How to Make Money Trading with Candlestick Charts

Inverted Hammer signal
As you can see from the directions of the
arrows, the Inverted Hammer is found near
the bottom of a downtrend.

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Criteria
In order for the Inverted Hammer signal to be
valid, the following conditions must exist:
The stock must have been in a definite
downtrend before this signal occurs. This
can be visually seen on the chart.
The upper shadow must be at least twice
the size of the length of the body.
The day following the Inverted Hammer
should witness continued buying.
There should either be no lower shadow
or a very small lower shadow. The
colour of the body does not matter, but a
white body would be more positive than

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a black body.
Why the Reversal Works
Imagine a stock in a downtrend. As
portfolios start showing red, there is panic in
the street. People want to get out. That is the
time smart money likes to buy. One day, as
the stock opens down or flat, the bulls start
stepping in. They drive the price higher
during the day. Eventually, the bears drive it
back down and close it near the open of the
day. The bulls have, however, shown their
presence. They can now sense that the bears
are getting weaker. If the bulls manage to
close the price higher the next day, the
downtrend is considered broken. The key
here, as was in the case of the Hammer, is

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that the bulls need to show confirmed buying
the next day. Again, the Japanese candlestick
traders have placed emphasis on the fact that
the upper shadow must be at least twice that
of the body size. The colour of the body does
not matter, though a white body would be
ideal. That would demonstrate the bulls
managed to close the price higher than where
the stock had opened up.
The following conditions can make the
Inverted Hammer signal a more compelling
buy:
There is a gap down from the previous
day’s close on the day the Inverted
Hammer is formed.
There is a spike in volume on the

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Inverted Hammer day.
Stochastics are in oversold condition.
The longer the upper shadow, the more
the dominance shown by the bulls.
Figure 5.2
 shows the chart of Prism Cement.

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Figure 5.2: