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A bullish reversal signal at the bottom of downtrends - the long upper shadow shows buyers testing higher prices despite the prevailing bearish sentiment.
The Inverted Hammer is a single-candle bullish reversal pattern that forms at the bottom of a downtrend. It's characterized by a small body at the lower end of the trading range and a long upper shadow that's at least twice the length of the body.
The pattern looks like an upside-down hammer (or the same shape as a Shooting Star, but in opposite context). The long upper shadow shows that during the session, buyers pushed price significantly higher before sellers pushed it back down - but the fact that buyers attempted this rally at all hints at changing sentiment.
The Inverted Hammer represents the first sign of buyer interest after a sustained decline. During the downtrend, sellers have been in control. But on this session, something different happens - buyers push price significantly higher during the session.
Yes, sellers managed to push price back down by the close, which is why the body is at the bottom. But the long upper shadow is evidence that buyers are no longer completely absent. They tested higher prices and showed willingness to buy.
This is why confirmation is crucial: if the next candle closes higher, it confirms that buyers have returned with strength. If the next candle continues lower, the rally attempt failed and the downtrend continues.
Conservative (Recommended): Wait for next candle to close above the inverted hammer's high before entering long.
Aggressive: Enter at the close of the inverted hammer if at strong support with additional confluence.
Place stop below the low of the inverted hammer. This is the point where the pattern is invalidated - if price breaks below, the bullish signal failed.
T1: Previous swing high or nearest resistance level. T2: Measured move equal to the pattern's total range projected upward. T3: Use trailing stop on 50% position for extended moves.
Minimum 1:2 R:R required. Confirmation entry may provide better R:R despite later entry.
An inverted hammer is only as good as the context it appears in. The same candle shape can be a potential reversal signal or noise - the difference is where it forms and whether confirmation follows.
Confirmation is everything. Wait for the next candle to close above the inverted hammer's high before entering - the pattern alone has only ~33% reliability.
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