Two of the most common and easily recognizable reversal patterns in technical analysis of financial markets, including for crypto traders, are the hammer and inverted hammer candlestick patterns.
Usually, these two candlestick varieties emerge at the end of downtrending market action and are defined by:
Small body (open, high, and close are approximately the same price)
Long shadow or wick that is twice the size of the body, at least.
A hammer candlestick is a bullish pattern of reversal that occurs mostly at the end of downtrends.
It is distinguished by a tiny bullish body with the downside of a long wick.
A hammer candlestick suggests a complete rejection of bears by the bulls in terms of market psychology.
The long wick to the downside tells us that before bullish momentum emphatically drives the price back up to the opening price or high price of the candlestick, bears were able to drive price downward.
An inverted hammer candlestick is actually a bullish reversal pattern that usually occurs at the end of a downtrend, despite having a similar appearance to the bearish shooting star candlestick.
An inverted hammer represents a scenario in terms of market psychology in which bulls are able to effectively drive the price upwards before closing at or above the opening price.
After creating an initial level of trust, the inverted hammer sets the stage for bulls to enter the market.