The Inverted Hammer candlestick pattern is a two candle pattern that in theory acts as a bullish reversal signal. But even with this said, single candle patterns aren’t always reliable as standalone candles, which is why it’s important to wait for a confirmation candle before placing a trade.
The Inverted Hammer is nearly the same as a regular Hammer candle. The only difference is that while the regular Hammer’s body is located at the top showing little to no upper wick, the Inverted Hammer’s body is located at the bottom, showing little to now lower wick.
The first candle you should see in this pattern is a full bodied bearish candle where the close is near the candle’s low.
The second candle is the Inverted Hammer. The open of the Inverted Hammer should not touch the close of the first candle. There should also be a long upper wick with little to no lower wick. The candle can be bullish or bearish, as long as it’s an Inverted Hammer candle you’re in the clear.
Although this candle pattern is considered a bullish reversal signal, Bulkowski’s testing shows that the Inverted Hammer acts as a bearish continuation signal around 65% of the time. So if you see this candle formation, be aware that price can bound up just as easily as it can fall downwards.
Also keep in mind that an Inverted Hammer is only a valid signal when it has a large full body bearish candle preceding the Hammer, and that an Inverted Hammer alone is not a valid enough reason to jump into a Buy position.