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A candlestick with an inverted hammer can be useful for gaining a perception of the market’s motion. An inverted hammer candlestick’s nature makes it useful for identifying price reversals in securities. An inverted hammer design typically has a small body. Regarding the shadow, it’s typical to see a stretched-out upper wick over the candle and virtually no lower wick.
Following price action in the market will be able to affirm or reject the bulls’ move, depending on the market’s price movement.
But their intent and meaning are different. The inverted hammer formation generates powerful signals when it appears near the important support levels. An inverted hammer candlestick represents a strong bullish turnaround and market rejection of lower prices.
Formation of an inverted hammer candle
When the price begins at one level and then rises significantly, the “Inverted Hammer” pattern is created. The price reaches a peak before dropping sharply to close to its opening. It doesn’t matter if the candle is red or green; either color will do. The candle will be red if the closing price is less than the beginning price. Both have the name “Inverted Hammer.”
What does an upside-down hammer convey to traders?
Traders might identify that the market is under pressure from buyers by looking at an inverted hammer. It warns that a price reversal could occur after a bearish trend. It is not advisable to see the inverted hammer candlestick alone; instead, you should always confirm any potential signals with additional technical indicators or chart patterns. Finally, review your trading strategy before taking action on the inverted hammer.
An Illustration of a hammered candlestick
Consider that you are keeping track of Facebook’s share price, which is declining and just closed at $160.06. It starts at $160.91 the following day and reaches a high of $163.80 and a low of $160.52 during that day. The closing price of Facebook’s stock is $161.38, which results in the inverted hammer pattern seen below. The share price rose to $166.55 during the course of the following two days, confirming that the inverted hammer signaled a positive reversal.
Conclusion
Traders can hold off until a confirmation candle appears. Then, with an inverted hammer candlestick, they may have an advantage in capturing the first mover advantage. A reversed hammer pattern signals a positive trend in a security’s price.
An investor can profit from studying the pattern as long as the characteristics of an inverted hammer candle stick are observed. A bearish variation of the inverted hammer formation is the shooting star.
