Inverted hammer or Shooting star: The best signal for trend reversal

trend analysis

You will be amazed to know that some traders completely rely on candlestick chart pattern and decide their move according to their interpretation.

When I used to go to my friend to learn few kinds of stuff on trading I used to see how easily one could interpret the market and know the consequences behind the trades going in the market.

It is like he is communicating with the charts.

But It is very well said that learning candlestick patterns won’t help unless you are able to spot them in right time. Not only this you need to be quick enough to act accordingly.

Here I will show you not only the technical aspects of candlestick but also it’s key points which will help you to identify, recognize and respond quickly and efficiently.

You are already aware of the bullish trend reversal signal from my previous article of hammer style candlestick pattern.

Here I focused the same scenario but with a different condition.




Also, read about Spinning top Candlestick pattern




 

The opposite of hammer candlestick is inverted hammer candlestick. It is also sometimes coined as a shooting star.

The difference in name is due to the difference in the location of formation. Their physical appearance is same but the interpretation makes them different.

I will not waste much time writing in the context of the significance of its name. What is important is its identification and interpretation and how really you can use this.

Find the 4 hidden interpretations of candlestick here

Physical interpretation of Inverted hammer or Shooting Star

As I said earlier you need to train your eyes to identify the correct candlestick pattern. Inverted hammer or shooting star is similar in physical appearance but interpretation changes with the location of formation.

Both help to analyze trend reversal similar to hammer style candlestick.

The image below describes how classical inverted hammer or shooting star will appear.

inverted hammer or shooting star

I guess you have observed the physical appearance is similar to an actually inverted hammer as the name suggest.

With a long shadow above a short width body.

Key identification marks of Inverted hammer or shooting star

    1. Long Shadow above the body
    2. Shadow is 2 to 3 times the width of body
    3. The width of the body is short and open and close price remains close to each other.
    4. Bearish and bullish candles do not make difference. Both have the same significance.







 

Before you start confusing with inverted hammer and shooting star, let me drive you through the difference in their interpretation.

What makes Inverted hammer difference from shooting star

Each of them its unique position of appearance and interpretation. Both of them contribute in giving trend reversal signal. Let’s peep into their interpretation

Location of inverted hammer

An inverted hammer has its significance when it is formed after a downtrend in the market. When the market has shown bearish sessions in last few candles and an inverted hammer appears, there you need to get alerted as the trend may get reversed.

Interpretation of inverted hammer

The prime significance of the appearance of inverted hammer after a downtrend is that the bearish trend is near to its bottom surface. The buyers are active in the market and irrespective of previous bearish candles this time sellers tried but could not dominate the market resulting in long tail formation.

This explains that sellers have lost their strength and there is no more dominating effect from sellers side.The buyers are active and successful in bringing close price very near to open price. As a result, buyers did not let price to fall down more as what happened in previous bearish sessions.

Confirmation signal

Irrespective of other trend reversal signals given by candlestick charts inverted hammer has its own confirmation signals. You should not dive directly into the market looking for an inverted hammer, rather you need to wait for the confirmation to build its presence.

All you need to do is observe the very next candle after the formation of inverted hammer candlestick. If the new positive candle’s close price is above the close price of inverted hammer then you can assure that trend is going to change.



Key elements to remember

  1. Inverted Hammers forms only after a downtrend
  2. Buying opportunity starts here
  3. Bullish trend reversal signal, time to enter the market
  4. Works better after confirmation signal
  5. Sellers have lost their domination

Try this out before you jump

It is always advised to try any candlestick pattern before you start analyzing for future. The past should be diagnosed well before future is predicted.

inverted hammer example_1
Source: Economic Times



inverted hammer example__2
Source: Economic Times

Location of shooting star

Unlike inverted hammer, shooting star shows its significance only when it is formed after an uptrend. It can help you identify the bearish trend reversal signal. With shooting star,  you can assume that the bullish trend has found its resistance level and may revert back. This can be confirmed after the complete formation of confirmation signal which is discussed below.

Interpretation of shooting star

If you watch the pattern carefully you can see that unlike previous bullish candles, the formation of shooting stars shows the fight between buyers and sellers. The buyers trying to pull the market to bullish side but the sellers are active and bring the close price near the open price forming a long shadow above the body.

The sellers are active here and do not let buyers dominate the market. Buyers are exhausted here and have lost their strength.

Confirmation signal

Similar to inverted hammer, shooting star also has the confirmation signal. With the formation of very next candle of a shooting star, you need to assure that the closing price is below the close of a shooting star. Wait till you get the confirmation. I know fear will drive your emotions here but all you need to have is patience and management of your hard earned money.



Key elements to remember

  1. Shooting star forms only after an uptrend
  2. Short term investors find this best time to move out.
  3. Sellers are active and buyers and exhausted
  4. Make exit from the market only when you get confirmation.

Try this out before you jump

Here few examples will help you analyze how shooting star works. You should try this out on your own.

shooting star example__1
Source: Economic Times



shooting star example__2
Source: Economic Times



You can also find trend reversal with Doji candlestick pattern

Bottom line

So you can see the same candle is said to be inverted hammer when found with a downtrend and shooting star when found after an uptrend. You not only need to identify these candlestick but also get confirmation. If you are satisfied and have reconfirmed your results, don’t hesitate to show your move. A little risk with proper management can earn you great profit.

Post Author: Sushant Putatunda

1 thought on “Inverted hammer or Shooting star: The best signal for trend reversal

    Edward Coutinho

    (July 23, 2017 - 1:35 pm)

    Good information

Leave a Reply

Your email address will not be published.
Required fields are marked *