Hammer and Inverted Hammer Patterns: Trading, Reversal Signals, and Key Strategies

The Hammer and the Inverted Hammer are two well-known candlestick patterns that we will examine in this post and provide you essential tips on using them in your trading approach. Even though they are considered advanced patterns, we will give you a great overview of how to spot and include them in your trading arsenal. Also, a great trader needs a broad portfolio, so we’ll give you three alternative trading approaches specifically suited to markets like Stocks, Cryptocurrencies, Commodities, Forex, and even NFTs.

In general successful trading with candle charts requires an understanding not only of the candle patterns but also of where the candle pattern appears and in the context of risk/reward analysis.

Hammer Pattern

The hammer candlestick pattern is one of the most popular bullish reversal patterns among traders. It signals that sellers are losing their grip on the market and that buyers are taking control.

What is the Hammer Pattern?

So, what exactly is a hammer candlestick pattern? Well, it’s a candlestick with a small real body and a long lower shadow that’s at least twice the size of the real body. The pattern also has no upper shadow and typically appears in either red or green, although the color of the real body doesn’t matter as much, according to the father of the candlestick pattern, Steve Nison.

The green hammer, also known as the “power line” in Japan, is considered to be more bullish than the red hammer because it suggests that buyers have completely taken over the market. However, regardless of the color, the hammer pattern is a bullish sign that you can look for to signal a potential buy.

How to Identify the Hammer Pattern?

To identify a hammer, you should pay attention to the length of its shadow and where it closes relative to the session’s high. The hammer’s long shadow suggests that the market sold off sharply during the session and then bounced back to close near the high of the session, which could indicate bullish sentiment. The pattern should also have little to no upper shadow to show that the buyers have overwhelmed the sellers. The Japanese would say there was a “kamikaze fight,” and the bears lost control.

It’s important to note that the hammer is a trend reversal pattern, meaning it signals a shift from a downtrend to an uptrend. Therefore, you need to have a previous decline before the hammer pattern emerges. Keep an eye out for the hammer pattern during your next trading session, and who knows, you might just discover the power of the hammer.

What Does a Hammer Pattern Look Like?

Inverted Hammer

The Inverted Hammer is a fascinating bullish reversal signal, appearing after a downtrend, where sellers initially dominate, but buyers regain strength, hinting at a potential market shift.

What is an Inverted Hammer?

So, what is an inverted hammer? Well, it’s a candlestick with a small real body at the lower end of the range and a long upper shadow. The color of the real body doesn’t matter much, but it’s important to note that the pattern requires confirmation with the next day’s opening above the inverted hammer’s real body, or a close above it, to be considered reliable.

But why does a bearish pattern like the inverted hammer signal a bullish reversal? The answer lies in what happens in the next session. If the market opens and closes above the inverted hammer’s real body, it means that those who shorted the opening or closing of the inverted hammer are losing money. The longer the market holds above the inverted hammer’s real body, the more likely these shorts will cover, which could spark a short covering rally and lead to bottom pickers going long. Eventually, this could snowball into a rally, and the bears will have to retreat. Keep an eye out for the inverted hammer during your next trading session, and you might just discover a bullish opportunity.

What Does an Inverted Hammer Pattern Look Like?

Hammer and Inverted Hammer Pattern Strategy Ideas

Strategy 1: Awesome Oscillator and Envelopes on Silver

Let’s look closer at a trading strategy combining the Awesome Oscillator and Envelopes indicators for trading Silver commodities. By using the Envelopes, you can identify whether the market is at the upper or lower bounds of the trend. For this particular strategy, you should focus on patterns close to the lower bounds of the Envelopes, as it may indicate a good entry position for a long trade. Additionally, you can use the Awesome Oscillator to identify market momentum. In this case, a Hammer Pattern formed on 01 September, which signals a potential bullish reversal. Although the color of the Hammer Pattern is red, which is not a strong bullish signal, it is still worth monitoring.

By analyzing the trends and technical indicators surrounding the market, you can see that you are approaching the lower bounds of the Envelopes. This indicates that it might be a good moment for a long position if the pattern confirms. Furthermore, the Awesome Oscillator is still showing a downward trend at this point, suggesting that bears are still in control. However, the downward trend has been going on for some time, which might suggest that bears are losing steam.

Although this pattern may not be the strongest, both indicators show that it might be worth a try as the momentum may be slowing down, and a reversal could be imminent. In this case, the reversal occurred during the following days. You may have entered the trade already at the time you spotted the pattern or waited for five candles to confirm that the Awesome Oscillator also turned green and the trend was clearly reversing before reaping the profits.

Strategy 1 Trading Rules

1. Predominant trend must be a downward trend
2. Hammer Pattern
3. Pattern close to the lower bounds of the Envelopes
4. Awesome Oscillator indicating a potential reversal
5. Go Long

Strategy 2: Choppiness Index and Chop Zone on Amsterdam Exchange 

In this strategy, you’ll be using the choppiness index and the chop zone, which is a visual representation of the index. We’ll be trading the Amsterdam exchange. So, for starters, we need to look for a downtrend to spot a hammer or inverted hammer pattern. To do this, the Choppiness Index needs to trend down. We can use the Chop Zone as a visual aid, where the turquoise color indicates a trend. In June 2022, we can see a trend starting, so we’ll start looking for patterns forming to catch a trend reversal. Around mid-June, we see that the Chop Zone is starting to get red, indicating that the trend is slowing down.

