The Inverted Hammer produces very important attributes when analyzing a potential reversal. It is considered one of the 12 major candlestick patterns and it is comprised on one candle. The inverted hammer is easily identified by a small body with a shadow at least two times greater than the body. It is found at the bottom of a downtrend and it indicates that the bulls are stepping in however selling is still occurring. The color of the small body is not important but a white or green body has more bullish implications than a black or red body. The following day requires a positive day in order to confirm that the inverted hammer signal has occurred.
Criteria
- The upper shadow should be at least two times the length of the body.
- The real body is at the lower end of the trading range and the color of the body is not important however, a white or green body has slightly more bullish implications.
- There should be no lower shadow or a very small lower shadow.
Signal Enhancements
- The longer the upper shadow the higher the potential for a reversal to occur.
- If on the day after this signal occurs, the price opens up higher than the previous day’s close, then the signal has even stronger confirmation.
- The chances that a blow-off day occurred are increased if there is large volume on the day of the inverted hammer signal.
Pattern Psychology
After a downtrend has been in effect the atmosphere is bearish but the price opens and begins to trade higher. The bulls have stepped in however they cannot maintain their strength and the existing sellers know the price back down to the lower end of the trading range. The bears are still in control but on the following day the bulls step in and take the price back up without any major resistance from the bears. If the price stays strong after the inverted hammer day then the signal is confirmed.
Utilizing just the major Japanese Candlesticks trading signals will provide more than enough trade situations for most investors. They are the signals that investors should contribute most of their time and effort. However, this does not mean that the remaining patterns should not be considered. Those signals are extremely effective for producing profits.
Continue your education and read about the secondary signals beginning with the tri-star pattern.
