An inverted hammer is a technical indicator that is used to identify potential bottoms to downtrends that promise a quick turnaround in the near future. It is the opposite of the widely used hammer indicator, which is employed to identify the top of trends and follows the same basic reasoning.
Inverted Hammer Details
The inverted hammer technical indicator derives its name from its appearance as an upside down hammer when using the candlestick setting for trading charts.
The head of the hammer is opening and closing price, which forms a block, while the handle of the hammer is the long tail of the period’s highest price that far exceeded the day’s close.
Trading with an Inverted Hammer
The inverted hammer technical indicator is generally used to identify the potential bottom for a downtrend with the promise of a quick and sharp turnaround in the near future.
The long tail of the period’s highest price indicates that there was substantial buying pressure that failed to materialize in the closing price. This means that this pressure is likely to continue into the next period, where it will lead to a sharp increase in price.
Generally the inverted hammer is used on charts with one day periods for each candlestick, as anything less fails to capture the unrealized pressure that occurs during a trading session that closes with unmet buying potential.
Inverted hammers are employed to identify potential trades, which are then investigated further using other tools and technical indicators, and traders will rarely make a trade based solely on the existence of an inverted hammer.
The inverted hammer indicator is a very effective way of quickly identifying potential trades that are worthy of further investigation using more detailed and robust tools and analyses. Not all inverted hammers will indicate an coming uptrend, but most uptrends that have an inverted hammer are likely to reverse especially if there is volume on that candle.