Finally, on the 17th of June, we can spot an inverted hammer pattern and await confirmation. The next candle gives us the confirmation we need, and the Choppiness Index seems to be flat, with the Chop Zone showing a red sign, indicating that the trend has stopped for the last few days. Even though the pattern is not perfect, as the green candle is not too big and the hammer is still near the bottom but not exactly at the bottom, it might be a good time to open a trade for a trend reversal. At this time, we only have the indication that the trend might be over and a not-so-perfect inverted hammer pattern, so having a stop loss in place is very important.

A couple of candles later, you’ll see that the day opens with a very strong green candle, and the bulls take over, giving you a very profitable trade. It’s important to remember that the trade was not perfect, and it was all decided in the next few candles whether the bulls would take over, so always be vigilant and prepared to adjust your trades.

Strategy 2 Trading Rules

1. Predominant trend must be a downward trend
2. Inverted Hammer Pattern
3. Choppiness Index needs to trend down, ideally below 40
4. Chop Zone showing red (trend change from blue to red, meaning it is slowing down)
5. Protect yourself with a Stop-Loss
6. Go Long

Strategy 3: Hull Moving Average and Dochian Channels for Bored Ape Yacht Club NFTs

Let’s talk about our third strategy, which is using the Bored Ape Yacht Club NFT collection market. This is a really unique market, as Candlestick patterns have not really been tested on it yet. For this, we will use the Hull Moving Average and Dochian Channels to check for support levels with the Channels and the latest trend with the Hull MA.

So, let’s get started! As a trader, you’re searching for a downward trend in the charts, which is showing to appear from the beginning of this chart. However, even though there was a big move down, we did not see any patterns that we are interested in. After, the trend shows to be reversing and falling once more, providing another opportunity for you to wait for a useful hammer pattern.

On 27 February, we can see a hammer pattern and can now look at the supporting indicators. As you can see from the Channels, the biggest move down already happened, so there might be a bigger trend reversal on the overall chart, meaning the momentum will likely continue to go up, and the current downtrend was only a slight retracement. Also, the Hull MA is prioritizing short-term trends, which are actually showing to be flattening out, potentially indicating a reversal. Finally, the Hull MA Cross shows, that the short-term trend is on the upside again.

In this case, once you confirm the next green candle, you might have taken the trade to go long. It’s important to remember that this market is unique and untested, so it’s always a good idea to have a stop-loss strategy to manage any risks. With these indicators, you could have taken advantage of this opportunity and potentially made a profitable trade.

Strategy 3 Trading Rules

1. Predominant trend must be a downward trend
2. Hammer Pattern
3. Pattern should be around lower bounds of the Channels, ideally the low already happend
4. Hull MA, flattening out, ideally visible Cross
5. Go Long

Candlestick Patterns are not 100% Accurate

No technical analysis tool is 100% accurate, and this includes candlestick patterns. While they can provide you with an edge in the markets, their effectiveness depends on several factors, such as timeframe, asset, volatility, and the specific entry/exit trading rules that the trader sets. Therefore, you should exercise caution when using candlestick patterns and not rely solely on them for trading decisions.

There are several examples of situations when candlestick patterns fail to predict price movements. For instance, a candlestick pattern may indicate a reversal of a trend, but unexpected news events or market conditions could result in a continuation of the trend. Additionally, a candlestick pattern may appear to be forming, but the lack of trading volume could make it less reliable. 

In volatile markets, candlestick patterns sometimes fail due to unpredictable factors like news events or low trading volume. That’s where Morpher AI steps in, offering real-time, data-driven insights across multiple assets, from crypto to stocks and even NFTs. Acting like your personal financial analyst, Morpher AI simplifies the process, allowing you to make more informed decisions effortlessly. Best of all, it’s free! Experience the convenience of staying ahead in the market—check out Morpher AI’s real-time insights now!

Before incorporating candlestick patterns into your trading methods, you should do extensive research and backtesting to enhance your performance. You should also consider other important market indicators, such as volume, order flow, and news events, and avoid relying too heavily on patterns because this can result in a trader’s trading strategy lacking diversity, which raises your risk exposure. 

In conclusion, you shouldn’t base all of your trading decisions simply on candlestick patterns, despite the fact that they can provide insightful analyses of market emotion. Before trading candlestick patterns, you should do extensive study and backtesting, and consider other important market indicators. You can boost your chances of market success by doing this and avoiding costly mistakes.

Best Platform to Trade Candlestick Patterns

When trading candlestick patterns, having the right platform is crucial to success. Here are some key factors to consider when choosing the best platform:

• Maximum Flexibility: Look for a platform that allows you to go long or short on any asset and use leverage to profit from even the smallest signals in any direction.
• Variety of Assets: A good platform should offer a diverse range of assets to trade from, including stocks, cryptocurrencies, commodities, forex, and unique markets. This ensures you can always find useful patterns and profitable markets to trade.
• Great Indicators and Advanced Chart View: The platform should have great indicators and an advanced chart view that allows you to save templates you have created and combine multiple indicators to get the best edge possible.
• Infinite Liquidity: Choosing a platform with infinite liquidity is important, so you can close every position at the exact price you aimed for and have no slippage.
• Zero Comission: Look for a platform that offers zero comissions, so even if you want to scalp some quick profits, you do not lose on the fees. Combined with fractional trading, you can get in on every position for less than $1.

If you’re looking for a platform that offers all of these features, Morpher is a great choice. It’s specifically designed to provide the best trading experience possible, with maximum flexibility, a wide range of assets to trade, great indicators and an advanced chart view, infinite liquidity, and zero fees.

Conclusion

In conclusion, these patterns have proven to be valuable tools for making profitable trades. By incorporating the Hammer and Inverted Hammer patterns into your trading strategy and using technical indicators to identify market trends, you can maximize your chances of making informed trading decisions.

Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.