Trading with Inverted Hammer

The inverted hammer candlestick pattern is commonly observed in the forex market and provides important insight into market momentum. In particular, the Inverted hammer can help validate a potential reversal. The inverted hammer candle has a small body, a long upper wick and little or no lower wick. It appears at the bottom of a downtrend and signals a potential upside reversal. The long upper wick indicates that the bulls are looking to push the price up. The validation of this move will be confirmed or rejected through the next price action.

Inverted hammer should not be confused with shooting star. The two candles have a similar appearance but have very different meanings. A shooting star is a bearish signal and appears at the top of an uptrend, while an inverted hammer is an uptrend signal at the bottom of a downtrend.

How to see the Inverted Hammer candlestick pattern:

- Candles with a small body, long upper wick and little or no lower wick

- Appears at the bottom of a downtrend

- Stronger signals are generated when candles appear near key support levels

Inverted Hammer Candlestick Advantages and Limitations

As with all candle patterns, there are pros and cons to using the Inverted hammer in a trading strategy:

Advantages 

- Favorable entry point: If the inverted hammer candle immediately triggers a new uptrend, the trader can enter the market at the start of the trend and take full advantage of the uptrend.

- Easy to Identify: The Inverted Hammer candlestick is easy to identify on the chart.

Limitations

- Overdependence on one candle: Inverted hammer is a single candle, which represents price action. Relying entirely on a single candle to reverse market momentum, without considering additional supporting evidence/indicators, can result in sub-optimal results.

- Short-lived retracement: The Inverted Hammer Candle may signal a momentary spike in bullish price action that failed to develop into a longer-term trend reversal. This can happen if buyers are unable to maintain buying pressure in the midst of a dominant downtrend.

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