The Inverted Hammer is nothing new but a variation of the Hammer or the Hanging Man if you prefer.

So, an Inverted Hammer at the bottom of a downtrend will indicate that the bears are running out of steam and the bulls are taking over.

The long upper shadow displays the buyers’ intention to pull prices higher in the direction of the established trend but unfortunately for them, the market rejects the high prices as the sellers take over and push prices lower.

Eventually, the sessions closes at about the same price level that opened unable to fall significantly lower. And this is what makes it bullish. The weakness of the bears to push prices lower.

Now, let’s take a look at the specifications of the Inverted Hammer:

  1. It has a long upper shadow, 2-3 times the size of the body
  2. The color of the body is not important in this case
  3. It has a tiny or no lower shadow at all 4. The body is small

Great! Now, a potential buy setup may be in place at the bottom of a downtrend or near a support area, and a buy order is seen right above the high price of the candle. Of course, a protective stop loss is always recommended to protect our capital. This time the stop loss may be in place right below the low price of the Inverted.

Stay tuned for more!