The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and can act as a warning of a potential reversal upward.
It is important to note that the Inverted pattern is a warning of potential price change, not a signal, in and of itself, to buy.
The inverted hammer candle has a small real body, an extended upper wick, and little or no lower wick.
It appears at the bottom of a downtrend and signals a potential bullish reversal.
The extended upper wick suggests that the bulls are looking to drive the price upwards.
Validation of this move will be confirmed or rejected through subsequent price action.
Inverted Hammer candlestick pattern:
Let’s say you’re following Facebook’s share price, which is on a downtrend, last closing on $160.06.
The next day, it opens at $160.91, with an intra-day low of $160.52 and a high of $163.80.
Facebook’s share price closes at $161.38, creating an inverted hammer pattern, as seen below.
Over the next two days, the share price increases to $166.55, confirming that the inverted hammer signaled bullish reversal.