As its name implies, the inverted Hammer looks like an upside down version of the Hammer Candlestick Chart Pattern which we learned about several lessons ago. Like the Hammer Pattern, the Inverted Hammer is comprised of one candle and when found in a downtrend is considered a potential reversal pattern.
The pattern is made up of a candle with a small lower body and a long upper wick which is at least two times as large as the short lower body. The body of the candle should be at the low end of the trading range and there should be little or no lower wick in the candle.
What this chart pattern is basically telling us is that although sellers ended up driving price down to close near to where it opened, buyers had significant control of the market at some point during the period which formed the long upper wick. This buying pressure during the downtrend calls the trend into question which is why the candle is considered a potential reversal pattern. Like the other one candle patterns we have learned about however, most traders will wait for a higher open on the next trading period before taking any action based on the pattern.
Most traders will also look at a longer wick as a sign of a greater potential reversal and like to see an increase in volume on the day the Inverted Hammer Forms.