The Inverted Hammer is the exact opposite of the hammer. No surprise! This candlestick pattern has a long upper wick and a small body at the lower end of the candle. It forms a hammer sitting on top of its head. When looking at hammers its important to know that there will be virtually zero wick on one side of the hammer, this determines if it is a Hammer or Inverted Hammer pattern.
The Inverted Hammer resembles the Shooting Star formation. The upper wick tells traders that the buyers were driving the price of the stock up but there was a turning point and the pressure of the sellers brought the price back down to close where it opened.
When trading the Inverted Hammer its good to spot it after a downtrend and then wait for the next candle afterwards to close higher than the hammer. This indicates a bullish period.
Here is an example:
Notice how in the image above we see a downtrend then the momentum starts to shift and a reversal begins. The Inverted Hammer is a great sign here so we wait to see what the next candle does, which as we can see closes higher. If we bought in at this moment we would have had a nice run up.
Remember, each candle tells a story. When reading candles its important to consider volume, momentum and the volatility of the stock. It’s best to use other technical indicators when doing chart analysis. The Money Flow Index along with RSI can be very handy when reviewing candlestick patterns. Be patient and wait for your price. Jumping the gun and paying more can cost you. Wait for that second signal candle before purchasing.