An Inverted Hammer is a special pattern that traders look for in the market to spot a possible change from a downtrend to an uptrend. Imagine a hammer turned upside down, where the handle points up and the head is small and at the bottom. This pattern shows up after prices have been falling, signaling that things might start going up again.

Key Features

1. Small Body: The main part of the candlestick is small and is located at the bottom of the price range.
2. Long Upper Shadow: There’s a long line above the small body, which is at least twice as long as the body itself.
3. Little to No Lower Shadow: There’s either a tiny line or no line at all below the body.

When you see an Inverted Hammer, it means that sellers were in charge at first, pushing prices down. However, buyers stepped in and managed to push prices back up, suggesting that the downtrend might be ending and an upward movement could start.

Why It Is Used in Forex Trading

The Inverted Hammer is important because it signals a potential bullish reversal, meaning prices might start going up. This pattern is especially powerful when it appears after prices have been falling for a while. It shows that the pressure from sellers might be fading, and buyers are starting to take control.

However, just seeing this candlestick pattern isn’t enough. Traders need to look at the bigger picture and use other tools to confirm the pattern. For example, if the Inverted Hammer shows up at a key price level or when the market is oversold (which can be checked using tools like the Relative Strength Index, or RSI), it’s a stronger signal that prices might rise.

How to Spot an Inverted Hammer

Finding an Inverted Hammer is easy once you know what to look for:

1. Small Body at the Bottom: The candlestick has a small body near the lower end of the price range.
2. Long Upper Shadow: A long line extends above the body, showing that buyers tried to push prices higher.
3. Tiny or No Lower Shadow: The line below the body is either very small or doesn’t exist.

It’s also important to know that the Inverted Hammer can look similar to another pattern called the Shooting Star. The Shooting Star, however, appears after prices have been going up, and it signals a possible downward move.

Trading with This Pattern

Once you’ve spotted an Inverted Hammer, there are a few strategies you can use. A simple one is to buy when the next candlestick closes above the high point of the Inverted Hammer. This makes it more likely that prices will continue to rise.

To make this strategy even stronger, combine the Inverted Hammer with other technical tools. For example, if the pattern shows up along with a bullish signal on the RSI or a moving average crossover, it could confirm the upward move. It’s also smart to protect yourself from losses by setting a stop-loss order below the low of the Inverted Hammer.