Inverted Hammer: Reversal or Trap?

An inverted hammer is a single-candle signal that appears after a decline and can mark the end of that move, provided the next session confirms it.

What the pattern is

The candle has a small body near the low of the range and a long upper wick that is at least twice the length of the body. It forms when price rallies sharply during the session but then gives back most of the gain, closing near where it opened. The result is a shape that looks like an upside-down hammer.

What forms it

The pattern only has meaning after a clear downward move. During the session, buyers push price higher, creating the long upper wick, yet sellers regain control by the close. That tug-of-war leaves the small body at the bottom of the range and signals that the attempted rally failed on the same day.

What confirms it

Confirmation comes from the next candle. If that candle closes above the high of the inverted hammer, the failure of the rally is treated as complete and the pattern is considered valid. Without that higher close, the signal remains unconfirmed and the candle stands alone as nothing more than a failed intraday rally.

How it fails

Traders commonly mistake the long upper wick for immediate support and enter long on the candle itself. Because the pattern is, by definition, a failed rally until proven otherwise, buying into the wick alone leaves the position exposed to further downside if the next session fails to close higher.