The Inverted Hammer is a bullish reversal candlestick pattern that appears at the bottom of a downtrend. Despite its bearish-looking structure with a long upper shadow, its location after a decline makes it a potential signal that buyers are beginning to challenge seller control. Understanding the Inverted Hammer can help you identify early reversal opportunities.
What is an Inverted Hammer Candlestick?
The Inverted Hammer is a single candlestick pattern that forms at the bottom of a downtrend. It has a small body at the bottom of the candle with a long upper shadow (at least twice the length of the body) and little to no lower shadow. The pattern looks like an upside-down Hammer, hence its name.
Visual Description: Picture a small square or rectangle (the body) at the bottom, with a long vertical line extending upward (the upper shadow). It looks like a Hammer flipped upside down, or like a Shooting Star but at the bottom of a downtrend instead of the top of an uptrend.
Inverted Hammer vs. Shooting Star: Location Matters
The Inverted Hammer and Shooting Star look identical but have opposite meanings:
- Inverted Hammer: Appears after a downtrend = bullish reversal signal
- Shooting Star: Appears after an uptrend = bearish reversal signal
The location in the trend determines the meaning. Always check what preceded the pattern.
Inverted Hammer Formation Criteria
For a candlestick to qualify as a valid Inverted Hammer, it must meet these criteria:
- Location: Must appear after a downtrend or significant decline
- Upper shadow: At least 2x the length of the body (ideally 2.5-3x)
- Lower shadow: Very small or nonexistent
- Body position: Located in the lower portion of the trading range
- Body color: Can be bullish (green) or bearish (red); green is considered slightly more bullish
Psychology Behind the Inverted Hammer
Understanding why this bearish-looking candle is actually bullish requires examining the session's story:
- Opening: After a downtrend, the session opens at or near the lows
- Rally attempt: During the session, buyers push price significantly higher - the first sign of buying interest
- Selling pressure: Sellers push price back down toward the open
- Close: Price closes near where it opened
The key insight: despite the pullback from highs, the fact that buyers were able to push price up so far suggests underlying demand is emerging. The long upper shadow represents the first attempt by bulls to reverse the downtrend.
Inverted Hammer Example
Stock XYZ has fallen from $80 to $50 over three weeks.
Today: Opens at $50, rallies to $55 mid-session, then pulls back to close at $50.50.
Result: A small body near the bottom with a long upper shadow - an Inverted Hammer.
The $5 rally during the session, despite the pullback, shows buyers are emerging at these levels.
How to Trade the Inverted Hammer
The Inverted Hammer requires confirmation more than most patterns due to its somewhat contradictory nature.
Confirmation Requirements
- A bullish candle the next day that closes above the Inverted Hammer's body
- A gap up opening the following session
- Break above the Inverted Hammer's high
Trading Example: Long Entry
Stock ABC has fallen from $100 to $70. An Inverted Hammer forms at $70 with a high of $75.
Next day: Opens at $71, closes at $74 (bullish confirmation candle).
Entry: Buy at $74.50 (above confirmation candle's close)
Stop loss: $68 (below the Inverted Hammer's low)
Target: $82 (previous support turned resistance)
Alternative Entry Strategies
Aggressive Entry
Enter on a break above the Inverted Hammer's high during the confirmation day.
Advantage: Earlier entry, captures more of the move
Risk: Higher chance of failure if confirmation day reverses
Conservative Entry
Wait for price to break above the high of the confirmation candle.
