Trading term
What is Inverted hammer?
An inverted hammer is a candle with a small body at the bottom of its range and an upper wick at least twice the body's length, appearing after a decline. It shows buyers testing higher prices for the first time.
The shape is a shooting star turned up the other way round — or rather, placed at the other end of a trend. Price opens near the low, rallies substantially during the period, and then gives most of it back to close near where it started. What is left is a long upper shadow with a small body underneath.
On its face that looks bearish: the rally failed. The bullish reading comes from context. After a sustained decline, an attempt to rally at all is new information — sellers had been in complete control and suddenly buyers were willing to bid price up several percent. Even though the attempt failed, the appearance of that demand is the signal.
Because the reasoning is less direct than a hammer's, the inverted hammer is generally held to need stronger confirmation. The identical candle after a rally is a shooting star and is read bearishly instead.
Price ran from $41.20 to $45.80 and gave it all back. The attempt failed — but after a sustained decline, the fact that buyers tried at all is the signal.
For example
After a five-session slide a stock opens at $41.20, rallies to $45.80, then fades to close at $41.80 — a $0.60 body under a $4.00 upper wick. The next candle opens higher and closes up, confirming the signal, and the decline ends.
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Explore Premium →Why it matters to you
It flags the first sign of demand in a downtrend, which is typically the earliest point at which a bottom becomes plausible. Getting that read early — with a stop below the candle's low, which is tight — is what separates buying a turn from buying a falling knife.
⚠ The rally inside it did fail
Unlike a hammer, where buyers finished in control, an inverted hammer ends with the day's advance surrendered. That makes it the weaker of the two and genuinely ambiguous on its own. Confirmation from the next candle — a higher close — is close to mandatory rather than optional.