Trading Hammers (revisited)

[NihabaAshi]

Quote from T.M.:

Hi Mark...

First , allow me to compliment you for unselfishly sharing your time & knowledge. I thought I knew a little about candlesticks, but after reading most of this thread I realize that I know little.

On the chart I posted there is a DIH at the yellow arrow. I believe it meets all the requirements except for the high of the DIH and the high of the White WRB are the same.

My question is:

Would you pass this trade up or try to enter after seeing the Dark WRB form?

http://www.elitetrader.com/vb/attachment.php?s=&postid=1392397

Thank you...

T.M.

Hi T.M.

Thanks for the 5min chart of the CBOT mini-sized Dow YM (H contract) of March 8th Thurs.

As mentioned earlier in this thread and a few times through out the thread...

I'm a strong believer that Japanese Candlestick patterns should only be used as a confirmation/secondary trading tool to whatever you consider to be your primary trading methodology.

Simply, had I violated my own rule about the above and traded Japanese Candlesticks as my primary strategy...

I would not have taken that DIH price action because it was not a valid pattern signal.

However, that price action is part of my primary strategy (something that has nothing to do with Japanese Candlesticks) and I would have taken the trade.

Yet, lets pretend that was a valid DIH and confirms the price action of your primary methodology.

I would not have enter the trade upon the close of the Dark WRB after the DIH.

Instead, I would have entered the trade any where within the range of the DIH but no worst than 2 ticks below the close of the DIH to better manage the risk exposure.

With that said, lets see if there's something else interesting about YM.

There's a failed (would have caused a loss) Bullish White Hammer pattern on YM 5min M contract the very next day of March 9th Fri.

That Bullish White Hammer pattern appeared at 2:05pm est and I would have traded it had I saw the pattern formed in realtime.

However, no contingency plan appeared to minimize the loss prior to the initial stop/loss protection nor was there a pattern to reverse the losing Long position into a short position.

Here's the interesting part involving sister trades.

I've talked several times in this thread about not getting tunnel vision by focusing on the trading instrument and nothing else.

I would monitor the AMEX DIA exchange traded fund with its chart along side the YM chart.

The DIA price action did produce a contingency plan signal to reverse the Long position into a very profitable Short position.

Its the same contingency plan I mentioned in this thread when a Dark WRB form after the White Hammer Line and closes within the range of the long lower shadow of the Hammer Line.

Simply, the trade (reversing the Long postion into a Short position) would have been taken in YM even though the actual contingency plan pattern signal occurred in the DIA...

I call this a sister trade.

The result of such a trade in this particular price action, the position would have been reversed long before the initial stop/loss protection been hit.

Two trade signals...

One small loss via the Bullish White Hammer pattern and One big profit via the contingency plan involving reversing the losing Long position into a Short position.

Mark
(a.k.a. NihabaAshi) Japanese Candlestick term

 

[T.M.]

Hi Mark...

Thank you for the explanation on the invalid DIH.

Referring to reversing the trade using the sister instrument DIA...

Would you have entered as soon as the Dark WRB closed or waited for a better entry which did occur?
Also..

This is probably a silly question, but I am brand new to trading futures.
Which if any of the e minis would be considered a sister to the YM?

T.M.

 

[NihabaAshi]

Quote from T.M.:

Hi Mark...

Thank you for the explanation on the invalid DIH.

Referring to reversing the trade using the sister instrument DIA...

Would you have entered as soon as the Dark WRB closed or waited for a better entry which did occur?
Also..

This is probably a silly question, but I am brand new to trading futures.
Which if any of the e minis would be considered a sister to the YM?

T.M.

Hi T.M.

In this thread I've discussed that just because something is a valid pattern signal doesn't imply it merits a trade position.

Simply, as explained before in this thread...

There must also be a valid entry signal.

Thus, there should be two signals.

* Pattern Signal
* Entry Signal

The entry signal is just a set of rules a trader designs that fits his/her trading style that must occur for a position to be open.

Entry signal should be designed to manage the risk:reward of the trade, position size managment et cetera.

Thus, there are times when there's a valid pattern signal but not a valid entry signal...resulting in no trade position being opened in theory.

One of my rules involved in the entry signal is the chase range.

I use a 2 tick chase range.

Thus, I attempt to enter the trade without paying more than 2 ticks away from the pattern signal price.

