls are in control of the market. This is followed by a gap opening and more buying.

But at some time, the bears take hold of the market. The bears start to push the prices lower. The close is equal to or very close to the low of the day. When you spot a bearish inverted hammer, you can sell or go short by placing the stop close to the open of the second or the signal day.

However, as an aggressive trader, you can place the stop at the high of the inverted hammer formed on the second or the signal day. Always follow the rules. Place the stops and wait for the market to move further. If the market moves in the direction anticipated, you can make a nice profit. If not and the candlestick pattern is not confirmed by the subsequent price action, the stop loss order will take you out of action at a very small loss. Sometimes, the price action can retrace itself but stick with the rules, this is what disciplined traders do!

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