Advantage: Stronger confirmation of reversal
Risk: May miss some of the move, larger distance to stop
Factors That Increase Reliability
Support Levels
An Inverted Hammer at a key support level is more significant:
- Previous swing lows
- Round psychological numbers ($50, $100)
- Key moving averages (50, 100, 200 MA)
- Fibonacci retracement levels
Volume Analysis
- High volume on the Inverted Hammer increases reliability
- Volume spike suggests significant buying interest during the rally
- Higher volume on the confirmation candle confirms buyer conviction
Oversold Conditions
- RSI below 30 when Inverted Hammer forms
- Price extended far below moving averages
- Stochastic in oversold territory
- Multiple oversold indicators align = stronger signal
Shadow Length
- Longer upper shadow = more significant buying attempt
- Shadow 3x the body is more reliable than 2x
- Very long shadows show aggressive buying during session
High-Probability Inverted Hammer Setup
Stock DEF falls from $120 to $80 (33% decline). At $80:
Price hits 200-day moving average support
RSI reaches 25 (deeply oversold)
Inverted Hammer forms with shadow 3x the body
Volume is 70% above average
Next day opens higher and closes above Inverted Hammer's body
This confluence creates a high-probability bullish setup.
Green vs. Red Inverted Hammer
The body color provides additional context:
Green (Bullish) Inverted Hammer
- Close is above the open
- Considered slightly more bullish
- Shows some buyers held on despite the pullback from highs
Red (Bearish) Inverted Hammer
- Close is below the open
- Still a potential bullish signal at downtrend bottoms
- The location (after downtrend) matters more than body color
Inverted Hammer Pattern Statistics
Historical studies show these approximate outcomes:
- Inverted Hammer with confirmation: 55-60% bullish reversal rate
- At support with volume: 60-65% success rate
- Without confirmation: 35-40% reversal rate
The Inverted Hammer is considered a weaker reversal signal compared to the standard Hammer. Confirmation is essential for trading this pattern.
Common Mistakes to Avoid
- Trading without confirmation: The Inverted Hammer alone has a lower success rate than many patterns
- Wrong location: An Inverted Hammer in an uptrend is a Shooting Star (bearish)
- Ignoring the prior trend: The pattern needs a clear downtrend to reverse
- Tight stops: Placing stops just below the body instead of below the low
- Overconfidence: This is a potential reversal, not a guaranteed one
Inverted Hammer vs. Similar Patterns
Inverted Hammer vs. Hammer
Both appear at downtrend bottoms and signal bullish reversals, but they have opposite structures:
- Hammer: Long lower shadow, small/no upper shadow
- Inverted Hammer: Long upper shadow, small/no lower shadow
The Hammer is generally considered more reliable than the Inverted Hammer.
Inverted Hammer vs. Gravestone Doji
The Gravestone Doji has virtually no body (open equals close), while the Inverted Hammer has a small but visible body. At downtrend bottoms, both can signal potential reversals, but the Gravestone Doji is more common at tops.
Inverted Hammer vs. Dragonfly Doji
These are opposite patterns. The Dragonfly Doji has a long lower shadow (like a Hammer with no body), while the Inverted Hammer has a long upper shadow.
Why the Inverted Hammer Works
The pattern works for several reasons:
- First sign of demand: The rally during the session shows buyers are interested at these prices
- Short covering potential: Shorts may begin covering when they see buying emerge
- Psychology shift: Sellers who saw price rally may be hesitant to sell as aggressively
- Support testing: The pattern often forms at natural support levels where buying interest accumulates
Combining Inverted Hammer with Indicators
RSI Confirmation
Inverted Hammer with RSI below 30 and showing bullish divergence is a stronger signal.
MACD
Look for MACD histogram turning up or a bullish crossover forming.
Volume Profile
High volume on the Inverted Hammer followed by even higher volume on confirmation is ideal.
Track Your Inverted Hammer Trades
Pro Trader Dashboard helps you identify candlestick patterns and track which setups perform best for your trading strategy.
Summary
The Inverted Hammer is a potential bullish reversal candlestick that appears at the bottom of downtrends. Despite its bearish appearance with a long upper shadow, its location after a decline gives it bullish implications. The long upper shadow shows that buyers made an attempt to push prices higher during the session - the first sign of demand emerging. Confirmation is essential for this pattern; always wait for a bullish candle the following day that closes above the Inverted Hammer's body. Look for additional confluence with support levels, oversold indicators, and volume confirmation. While not as reliable as the standard Hammer, the Inverted Hammer can be a valuable early warning of potential trend reversal.
Learn more: Hammer candlestick and Shooting Star pattern.