An inverted hammer candlestick is a single-candle bullish reversal pattern that looks like an upside-down hammer or reverse hammer candlestick and forms at the bottom of a downtrend. It has a small body near the low of the candle, a long upper shadow at least twice the length of the body, and little or no lower shadow. This shape shows that buyers tested higher prices and sellers could not push the price to a new low, so selling pressure may be weakening.
Traders use the inverted hammer in three ways: as an early warning within a downtrend, as a buy setup once a confirmation candle closes above its high, and as a reference point for placing a stop-loss below its low.
What Is an Inverted Hammer Candlestick Pattern?
The inverted hammer candlestick is a bullish reversal pattern made up of a single candle. It appears after a downtrend and signals a possible trend reversal by reflecting a shift in momentum.
The name comes from its shape, which looks like a hammer turned upside down with the handle pointing up. Traders also search for it as the inverse hammer, reverse hammer candle or upside-down hammer, and each name refers to the same pattern.
On its own, an inverted hammer is a warning rather than a buy signal. The next candle tells you whether the bullish reversal is genuine. The pattern appears in any market that uses candlestick charts, including forex, commodities, stock indices and crypto.
How to Identify an Inverted Hammer Pattern?
To identify an inverted hammer candle you need to find a candlestick with a small body, a long upper shadow, and little to no lower shadow that appears during a downtrend. All four conditions must be met before you treat the candle as an inverted hammer.
Where the candle forms also affects its significance. An inverted hammer at a support level, such as a previous swing low or a round number, is more likely to lead to a bullish reversal than one that forms in the middle of a downtrend.
What Does the Inverted Hammer Candlestick Mean?
To explain the meaning of an inverted hammer, we need to look at price action and trader psychology. The candle opened near its low, buyers pushed the price well above the open, and sellers then pulled it back down to close near where it started.
Read as a tug of war, sellers won the session because the price closed near the open. The more useful detail is where the price did not go: sellers could not push it to a new low, which is what the small or missing lower shadow shows.
Many explanations say sellers pushed the price down first and buyers came in after. In an inverted hammer, the selling pressure is the downtrend that came before the candle. During the session itself, sellers made little or no progress below the open.
The result is a candle of indecision after a run of candles in which sellers were in control. Buyers have tested higher prices once, and the next candle shows whether they can hold them.
Is an Inverted Hammer Bullish or Bearish?
An inverted hammer is bullish when it forms after a downtrend. It suggests the downtrend is losing strength and that a bullish reversal may follow.
It is still an early signal. Until a confirmation candle closes above its high, the downtrend can continue, and the inverted hammer becomes just another candle within it.
If the same shape forms after an uptrend, traders interpret it as bearish and call it a shooting star. The section on uptrends below explains the difference.
What Is the Difference Between a Green and Red Inverted Hammer?
The colour of the body tells you whether the candle closed above or below its open. A green inverted hammer closed above its open, and a red inverted hammer closed below it.
A green inverted hammer is slightly stronger because buyers ended the session with a price gain, which can signal stronger momentum. A red inverted hammer after a downtrend is still a bullish pattern, and the red body does not make it a bearish inverted hammer.
Shape and location determine whether you have an inverted hammer. Colour only adjusts how much weight you give it, and both colours require a confirmation candle.
Is an Inverted Hammer in Uptrend a Shooting Star?
Yes. An inverted hammer in an uptrend has the same shape but a different name and meaning: it is a shooting star, a bearish reversal pattern. When traders search for a bearish inverted hammer, this is usually the pattern they mean.
In an uptrend, the long upper shadow shows that buyers pushed to a new high and could not hold it. That points to a weakening uptrend, which is the opposite interpretation of the same shape at the bottom of a downtrend.
How Do You Confirm an Inverted Hammer Signal?
The main confirmation is the next candle. A confirmation candle that closes above the inverted hammer's high shows that buyers have reclaimed the prices they tested and held them into the close.
To capture more profit, some traders enter a position before the third candle appears, placing the entry level at the breakout price above the inverted hammer's high of the second candle. This way, the breakout entry gets a better price but produces more false signals, because the price can move above the high and fall back before the candle closes.
So, how do those traders decide which setups are valid signals and which are not? There are several additional confirmation signals that can strengthen the reliability of the setup:
Volume: higher volume on the inverted hammer or the confirmation candle shows that more traders are buying. Low volume indicates weak momentum. Many traders do not buy if there is no satisfactory volume spike on the breakout.
Support level and trendline: an inverted hammer at a major support level is more reliable. In addition, if a confirmation candle closes above the downtrend's trendline, that also increases reliability.
RSI: an oversold RSI reading, or a bullish divergence where price makes a lower low while RSI makes a higher low, supports the bullish reversal.
How Do You Trade the Inverted Hammer Candlestick Pattern?
Trading the inverted hammer candlestick pattern comes down to where you enter, where you place the stop-loss, and where you take profit. Decide all three before you open the trade.
Where to Enter an Inverted Hammer Trade
The standard entry is a buy at the close of the confirmation candle. The faster entry is a buy stop order placed a few pips above the inverted hammer's high, which is triggered as soon as the breakout occurs.
The buy stop gets a better price and a shorter distance to the stop-loss. The trade-off is that some of these breakouts reverse before the candle closes, and you may be filled at an unfavourable price.
Where to Place the Stop-Loss
Place the stop-loss below the inverted hammer's low. If the price trades below that low, sellers have started to regain control and the setup has failed.
