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Inverted Hammer Candle Pattern
Years ago when I started learning about candlesticks, I already knew about the hammer, but the inverted hammer escaped my attention. I thought it was a hammer upside down, but it’s not. A hammer is a single candle line in a downtrend, but an inverted hammer is a two line candle, also in a downtrend. The inverted hammer is supposed to be a bullish reversal candlestick, but it really acts as a bearish continuation 65% of the time. The overall performance ranks it 6 out of 103 candles, meaning the trend after the candle often results in a good sized move.
Inverted Hammer Candlestick: Important Results
Theoretical performance: Bullish reversal Tested performance: Bearish continuation 65% of the time Frequency rank: 61 Overall performance rank: 6 Best percentage meeting price target: 68% (bull market, up breakout) Best average move in 10 days: 7.74% (bear market, up breakout) Best 10-day performance rank: 9 (bear market, up breakout) All ranks are out of 103 candlestick patterns with the top performer ranking 1. “Best” means the highest rated of the four combinations of bull/bear market, up/down breakouts. The above numbers are based on hundreds of perfect trades. See the glossary for definitions. |  Inverted Hammer |
Inverted Hammer Candlestick: Discussion
The inverted hammer is a two line candle, the first one is tall and black followed by a short candle line of any color. The inverted hammer is supposed to act as a bullish reversal and that makes sense from the picture. It looks as if downward momentum is slowing. However, for an upward breakout to occur (confirming a reversal of the existing price trend), price has to close above the top of the candle pattern, and that is more rare than a downward breakout. Thus, this candle acts as a bearish continuation because price frequently continues lower.
The overall performance rank is 6 out of 103 candle types, where 1 is the best performing. The best average move in 10 days is a huge rise of 7.75%. I consider moves above 6% as good ones, so this is exceptional. The pattern does best in a bear market after an upward breakout, ranking 9th for performance.
Inverted Hammer Candlestick: Three Trading Tidbits
If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.
Inverted Hammer Candlestick: Example
The chart shows an inverted hammer (the two candles circled in red) on the daily scale. The inverted hammer is a two-line candle pattern with the first candle line being a tall black one with a short lower shadow (a close near the low) followed by a shorter second candle. The second candle cannot be a doji, meaning the opening and closing prices must be far enough away to show a body color. Plus, the second candle must have an opening price below the prior day’s close.
That configuration is what you see here.
Whenever I think of a continuation candle, I often wonder why did they bother to name it? The answer is obvious because it says price is unlikely to reverse and that is worth knowing. Of course, knowing that theory is wrong about this candle can pay you big dividends, too, when shorting a stock with an inverted hammer. As in this case, price continues lower. If you had believed that an inverted hammer was a reversal and closed out your short position, you would have missed a major move down.
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