An inverted hammer candlestick is a single-candle bullish reversal pattern that looks like an upside down hammer or reverse hammer candlestick that forms at the bottom of a downtrend. It has a small body near the low of the candle, a long upper shadow at least twice the length of the body, and little or no lower shadow. The shape shows that buyers tested higher prices and sellers could not push price to a new low, so selling pressure may be weakening.
Traders use the inverted hammer in three ways: as an early warning inside a downtrend, as a buy setup once a confirmation candle closes above its high, and as the reference point for a stop-loss below its low.
What Is an Inverted Hammer Candlestick Pattern?
The inverted hammer candlestick is a bullish reversal pattern made of one candle. It appears after a downtrend signaling a possible trend reversal due to the observation of changes in momentum using the candlestick pattern.
The name comes from its shape, which looks like a hammer turned upside down with the handle pointing up. Traders also search for it as the inverse hammer, reverse hammer candle or upside down hammer, and each name refers to the same pattern.
On its own, an inverted hammer is a warning and does not count as a buy signal. The next candle tells you whether the bullish reversal is real. The pattern appears on any market with a candlestick chart, including forex, commodities, stock indices and crypto.
How to Identify an Inverted Hammer Pattern?
To identify an inverted hammer candle you need to find a candlestick with a small body, long upper shadow, with little to no lower shadow that appears during a downtrend. All four must be true before you treat the candle as an inverted hammer.
Where the candle forms also changes its weight. An inverted hammer at a support level, such as a previous swing low or a round number, is more likely to lead to a bullish reversal than one that forms in the middle of a downtrend.
What Does the Inverted Hammer Candlestick Mean?
To explain the meaning of an inverted hammer, we need to look at price action and trader psychology. The candle opened near its low, buyers pushed price well above the open, and sellers then pulled price back down to close near where it started.
Read as a tug of war, sellers won the session because price closed near the open. The more useful detail is where price did not go: sellers could not push it to a new low, which is what the small or missing lower shadow shows.
Many explanations say sellers pushed price down first and buyers came in after. In an inverted hammer, the selling pressure is the downtrend that came before the candle. Inside the session, sellers made little or no progress below the open.
The result is a candle of indecision after a run of candles where sellers were in control. Buyers have tested higher prices once, and the next candle shows whether they can hold them.
Is an Inverted Hammer Bullish or Bearish?
An inverted hammer is bullish when it forms after a downtrend. It suggests the downtrend is losing strength and a bullish reversal may follow.
It is still an early signal. Until a confirmation candle closes above its high, the downtrend can continue, and the inverted hammer becomes one more candle in it.
If the same shape forms after an uptrend, traders read it as bearish and call it a shooting star. The section on uptrends below explains the difference.
What Is the Difference Between a Green and Red Inverted Hammer?
The colour of the body tells you whether the candle closed above or below its open. A green inverted hammer closed above its open, and a red inverted hammer closed below it.
A green inverted hammer is slightly stronger because buyers finished the session with price gain, which can signal stronger momentum. A red inverted hammer after a downtrend is still a bullish pattern, and the red body does not make it a bearish inverted hammer.
Shape and location decide whether you have an inverted hammer. Colour only adjusts how much weight you give it, and both colours need a confirmation candle.
Is an Inverted Hammer in Uptrend a Shooting Star?
Yes. An inverted hammer in an uptrend has the same shape but a different name and meaning: it is a shooting star, a bearish reversal pattern. When traders search for a bearish inverted hammer, this is usually the pattern they mean.
In an uptrend, the long upper shadow shows buyers pushed to a new high and could not hold it. That points to a weakening uptrend, which is the opposite reading of the same shape at the bottom of a downtrend.
How Do You Confirm an Inverted Hammer Signal?
The main confirmation is the next candle. A confirmation candle that closes above the inverted hammer's high shows buyers have taken back the prices they tested and held them into the close.
To capture more profits, some traders enter a position before the 3rd candle appears, placing the entry level on the breakout price above the inverted hammer's high of the 2nd candle.This way the breakout entry gets a better price but produces more false signals, because price can move above the high and fall back before the candle closes.
So, how do those traders decide which ones are signals and which ones are not? There are several other confirmation signals that can strengthen the reliability of the setup:
Volume: higher volume on the inverted hammer or the confirmation candle shows more traders are buying. Low volume shows weak momentum. Many traders do not buy if there is no satisfying volume spike on breakout.
Support level and trendline: an inverted hammer at a major support level is more reliable. Besides that, if a confirmation candle closes above the downtrend's trendline, it also increases the reliability.
RSI: an oversold RSI reading, or a bullish divergence where price makes a lower low while RSI makes a higher low, supports the bullish reversal.
How Do You Trade the Inverted Hammer Candlestick Pattern?
Trading the inverted hammer candlestick pattern comes down to where you enter, where you place the stop-loss and where you take profit. Decide all of them before you open the trade.
Where to Enter an Inverted Hammer Trade
The standard entry is a buy at the close of the confirmation candle. The faster entry is a buy stop order a few pips above the inverted hammer's high, which fills as soon as the breakout happens.
The buy stop gets a better price and a shorter distance to the stop-loss. The cost is that some of these breakouts reverse before the candle closes, and you will be filled at an undesirable price.
Where to Place the Stop-Loss
Place the stop-loss below the inverted hammer's low. If price trades below that low, sellers have started taking back control, and the setup has failed.
