Inverted Hammer Candlestick Pattern Forex Trading Strategy

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By Richard Naxon

The Inverted Hammer Candlestick Pattern Forex Trading Strategy as the name says is based on the inverted hammer pattern.

Now, if you don’t know what an inverted hammer pattern looks like, don’t stress out as I will explain here.

Inverted Hammer Candlestick Pattern

The inverted hammer candlestick pattern is a bullish reversal, the one-candlestick pattern that looks like a shooting star candlestick pattern but whereas the shooting star candlestick pattern appears in an uptrend, the inverted hammer candlestick pattern forms in a downtrend.

Bullish Or Bearish?

  • The inverted hammer pattern itself is a bullish pattern.
  • But the candlesticks that classify as an inverted hammer can be both bullish or bearish candlestick patterns as you can see below.

What Causes Inverted Hammer Pattern To Form?

In an inverted hammer pattern:

  • The buyers overcame the sellers and at some point during that time-period, pushed the price higher.
  • However, the price retraces and closes near the opening price.
  • The buyers push high and subsequent retracment by sellers is reflected by the very long upper wick or shadow.
  • The fact that the price closes near to the opening price gives a very short body candlestick.

Inverted Hammer Candlestick Pattern Forex Trading Strategy Buy Trading Rules

Since this is a bullish candlestick pattern, it only has buying rules…

Here are the rules:

  1. identify on your charts the possible price reversal points like support levels, resistance-turned support levels, Fibonacci retracement levels, rising trendlines, etc.
  2. When you see an inverted hammer pattern form, place a pending buy stop order 1-2 pips above the high of the inverted hammer candlestick.
  3. Place your stop loss anywhere from 2-10 pips below the low of the inverted hammer candlestick pattern.
  4. For the take profit target, look for the nearest swing high and see if the risk/reward is good, like 1:3 or more, and use them as your take profit target level.

Advantages Of Inverted Hammer Candlestick Pattern Forex Trading Strategy

  • Sometimes you can be able to pick the bottoms of the market accurately and ride out the upward trend for maximum profits when the pattern really works out as anticipated.
  • Good risk/reward ratio
  • Can be a set-and-forget type of trading system if the daily chart is used.

Disadvantages Of Inverted Hammer Candlestick Pattern Forex Trading Strategy

  • As with any forex trading system, this also will have periods where the signals will not work out as anticipated.
  • there’s always the tendency to think that the inverted hammer candlestick may be a shooting star and trader miss the obvious by the signal being presented right in front of their face.