Quote from CFerret:
Hi Mark -
Sorry for too small first chart, I never posted charts here before and have not much experience in posting pictures of optimal quality.
Great to hear from you that I successfully found valid hammer patterns.
If you don't mind I have a couple more of questions to you related to them:
1) I currently use volume as a confirmation (must be higher than previous bar). Is it really as important? I'm asking cause if I remember right you once said that you don't use it, but at the same time you also once said it's a big hint...
2) Yesterday I re-read this thread once again and especially stopped by your post where you explained the difference between trend-reversal and counter-trend hammer patterns. If I understand it right, trend reversals should be more reliable. I looked through your examples of trend-reversal hammer patterns and found that they are often based on prior price action similar to double tops/bottoms. The questions is: is it the way to identify trend-reversal pattern vs. counter-trend? I mean if we have a hammer off the double top/bottom and similar chart patterns it's a trend reversal and if we have a hammer off the lower low (if we're in a down trend) it would be a counter-trend trade with lower probability?
Would be great to listen to your explanations about this reversal vs. countertrend stuff cause it took a month for me to finally begin to realize the difference between these (hope I began to realize it right)...
Wish happy holiday to all people in US!
Janis
Hi Janis,
I recommend you continue to use volume until you completely understand WRB Analysis (a topic separate from this thread about Hammer patterns).
Simply, WRB Analysis elimates the need to do Volume Analysis while at the same time WRB Analysis represents changes in supply/demand.
Therefore, if you are already using volume or anyone else reading this thread....
Continue to use it because I do not go into details in this thread about WRB Analysis other than what I've already mentioned about it.
As for trend reversal trading versus counter-trend trading...here's my prior discussion in case someone reading this is unfamiliar...
In this thread I've talked briefly about some invalid or not reliable Hammer patterns.
For example...I've talked about one particular price action that involves a White Hammer Line that occurs after three consecutive dark lines in a price decline.
That particular price action is a counter-trend pattern because there's no shift (change) in supply/demand unless the Close of the White Hammer Line > Open of the most recent prior Dark Line.
Thus, yes, trend reversal patterns are more reliable than counter-trend patterns.
Also, the trade management (initial stops, trailing stops and contingency plans) is much easier with trend reversal patterns in comparison to counter-trend patterns.
As for your reference to double tops/bottoms...it's not part of my trade methodology although some Hammer patterns can occur in such types of price action.
However, if there's no shift or change in supply demand when that Hammer pattern appears...
It's counter-trend trading.
Also, lower lows or higher highs can be either trend continuation patterns, trend reversal patterns or counter-trend patterns.
The key is if its a shift in supply/demand and not if its a double top/bottom, higher high or lower low.
I don't recommend counter-trend trading to new traders or to traders new to a particular strategy.
Only those traders that understand position size management, use position size management as part of their trading plan and are profitable traders...
They can counter-trend trade but with a reduced position size and only if they've identified a market tendency that puts the odds in their favor that the counter-trend trade has more of a chance to be profitable instead of a loss.
The reality is that most traders that counter-trend trade do not have a specific trading plan for such.
I mean...they don't sit down and review their trading plan with the knowledge its a counter-trend plan.
Thus, those that counter-trend trade tend to do such either as intuition trades, misunderstanding of volume analysis, misunderstanding of volatility analysis, discipline problems, shooting from the hip (feeling of being invincible), trading something that looks familiar, inability to admit when their wrong et cetera.
By the way, holiday trading or any other light trading day are notorius for wrecking havoc on counter-trend traders.
With all that said, I've never met a profitable trader that mainly trades counter-trend patterns.
I've met profitable traders that mainly trade trend reversal patterns.
Mark
(a.k.a. NihabaAshi) Japanese Candlestick term
