|By Nathan Young|
June 13, 2017
The inverted hammer is a technical analysis occurrence when there is a downtrend in the market, and a candle appears with a small body, minimal bottom shadow, and a long top shadow and forms an upside down hammer.
Spotting an inverted hammer typically means there could be a trend reversal near. When the wick is long at the top, that indicates that bulls were present and pushed the stock high for that period but the bears ultimately closed the period. What that indicates however is that the bulls are around and ready to buy the equity and take price higher.
The technical indicator is as simple as that, but the other factor you should watch is volume, because if volume is higher, that means there could be many bulls present to push the stock higher on the next day. This formation typically only means a reversal may be near, but there is no guarantee that the stock does reverse and if so, for how long it will change the trend. If there is a bull trend, the candle is referred too as a hammer.
How you can implement this is first, open a demo account and test it on there. Then, find a few active charts and wait to identify the pattern and see if it holds true. You can also use other indicators and tools to help you find chart momentum, which can assist in finding where the stock may truly turn. Again, these technical occurrences do not mean for sure shift in the market, but should be rather used as an indication of what may occur.
If you get stuck using this or looking for the pattern, the Internet is a great place to complete research on how other people are using this charting pattern as well as how they have adapted their trading style. Should that not be enough, reach out to your investing professional and ask them for assistance and they should be able to guide you in the right direction. This may not be for everyone but should certainly be learned because you can keep it in your trading toolbox for a later date where it may be more practical. Technical patters also may not take into account fundamental data so be sure to see the underlying health of the company making a final decision on the company.