Inverted hammer candlestick

An inverted hammer is a single candle with a small real body at the lower end of the range, a long upper wick and little or no lower wick. It counts as an inverted hammer only after a decline.

It is the hammer candlestick turned upside down. A hammer shows buyers taking back a drop. An inverted hammer shows buyers starting a rally and failing to hold it, which is why it is the weaker of the two and depends more on the next candle.

• Body – small and in the lower part of the candle.
• Upper wick – at least twice the height of the body.
• Lower wick – none or very short.
• Trend – a decline before the candle.
• Location – the candle gets more weight at support or at a previous low.

During the period buyers pushed price well above the open. That is new: in the falling candles before it, rallies were small. Sellers then brought price back down, and the close ended near the open.

On its own this looks like a win for sellers. The bullish reading comes from the next candle. If price then closes above the inverted hammer, the sellers who pushed it down are at a loss, and their exits add to the buying. If price makes a new low instead, the pattern has failed.

The two candles are the same shape: a small body at the bottom and a long upper wick. The difference is where they form.

An inverted hammer forms after a decline and is read as a possible bottom. A shooting star forms after an advance and is read as a possible top. In both cases the long upper wick shows that higher prices were rejected, so the bearish reading of the shooting star is the more direct one, and the inverted hammer needs stronger confirmation.

If the body shrinks to a line, the candle becomes a gravestone doji.

The body can be either color. A green inverted hammer closed above its open and is read as slightly more bullish. A red one closed just below its open. Both are valid, and the shape and the decline before it matter more than the color.

An inverted hammer is not traded without confirmation. Replay mode on Charts lets you step through history candle by candle and see which inverted hammers on your market were followed through.

• Confirmation – the next candle closes above the high of the inverted hammer, or at least above its body with a clear rising candle.
• Entry – on that close.
• Stop – below the low of the inverted hammer.
• Target – the nearest resistance level or the start of the last leg down.
• Filter – rising volume on the confirming candle and an oversold RSI are common additions.

• Buying the candle itself – without a higher close after it, the long upper wick is a sign of selling.
• Calling it a shooting star, or the reverse – check the trend before the candle.
• Accepting a short upper wick – it has to be at least twice the body.
• Trading it inside a range, where it has no decline to reverse.
• Placing the stop above the low – the pattern is void only below the low of the candle.