Leave a small buffer below the low, at least the size of the current spread, so normal market noise does not close the trade. Once the trade moves in your favour, a trailing stop below each new swing low protects part of the gain and leaves room for the new uptrend to continue.
How to Set a Profit Target
Set the first target at the nearest major resistance level, such as the last swing high within the downtrend. Then check the risk-reward ratio.
Many traders look for at least a 1:2 risk-reward ratio, meaning the target is twice as far from the entry as the stop-loss.
Inverted Hammer Example on EUR/USD
The example below is hypothetical. It uses a EUR/USD daily chart after a two-week downtrend into a support level near 1.0800.
1. Check the shape. The body is 12 pips, the upper shadow is 52 pips (more than four times the body), and the lower shadow is 3 pips. The candle formed after a downtrend at a support level, so it passes all four rules.
2. Wait for confirmation. The next daily candle closes at 1.0885, above the inverted hammer's high of 1.0870.
3. Set the stop-loss. The low is 1.0803. A 5-pip buffer places the stop-loss at 1.0798.
4. Measure the risk. An entry at the close of 1.0885 carries 87 pips of risk. A buy stop at 1.0872 would have been filled earlier with 74 pips of risk.
5. Size the position. With a $10,000 account and 1% risk ($100), and one standard lot of EUR/USD worth about $10 per pip, the position size is $100 ÷ (87 × $10) = 0.11 lots.
6. Set the target. A 1:2 risk-reward ratio places the target at 1.1059, which is 174 pips above the entry. If the nearest resistance level is at 1.1000, the trade offers only about 1:1.3, and you may decide to pass.
What Is the Best Timeframe for the Inverted Hammer?
Daily and weekly charts provide the most reliable inverted hammer signals. Each candle covers a full day or week of trading, so the long upper shadow reflects far more buying and selling activity than a 5-minute candle does.
Intraday charts produce many more inverted hammers, and more of them fail. On 15-minute and shorter charts, a long upper shadow can result from a single news spike or a quiet trading hour.
A useful check is to look one timeframe higher. An inverted hammer on the 4-hour chart that forms at a major support level visible on the daily chart is more likely to hold than one with no support on the higher timeframe.
How Does the Inverted Hammer Work in Forex and CFD Trading?
The inverted hammer works on forex and CFD charts, but a few platform details affect how you read and trade it.
Volume is tick volume. Spot forex has no central exchange, so MT4 and MT5 show tick volume, which counts the price updates within each candle. It is a reasonable guide to activity, but it measures your broker's price feed and does not count traded contracts. Compare the inverted hammer's tick volume with the surrounding candles and avoid interpreting the number in isolation.
The daily candle depends on your broker's close time. Most forex brokers close the daily candle at 5 p.m. New York time, which gives five daily candles per week. A broker using a different server time may show a short Sunday candle, which changes the open, high, low and close of the surrounding days. An inverted hammer on one platform may not appear on another, so check your broker's server time before trading daily patterns.
Spread and gaps affect your actual execution prices. Charts plot the bid price, but a buy order is filled at the ask, so a buy stop set at the inverted hammer's high is filled at roughly one spread above what the chart shows. A weekend gap can also open the price below your stop-loss, in which case the stop-loss is filled at the next available price. This is slippage, and it is one reason to keep the position small enough that a larger loss still fits your trading plan.
You can practise spotting inverted hammers and testing both entry methods on a TMGM demo account on MT4 or MT5 before trading with real money.
How Does the Inverted Hammer Compare With Other Bullish Reversal Patterns?
The inverted hammer is a one-candle signal. Two- and three-candle bullish reversal patterns include the market's reaction after the first candle, so they carry more evidence on their own.
An inverted hammer followed by a bullish engulfing candle is a common combination, where the engulfing candle acts as the confirmation candle. An inverted hammer can also be the small middle candle of a morning star, and the third candle then completes the pattern.
What Are the Common Mistakes When Trading an Inverted Hammer?
1. Entering before confirmation. Buying at the close of the inverted hammer skips the step that filters out most failed signals.
2. Trading it in a sideways market. Without a downtrend beforehand, there is no trend to reverse, and the pattern is unreliable.
3. Mistaking a shooting star for an inverted hammer. Check the trend first. After an uptrend, the same shape is bearish.
4. Ignoring volume and the support level. An inverted hammer on low volume, far from any support level, has the weakest probability of success.
5. Using too much leverage without a stop-loss. CFDs are leveraged, so a failed bullish reversal can cost far more than the candle's length suggests. Set the stop-loss below the low and size the position before you enter.
Frequently Asked Questions
Is the inverted hammer candlestick profitable?
It can be, when you trade it with a confirmation candle and a stop-loss. A 20-year backtest by Barry D. Moore reported a 60% success rate and an average return of 1.12% per trade, with positions closed after 10 days. Past performance does not guarantee future returns, and your results depend on the market, the timeframe and trading costs such as spread.
What is the difference between a hammer and an inverted hammer?
Both are bullish reversal patterns that form after a downtrend. The hammer has a long lower shadow, showing that sellers pushed the price down and buyers pushed it back up before the close. The inverted hammer has a long upper shadow, and because buyers could not hold the higher prices, it is a weaker signal until a confirmation candle forms.
What is the difference between a hanging man and an inverted hammer?
They have different shapes. A hanging man has the hammer's shape, with a small body at the top and a long lower shadow, and it forms after an uptrend as a bearish signal. The inverted hammer has a long upper shadow and forms after a downtrend as a bullish signal. The inverted hammer's bearish counterpart is the shooting star.
