What the hammer formartions tell you
As noted earlier, both of these patterns are considered to be powerful reversal patterns.
Following a downtrend, where the price action created a series of the lower lows and lower highs, the bulls are increasing their presence in the game and are signaling that there might be a change in the price direction.
Thus, a hammer signals a potential change in the price direction, as the bears were unable to follow up on the new short-term low by allowing the bulls to push the price higher to force a higher close.
It is exactly the high close that signals that the bulls have just assumed control over the price action, as they defeated the bears in an important fight near the session lows.
Similarly, the inverted hammer also generates the same message, but in a different manner. The price action opened low, but pushed higher to surprise the bears. Still, the bears still have control and they push back the price action to close near the lows.
Unlike the hammer, the bulls in an inverted hammer were unable to secure a high close, but were defeated in the session’s closing stages. Still, the mere fact that the buyers were able to press the price higher shows that they are testing the bears’ resolve.
The fact that the hammer’s bulls managed to get a close at the top of the candle is the reason the hammer is considered stronger than the inverted hammer. This is a logical sequence as the hammer is considered to be one of the most powerful candlestick patterns of any type.
It is important to note that neither of these two patterns is a direct trading signal, but a tool which generates a sign that the price action may reverse as a balance shift is occurring.
To master the hammer and the inverted hammer, as well as other technical indicators and formations, you may want to consider opening a demo trading account, which you can access here. This way you will prepare yourself before you start risking your own capital.