This is a price action trading strategy called the inverted hammer forex trading strategy and it is based on a candlestick pattern called the inverted hammer.
Currency Pair: Any
Forex Indicators: none required
WHAT IS THE INVERTED HAMMER AND HOW DOES IT LOOK LIKE?
The inverted hammer is a single bullish reversal candlestick pattern. Which means if the market is in a downtrend and you see the inverted hammer candlestick forms, there’s a likely chance that the market my start to reverse and head back up.
The inverted hammer is the exact opposite of the shooting star candlestick pattern. The shooting start candlestick pattern is a bearish reversal candlestick pattern.
Now, here’s what an inverted hammer candlestick pattern looks like:
Now, you have to note that the color of the inverted hammer does not matter in this case. It can be green or red, it does not matter as long as this candlestick forms in a downtrend, then that’s considered an inverted hammer.
Now, here’s what an inverted hammer looks like in a market that is in a downtrend. Notice that after the inverted hammer candlestick forms, the market started and uptrend:
SHOULD YOU TRADE ALL THE INVERTED HAMMERS YOU SEE?
The short answer is: no. Do not trade all the inverted hammers you see.
Because in my opinion, the location on the chart where the inverted hammer forms is very important. So what types of location I’m talking about here? Well, I mean such locations as:
- support levels &
- fibonacci retracement levels
Those are the two main things you need to be watching to see if an inverted hammer pattern forms. I would not take a trade if it does not form in any of these two locations.
This simply means that not all inverted hammers are created equal. There’s a lot more likely chance of your trade being successful if you take if based on the two levels given above.
INVERTED HAMMER TRADING RULES
- The market must be in a downtrend
- you see an inverted hammer form
- check to see if its forming in an area of support or fibonacci retracment level
- Place a buy stop pending order 1-2 pips above the high of the inverted hammer candlestick
- Place your stop loss order 2-5 pips or more below the low of the inverted hammer candlestick
- For your take profit targets, you can aim for 3 times what your risked or if there’s a previous swing high point nearby, you can use that as your take profit target level but make sure at least that swing high point, if the profit target was to be high has a Risk:Reward of 2 or more.
Here’s an example of a buy trade setup for an inverted hammer pattern which formed on a 38.2 Fibonacci level:
Apply the same technique when you see see an inverted hammer candlestick pattern form on a support level.
ADVANTAGES OF THE INVERTED HAMMER FOREX TRADING STRATEGY
- simple price action trading system with no complicated rules
- and the inverted hammer is a very easy candlestick pattern to pick on your chart
- risk to reward of this forex strategy is really great if the trade works out as anticipated.
DISADVANTAGES OF THE INVERTED HAMMER FOREX TRADING STRATEGY
- sometimes you will notice that even after the inverted hammer forms at a support level (example), there can be 1 or 2 more candlesticks that will form before the market reverses and goes up. So what this can do is trick you into thinking that the inverted hammer buy setup is not valid anymore.
- like all forex trading strategies, not every candlestick pattern based forex trading strategies will give you 100% win rate. You’ve got to expect loses from the forex strategy as well but important thing is manage your trading risk and you’ll do fine.
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