Leave a small buffer below the low, at least the size of the current spread, so normal price noise does not close the trade. Once the trade moves in your favour, a trailing stop below each new swing low protects part of the gain and leaves room for the new uptrend to continue.
How to Set a Profit Target
Set the first target at the nearest major resistance level, such as the last swing high inside the downtrend. Then check the risk reward ratio.
Many traders look for at least 1:2 risk reward ratio, meaning the target is twice as far from the entry as the stop-loss.
Inverted Hammer Example on EUR/USD
The example below is hypothetical. It uses a EUR/USD daily chart after a two-week downtrend into a support level near 1.0800.
1. Check the shape. The body is 12 pips, the upper shadow is 52 pips (more than four times the body) and the lower shadow is 3 pips. The candle formed after a downtrend at a support level, so it passes all four rules.
2. Wait for confirmation. The next daily candle closes at 1.0885, above the inverted hammer's high of 1.0870.
3. Set the stop-loss. The low is 1.0803. A 5-pip buffer puts the stop-loss at 1.0798.
4. Measure the risk. An entry at the close of 1.0885 carries 87 pips of risk. A buy stop at 1.0872 would have filled earlier with 74 pips of risk.
5. Size the position. With a $10,000 account and 1% risk ($100), and one standard lot of EUR/USD worth about $10 per pip, the position is $100 ÷ (87 × $10) = 0.11 lots.
6. Set the target. A 1:2 risk-reward ratio puts the target at 1.1059, which is 174 pips above the entry. If the nearest resistance level sits at 1.1000, the trade offers only about 1:1.3, and you may decide to pass.
What Is the Best Timeframe for the Inverted Hammer?
Daily and weekly charts give the most reliable inverted hammer signals. Each candle covers a full day or week of trading, so the long upper shadow reflects far more buying and selling than a 5-minute candle does.
Intraday charts produce many more inverted hammers, and more of them fail. On 15-minute and shorter charts, a long upper shadow can come from a single news spike or a quiet trading hour.
A useful check is to look one timeframe up. An inverted hammer on the 4-hour chart that forms at a major support level visible on the daily chart is more likely to hold than one with no support on the higher timeframe.
How Does the Inverted Hammer Work in Forex and CFD Trading?
The inverted hammer works on forex and CFD charts, but a few platform details change how you read and trade it.
Volume is tick volume. Spot forex has no central exchange, so MT4 and MT5 show tick volume, which counts the price updates in each candle. It is a fair guide to activity, but it measures your broker's price feed and does not count traded contracts. Compare the inverted hammer's tick volume with the candles around it and avoid reading the number on its own.
The daily candle depends on your broker's close time. Most forex brokers close the daily candle at 5 p.m. New York time, which gives five daily candles a week. A broker on a different server time can show a short Sunday candle, which changes the open, high, low and close of the days around it. An inverted hammer on one platform may not appear on another, so check your broker's server time before trading daily patterns.
Spread and gaps move your real prices. Charts plot the bid price, but a buy order fills at the ask, so a buy stop set at the inverted hammer's high fills about one spread above what the chart shows. A weekend gap can also open price below your stop-loss, and the stop-loss then fills at the next available price. This is slippage, and it is one reason to keep the position small enough that a larger loss still fits your plan.
You can practise spotting inverted hammers and testing both entry methods on a TMGM demo account on MT4 or MT5 before trading with real money.
How Does the Inverted Hammer Compare With Other Bullish Reversal Patterns?
The inverted hammer is a one-candle signal. Two- and three-candle bullish reversal patterns include the market's reaction after the first candle, so they carry more evidence on their own.
An inverted hammer followed by a bullish engulfing candle is a common combination, where the engulfing candle acts as the confirmation candle. An inverted hammer can also be the small middle candle of a morning star, and the third candle then completes the pattern.
What Are the Common Mistakes When Trading an Inverted Hammer?
1. Entering before confirmation. Buying at the close of the inverted hammer skips the step that filters out most failed signals.
2. Trading it in a sideways market. Without a downtrend before it, there is no trend to reverse, and the pattern is unreliable.
3. Mistaking a shooting star for an inverted hammer. Check the trend first. After an uptrend, the same shape is bearish.
4. Ignoring volume and the support level. An inverted hammer on low volume, far from any support level, has the weakest odds.
5. Using too much leverage without a stop-loss. CFDs are leveraged, so a failed bullish reversal can cost far more than the candle's length suggests. Set the stop-loss below the low and size the position before you enter.
Frequently Asked Questions
Is the inverted hammer candlestick profitable?
It can be, when you trade it with a confirmation candle and a stop-loss. A 20-year backtest by Barry D. Moore reported a 60% success rate and an average return of 1.12% per trade, with positions closed after 10 days. Past results do not guarantee future returns, and your results depend on the market, the timeframe and trading costs such as spread.
What is the difference between a hammer and an inverted hammer?
Both are bullish reversal patterns that form after a downtrend. The hammer has a long lower shadow, showing sellers pushed price down and buyers pushed it back up before the close. The inverted hammer has a long upper shadow, and because buyers could not hold the higher prices, it is a weaker signal until a confirmation candle forms.
What is the difference between a hanging man and an inverted hammer?
They have different shapes. A hanging man has the hammer's shape, with a small body at the top and a long lower shadow, and it forms after an uptrend as a bearish signal. The inverted hammer has a long upper shadow and forms after a downtrend as a bullish signal. The inverted hammer's bearish twin is the shooting star.
