What trading signal follows an inverted hammer?

An inverted hammer is a candlestick pattern that typically appears at the bottom of a downtrend and is considered a potential bullish reversal signal. The key component of this pattern is the relationship between the open, high, low, and close prices. An inverted hammer has a small real body, a long upper shadow, and little or no lower shadow, which indicates that although sellers pushed the price down during the period, buyers managed to push it back up towards the close.

The significance of the inverted hammer lies in the implication that buying pressure may be increasing, which is why it can be interpreted as a bullish signal. For this pattern to be confirmed as a bullish reversal, the subsequent price action—particularly the closing price—becomes crucial. If the price closes higher after forming the inverted hammer, it reinforces the bullish sentiment, suggesting potential upward momentum.

In this context, focusing on the closing price helps traders assess the strength of the bullish signal generated by the inverted hammer pattern. The confirmation that often follows—such as a higher close—can validate the expectation of a bullish reversal.

Thus, the statement that the inverted hammer provides a bullish signal based on the closing price captures the essence of what traders look for when identifying trading opportunities following this pattern.