What is an Inverted Hammer?

The Inverted Hammer is a single candlestick pattern that signals a potential bullish reversal from a downtrend to an uptrend. It typically appears at the bottom of a downtrend and indicates that buying pressure is starting to increase.

Inverted Hammer Candle Shape

An Inverted Hammer has a small body at the lower end, a long upper shadow (at least twice the length of the body), and very little or no lower shadow. The long upper shadow shows that the price was pushed higher during the session but then came back down, yet buyers are gaining control.

How to Identify

Appears after a clear downtrend.

Small body, color is not crucial (can be green or red).

Upper shadow is at least twice the body length.

Very short or no lower shadow.

How to Trade with Inverted Hammer

When you spot an Inverted Hammer at a support level or at the end of a downtrend, wait for confirmation.

Confirmation signal: the next candle closes with a long bullish body, or a green Inverted Hammer is stronger.

Entry: after confirmation, enter a BUY trade at the open of the next candle.

Stop-loss: place below the low of the Inverted Hammer candle.

Take-profit: at least a 1:2 risk-to-reward ratio, targeting the nearest resistance.

Real Example

Suppose EUR/USD is in a downtrend, hitting support at 1.0500. An Inverted Hammer appears with a long upper shadow and small body. The next candle is a strong bullish candle closing above the Inverted Hammer's open. This is a good buy signal; price later rises to 1.0650.

Common Mistakes

Confusing Inverted Hammer with Shooting Star. They look identical but appear in different contexts: Inverted Hammer after a downtrend, Shooting Star after an uptrend.

Trading immediately upon seeing Inverted Hammer without waiting for confirmation. The Inverted Hammer is only a potential signal; confirmation is needed to avoid false signals.

Ignoring market context: avoid buying unless there is support or other technical signals (e.g., oversold, RSI divergence).

Content is for reference only, not investment advice. Forex trading carries high risk.

Inverted Hammer - Bullish Reversal Signal