Types of candlesticks, there are many. Moreover, many of them differ only in minor details. As a result, a newcomer may be discouraged by the inability to understand such a multitude of nuances. Therefore, an important component of learning to trade successfully is the study of candlestick patterns. Alas, the market does not forgive mistakes.
An inverted hammer is the name of a bullish reversal pattern, observed after the end of a falling trend.
As you can see on the graph, the presence of this figure is indicated by the too long (compared to the body) upper shadow, while the lower shadow is almost not noticeable. Significant upper shadow indicates the attempts of bulls to push the price up. The figure becomes a pre-determining signal, after which buyers make another attempt to push the price upwards, which is already accompanied by success. The following signs are necessary for recognition of the hammer forex pattern:
- The length of the upper shadow is 2-3 times the length of the body of the candle.
- The length of the lower shadow is either very slight or there is no shadow at all.
Note. Body color is not important, as the candle hammer can be both bullish and bearish. But if the candle is bullish and there is no shadow at the bottom, a stronger signal will be observed, and the length of the upper candle is in direct proportion with the signal strength.
Increased signal strength inverted hammer
Confirmation will be considered more reliable if there are several conditions:
- There is a price gap down between 1 and 2 candles. And the larger the gap, the more reliable the signal.
- If there is no shadow at the bottom, this is a confirmation of the signal.
- The hammer appeared near a powerful support level, and no penetration occurred.
Candle inverted hammer emerges on the basis of a strong falling trend, and the presence of a bearish candle indicates the advantage of the sellers at the moment. Tomorrow trading will open near or at the price low. During the day, the bulls manage to get an advantage, which leads to the appearance of a long upper shadow, but by the end of the day the bears were able to regain their priority. What will happen next? Everything is determined by whether the resulting confirmation will appear tomorrow. If so, the bears will close their cell orders, and the bulls will increase the pressure.
Criteria for evaluation
To be able to confidently assert the presence of this figure, a number of criteria are required:
- There should be a clear bearish trend, clearly visible on the chart.
- The first candle is a bear. The length of her body is longer than that of the previous candles.
- The next day of the auction, the candle of our Hammer appears, which has a relatively small body located at the top of the price range. Moreover, the candle can be both bullish and bearish.
- The shadow above is at least twice the size of the body.
- With an ideal pattern, there is no lower shadow at all, although in reality it can be, but insignificant.
- The subsequent pattern candle has a low point located lower than the same point at the first candle.
Option trading on the hammer.
- Open the D1 EUR / USD chart. We see a bearish trend. So, we will wait for the price reversal.
- We observe the formation of a reversal candlestick pattern of the hammer with a small body and a large shadow below, and there are also bearish candles in front of this pattern. At the top of the shadow is not observed.
- Expect the appearance of a new candle. We see a bullish candle foreshadowing a change in trend. We are waiting for a new candle and open a buy deal.
- Stop expose just below the shadow of an inverted hammer. Take profit should be set a little lower under the last local maximum.
PS As you can see, the deal closed on TP and our deposit has grown.