The inverted hammer has the same shape as a shooting star with its long upper shadow, the small real body
and the small lower shadow.
So if you compare the conditions, you will see that the first five are the same but the last one changes.
In fact, the inverted hammer appears after a decline when the market is in a downtrend.
Do you remember when we have seen hammer and hanging man? All the conditions were the same but the last
one was different.
Here we have a similar situation between shooting star and inverted hammer.
All the conditions are the same except for the last one.
Does this make a huge difference?
Let's see. Here we have pound-dollar on a four-hour chart.
Once again I have highlighted in green the candles with the same shape of an inverted hammer but
that are not inverted hammer because they miss the last condition,
they don't appear during a downtrend.
The one highlighted in yellow is a good inverted hammer.
We can see that it comes after a long and strong down move. Once again, to understand the logic of the
pattern,
I like to analyze what happened before the pattern and what happens with the candlestick that forms the
pattern. In the sessions that preceded the inverted hammer, the sellers have the power and you can see
that all the candles are red.
There is no trace of buyers. Then an inverted hammer appears
and it tells us the same things that we have already learned from the shooting star.
The buyers were completely in control at the beginning of the session and pushed the price higher till
the end of the upper shadow.
Then the sellers reacted and the price closed near the opening.
So combining the two analyses, we can say that there is a downtrend and then the inverted hammer at the
end shows that buyers attempted to change this downtrend,
but sellers reacted and the price went down again.
So sellers were stronger than buyers by the end of the session.
As for the hanging man,
ask yourself a question.
Do you want to open long positions on a candlestick that is telling you that sellers are stronger than
buyers at the moment?
Not at all.
That's why I don't suggest to use the inverted hammer.