Introduction

The Inverted Hammer often confuses new traders because it looks identical to the “Shooting Star” (a bearish pattern). The difference lies entirely in where you find it.

When found at the bottom of a downtrend, this pattern signals that buyers are starting to “test the waters” and break the selling momentum.

How to Identify an Inverted Hammer

1. The Shape: A small body at the bottom of the range with a long upper wick.
2. The Wick: The upper wick should be at least 2x the size of the body.
3. The Context: It must appear after a series of red candles or a confirmed price drop.

The Psychology: Why is this Bullish?

At first glance, a long upper wick looks like rejection (bad). But here is the nuance:

• The market opened low.
• Buyers pushed the price up aggressively during the session (creating the upper wick).
• Sellers managed to push it back down by the close, BUT they could not push it below the open.
• The Takeaway: Sellers are losing the ability to make new lows. Buyers are actively testing higher prices.

Trading Strategy

The Inverted Hammer requires more confirmation than a standard Hammer.

1. Wait for Confirmation: Do not buy on the Inverted Hammer itself. You typically need a strong green candle the following day to confirm the buyers have won.
2. The Entry: Enter when the price breaks above the high of the Inverted Hammer’s wick.
3. Stop Loss: Place it below the low of the candle body.