Japanese candlesticks are the basic building block of most technical analysis. That makes the ability to recognize different candlestick types a crucial trading skill.
First though, let’s start with a definition.
What Is an Inverted Hammer Candlestick?
An inverted hammer candlestick is a candlestick with a short body, little to no lower shadow, and a longer upper shadow. It indicates that the open and close prices are close together and near the bottom of the trading range. Hammer candlesticks are commonly seen during bottoming formations, reversals, trending moves, and volatile periods.
Unlike some other candlestick types, their name does not have a Japanese meaning. Instead, they are named as such because they look like an upside-down hammer. In trading terms, an inverted hammer candle signals that the bulls are trying to resist continuation of a bearish trend.
Inverted hammers paint a picture of a last stand. With a short body, the long upper wick usually stands out most. On the chart, it looks like the bulls attempted to reverse the trend but the bears replied, “Not so fast.”
Technically, the upper wick should be at least twice as long as the body. It doesn’t matter what color the body is. But if the body is negligible or nonexistent, it should instead be classified as some type of doji.
Furthermore, some would say that it is only an inverted hammer if it appears at the end of a downtrend, leading to a bullish reversal—which would make it more of a multi-candlestick pattern.
By the same rule:
- A (regular) hammer is a rightside-up hammer that also signals a potential bullish reversal during a downtrend.
- A hanging man is a hammer-shaped candle that signals a potential bearish reversal during an uptrend.
- A shooting star is an inverted hammer that signals a potential bearish reversal during an uptrend.
It can get a little confusing because both shapes can signal direction, depending on where they appear. This is probably part of the reason many traders call all of them hammers (or inverted/upside-down hammers).
The main thing you need to know is this:
When you see a “T”-shaped candlestick, where it occurs in trend is more important than whether it is rightside up or not.
As always, context over criteria.
More on how to trade inverted hammer candles in a moment.
First, let’s illustrate how they are formed.
How Are Inverted Hammer Candles Formed?
An inverted hammer gives the impression of a bullish holdout.
That impression is usually correct.
Within the time period of the candle, price drove higher then fell back to end up near where it began. Thus, an inverted hammer candlestick on a daily chart implies that the bulls attempted to reverse the trend but were rebuffed for the day. However, the candle probably took on various shapes before closing as an inverted hammer.
You’d need shorter timeframes to see a more complete picture.
That’s also why you should usually wait for confirmation. It’s not officially an inverted hammer until the candle closes. And it can be dangerous to make trades based on incomplete candles.
You can never be 100% sure how a candlestick will look at the end of the time period.
That’s one of the reasons it’s so important not to get too focused on any single candle.
Where Inverted Hammer Candlesticks Fit in the Chart Narrative
The markets are often characterized as a battle between the bulls and the bears.
Inverted hammers indicate that the fight is fierce, with the bulls unable to retake control. Obviously, no single candlestick can determine an entire trend. Still, inverted hammers that appear at the right time can have significant implications on future price action.
Be on the lookout for them during:
- Bottoms – Inverted hammers sometimes appear along the support levels of local lows and bottoming formations.
- Reversals – Inverted hammer candlesticks are sometimes seen in and around reversal formations, especially bullish ones.
- Trending Moves – When bullish reversals fail on lower time frames, it often leads to inverted hammers on higher time frames.
- Volatile Periods – When volatility climbs, candles that imply back-and-forth action, like inverted hammers, become more common.
They may also appear in certain types of candlestick patterns.
To become a successful trader, understanding candlesticks is a great place to start. But you should also learn how candlestick patterns and chart patterns work. Plus, you need to be able to recognize cycles, trends, and price levels. From there, you can begin to read the story in the charts.
Tools like chart markup and trading indicators can reveal even more. And once you’ve chosen your asset(s) and trading style, the full chart narrative truly comes into focus. The charts will basically speak to you at this point.
By looking at the history of the chart, you can identify how price action played out around prior inverted hammer candles (or patterns that included them). Moreover, you can compare historical structures in price and your other tools to current price action.
Now, you’re actually doing real technical analysis.
How To Trade Inverted Hammer Candles
You should never trade based on a single candlestick.
However, certain candle shapes may give you some trading ideas, especially given the right context. Inverted hammer candlesticks are one of those shapes.
In addition to the overall structure surrounding an inverted hammer, there are some other things worth paying attention to.
- Trading Volume – The greater the trading volume during any candlestick’s formation, the greater its potential implications on price action.
- Upper Shadow – The longer the wick of an inverted hammer candle, the more likely it is to set in a bullish bias and/or test falling resistance.
- Price Formations – Inverted hammer candlesticks often appear along the bottom of various bullish price structures, such as ladder bottoms.
Generally, the fewer of these factors that are present, the less noteworthy the candle.
In order to form a complete trading strategy, you need to understand the basic math of trading, order types, and trading psychology. Even more importantly, you need to develop your own edge and learn risk management. And if you really want to take it all the way, look into options and trading automation.
Before you get there though, there’s still more to learn about the candles themselves.
Other Types of Candlesticks
The inverted hammer candlestick is but one of many candlestick types.
You’d be wise to get familiar with all of the other ones too.
- Bearish Belt Hold
- Bullish Belt Hold
- Doji
- Dragonfly Doji
- Gravestone Doji
- Hammer
- Hanging Man
- Long Candle
- Long-Legged Doji
- Marubozu
- Shooting Star
- Spinning Top
Not all candlesticks shapes earn names—so you should probably check out the ones that do. Just keep in mind that it’s not necessarily about memorizing all of the ins-and-outs of each. It’s more about ingraining the principles of price action into your brain.
In fact, you’re free to forget all of the names as long as you can look at a candlestick and understand what it means.
Takeaways
To review:
Inverted hammer candlesticks are a type of candlestick that signals a bullish holdout. They tend to show up during bottoming formations, reversals, trending moves, and periods of high volatility. That means they can help you find winning trades.
Of course, there are other types of candlesticks that you should learn about. And even so, candlestick analysis alone is not enough to trade successfully.
Nonetheless, you’ve now added one more tool to your toolkit.
Have questions or more information to add? Contribute to the conversation in the comments below! Or, if you know someone who could benefit from this post, share it with them. You can also check out our Japanese Candlesticks Guide to improve your candlestick analysis skills.