Written and copyright © 2008-2013 by Thomas N. Bulkowski. All rights reserved.
In my book,
Encyclopedia of Candlestick Charts, pictured on the right,
I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines
in the tests.
The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines,
performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators),
and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy
by clicking on the above link.
Years ago when I started learning about candlesticks, I already knew about the hammer, but the inverted hammer escaped my attention. I thought it was a hammer upside down, but it's
not. A hammer is a single candle line in a downtrend, but an inverted hammer is a two line candle, also in a downtrend. The inverted hammer is supposed to be a bullish reversal candlestick,
but it really acts as a bearish continuation 65% of the time. The overall performance ranks it 6 out of 103 candles, meaning the trend after the candle often results in a good sized move.
Inverted Hammer Important Results
Theoretical performance: Bullish reversal
Tested performance: Bearish continuation 65% of the time
Frequency rank: 61
Overall performance rank: 6
Best percentage meeting price target: 68% (bull market, up breakout)
Best average move in 10 days: 7.74% (bear market, up breakout)
Best 10-day performance rank: 9 (bear market, up breakout)
All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
Inverted Hammer Discussion
The inverted hammer is a two line candle, the first one is tall and black followed by a short candle line of any color. The inverted hammer is supposed to act as a bullish reversal
and that makes sense from the picture. It looks as if downward momentum is slowing. However, for an upward breakout to occur (confirming a reversal of the existing price trend),
price has to close above the top of the candle pattern,
and that is more rare than a downward breakout. Thus, this candle acts as a bearish continuation because price frequently continues lower.
The overall performance rank is 6 out of 103 candle types, where 1 is the best performing. The best average move in 10 days is a huge rise of 7.75%. I consider moves above 6% as good ones, so
this is exceptional. The pattern does best in a bear market after an upward breakout, ranking 9th for performance.
Inverted Hammer Identification Guidelines
|Number of candle lines||Two.|
|Price trend leading to the pattern||Downward.|
|Configuration||Look for a tall black candle with a close near the day's low followed by a short candle with a tall upper shadow and little or no lower
shadow. The second candle cannot be a doji (opening and closing prices cannot be within pennies of each other) and the open on the second candle
must be below the prior candle's
Inverted Hammer: Three Trading Tidbits
If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book
where the tips appear.
- Inverted hammer candles with tall shadows often perform well -- page 359-360.
- Pick inverted hammers as part of a downward retrace in an existing up trend -- page 361.
- Inverted hammers within a third of the yearly low often act as continuations of the existing price trend -- page 361.
Inverted Hammer Example
The chart shows an inverted hammer (the two candles circled in red) on the daily scale. The inverted hammer is a two-line candle pattern with the
first candle line being
a tall black one with a short lower shadow (a close near the low) followed by a shorter second candle. The second candle cannot be a doji, meaning the opening and closing prices must
be far enough away to show a body color. Plus, the second candle must have an opening price below the prior day's close.
That configuration is what you see here.
Whenever I think of a continuation candle, I often wonder why did they bother to name it? The answer is obvious because it says price is unlikely to reverse and that is worth knowing.
Of course, knowing that theory is wrong about this candle can pay you big dividends, too, when shorting a stock with an inverted hammer. As in this case, price continues lower.
If you had believed that an inverted
hammer was a reversal and closed out your short position, you would have missed a major move down.
-- Thomas Bulkowski
Copyright © 2008-2013 by Thomas N. Bulkowski. All rights reserved. Whatever kind of look you were going for, you missed.