How to Trade with the Inverted Hammer Candlestick Pattern IG International

Similar to a hammer, the green version is more bullish given that there is a higher close. This pattern always occurs at the bottom of a downtrend, signaling an imminent trend change. He has been a professional day and swing trader since 2005. Cory is an expert on stock, forex and futures price action trading strategies. It often comes down to where the candlestick forms instead of the color. That being said, a bullish hammer with a small green body suggests a little more power than one with a small red body.

The pattern is also widely used in the forex market to determine strong support and resistance levels. Since the close price will come near to the open price, as a trader, you will want to enter the market and buy more USD/EUR positions with an expectation of a market reversal. The reversal will be confirmed on the next candlestick, which will be a bullish candlestick with a higher open price of 1.9. Hereon, the prices of USD/EUR will continue to increase and reach a level equal to or beyond 3, signaling profit-taking opportunities for you.

Hammer vs Doji

During the consolidation phase, the trend appears to change; however, the continuation of the preceding trend is more probable. So, in this case, it’s best to place your stop loss below the lowest price level of the bullish hammer candle.

This candlestick occurs in the market after a long uptrend and signals a downtrend market reversal. With this candlestick, traders can enter a sell position since the market is expected to witness a drastic drop in prices. Always include the context of price action with hammer trading. The best way to show how you can interpret hammer candlesticks in conjunction with https://www.bigshotrading.info/ price action is to look at some real trading examples. Traders view a hammer candlestick pattern to be an extremely reliable indicator in candlestick charting, especially when it appears after a prolonged downtrend. West Texas Intermediate crude oil price fell during the 3rd week of August 2022. However, the market swiftly recovered, showing some signs of life.

What is the inverted hammer candlestick pattern?

Before you place your order, let’s take a look at a few practical considerations that can help you make the most of a trade based on the hammer pattern. However, what happens if the buyers break the top of that inverted hammer during the next candle? About what that says, it shows that bullish traders have had absolute resiliency to push to the upside. Traders that had shorted the market are now starting to lose money, causing them to come in and repurchase positions, putting more of an upward squeeze in the market. The most common type of hammer is going to be the bullish hammer, which forms after a pullback in the market.

• It has formed a bullish hammer which as per the pattern suggests the trader to go long on the stock.
• This is because longer candlesticks cover more price and so usually contain more order flow and activity.
• In our example, the 23.6% Fib level is the first target, and the 38.2% is the second take profit target.
• As we have discussed this before, once a trade has been set up, we should wait for either the stoploss or the target to be triggered.
• Notice how it is red, but the market rallied after it – demonstrated on the PrimeXBT platform.
• The bearish version of the Hammer is the Hanging Man formation.
• If these indicators support the hammer, you can consider its indication reliable.

However, it’s vital to set a Stop Loss level any time you trade. Draw a support level through the hammer and previous candlesticks. The key signal of the hammer candlestick is a price reversal. Still, you can use the hammer pattern for different trading phases. The hammer and hanging man candlesticks look similar but form in different circumstances.

The Take Profit Level

As we mentioned, the bullish hammer pattern forms at the end of a downward trend, meaning at the lowest levels near Hammer Candlestick Patterns a resistance breakout area. Therefore, it is vital to use other technical indicators to confirm the reversal.