If you want to maximise your opportunities while trading, you should be able to spot potential reversals. The inverted hammer pattern is extremely useful for identifying new trends. Keep exploring to learn more about the pattern.
Published on 16 December 2022
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Understanding the Inverted Hammer Candlestick Pattern
The inverted hammer candlestick appears when buyers create pressure to increase an asset’s price. It often appears below a downtrend and indicates a bullish reversal. The pattern gets its name from the shape it resembles. An inverted hammer candlestick is characterised by a short lower wick, a long upper wick, and a small body.
When Is an Inverted Hammer Pattern Formed?
An inverted hammer candlestick appears when bullish traders become more confident. The upper part of the wick gets formed as bulls take the price as high as possible. The lower part of the wick gets formed due to bears or short-sellers trying to get rid of the higher price.
Indications of an Inverted Hammer Candlestick Pattern
An inverted hammer candlestick pattern shows traders that buyers are pressuring the market. It provides a warning regarding a possible price reversal after a bearish trend. However, one should never view the inverted hammer candlestick pattern in isolation.
You should try to check other formations and technical indicators to become sure about possible signals. You should also check your overall trading plan before the inverted hammer influences your decisions.
Planning Your Trading Strategy After Spotting the Inverted Hammer Candlestick Pattern
When you start trading after spotting the inverted hammer pattern, you need to look at other indicators that confirm the potential reversal. Once you are certain about the reversal, you can trade using spread bets or CFDs. Since they are derivative products, you will be able to trade on the rising as well as the falling prices.
When you want to trade an uptrend, buying or going long is your option. If you think the downtrend will continue, you can go short or sell. You should remember the following while trying to trade with an inverted hammer candlestick pattern:
● Remember the Psychology Behind the Pattern
The prior trend needs to be a downtrend so that the prices are making lower lows. Moreover, the sellers should exert selling pressure to make the price go down. This candlestick shows that the bulls have returned to the market and are trying to make the price go high. Go into the buying position when the price manages to maintain its strength even in the next trading session.
● Don’t Get Confused with Other Candlestick Patterns
It is easy for traders to confuse the inverted hammer candlestick pattern with the shooting star pattern. However, the two occur in very different scenarios. While the shooting star appears during an uptrend, the inverted hammer appears during a downtrend.
Advantages of the Inverted Hammer Candlestick Pattern
The benefits associated with the inverted hammer pattern are as follows:
● Easy to Identify
The inverted hammer is easy to spot because of the distinct shape of the pattern. The proportionality between its shadow and real body length, along with its place in a trend line, is easy to identify.
● Good Entry Points
The day the inverted hammer is spotted is extremely suitable to start trading. You will be able to reap a huge amount of benefits due to the bullish reversal. It is more applicable when the pattern triggers a healthy upward trend in asset value.
Limitations of the Inverted Hammer Pattern
Some limitations associated with the inverted hammer candlestick pattern are as follows:
● May Not Signify Long Term Changes
The period after spotting an inverted hammer candlestick usually leads to an upward trend. But the upward trend might not last for an extended period. When buyers are not able to keep their market power, the security price starts going downward.
● Offers a Restricted View of Market Behaviour
An inverted hammer is one of the many candlestick patterns useful for forecasting market behaviour. However, relying on the inverted candlestick pattern alone and not considering other indicators might bring unfavourable outcomes.
Wrapping up
The inverted hammer pattern can be a valuable indicator of buyer preferences in some cases. However, you also need to understand other technical indicators and other factors before making your investment decisions to receive favourable outcomes. You must confirm the signal with other technical indicators because the inverted hammer often cannot reveal the long-term future.
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