However, if I do chase a position, I almost always reduce my overall position size along with designating the trade in my trade journal...

As a trade intentionally taken outside of the trading plan.

Therefore, to answer your question...

The Dark WRB interval appeared via the 5min chart approximately 3 intervals after the Hammer Line in DIA.

Then going looking at YM...its price at that close of DIA Dark WRB was 12345.00

That means in the next interval I would try to pay nothing less than 12343.00 on the Short position (contingency plan) eventhough the low of that interval is 12335.00 with a high for the interval at 12351.00

Lets pretend I intentionally chased the pattern signal beyond the chase range designated within my entry signal.

I know this is a trade outside my strategy for Hammer patterns.

Regardless if the trade results in a profit or loss...

It's statistically results does not get included with those trades that were via the trading plan.

Simply, you should keep a minimum of two different statistical info about Hammer patterns.

* Trades within the trading plan

* Trades outside the trading plan

Compare your results and it should reveal interesting info about your trading habits.

As to your questions about which of the Eminis would be suitable for sister trades in the YM...

I would use ES or NQ but only as second choice while DIA would be the primary source for sister trade pattern signals.

Mark
(a.k.a. NihabaAshi) Japanese Candlestick term

 

[T.M.]

Mark...

Thank you for the info on entry for contingency reversal.
Great advice.

I am always looking for a bargain at entry and normally wait for the price action to come back and hit my limit order.

Iv'e missed some good moves with this method but I don't like being too far away from the stop.

Please take a look at the chart attached.

I see this as a White Hammer that would not meet your specs for an entry. The White WRB appears within the prior three lines which brings the three lines prior to the WRB into play.

The 12:55 dark line has a body that is > than the White Hammer's lower shadow. Please correct me if wrong.

 

[T.M.]

Hi Mark....

I believe I made a mistake in idenifiying that White Hammer Pattern. I incorrectly used the White WRB. Only a Dark WRB would make it nessasary to measure the three lines proir to it.
Is this correct?

I now believe that the White Hammer would be considered a good hammer pattern.

 

[NihabaAshi]

Quote from T.M.:

Hi Mark....

I believe I made a mistake in idenifiying that White Hammer Pattern. I incorrectly used the White WRB. Only a Dark WRB would make it nessasary to measure the three lines proir to it.

Is this correct?

http://www.elitetrader.com/vb/attachment.php?s=&postid=1393882

I now believe that the White Hammer would be considered a good hammer pattern.

A WRB (dark or white) is not required for this pattern...as stated several times through out this thread.

However, when it does appear among the most recent three intervals before the White Hammer Line...

Do not measure the White Hammer Line against the WRB (dark or white).

Instead, measure the White Hammer Line to any interval between that WRB and the White Hammer Line and to the most recent three intervals before the WRB.

Thus, in your chart example, there is a White WRB among the three intervals before the White Hammer Line.

That forces you to measure the White Hammer Line to the three intervals before the White WRB.

Doing that you can see the one of those three intervals before the White WRB has a body that's larger than the long lower shadow of the White Hammer Line.

You should also see that the Low of one of those three intervals before the White WRB is equal to the low of the White Hammer Line...

That in itself makes it an invalid pattern signal via the discussion in this thread.

Further, in situations like this where the pattern is not valid but came close to being valid...

Quickly take a look at a lower chart interval to see if there's a valid pattern signal to merit trading that price action.

Once again, thanks for the chart.

P.S. I didn't have time to look at DIA to see what it did during that particular price action.

Mark
(a.k.a. NihabaAshi) Japanese Candlestick term

 

[T.M.]

Hi Mark...

I must have missed the post explaining that the low of the White Hammer line must be lower than the three prior bars before the WRB.

My understanding was that if a WRB appears in the three lines before the White Hammer...the length of the White Hammer's lower shadow is measured against the bodies & the shadows of those three lines prior the WRB... but not the low.

I didn't realize that added to the above rule , the following rule also applies:

"The low of the White Hammer has to be lower than the three lines prior the WRB."

Thank you for the correction. I think I got it now.

T.M.

 

[KPCURRENCY]

Quote from NihabaAshi:

Hi GoodMood,

Nice looking Bearish Dark Inverted Hammer pattern.

Out of curiosity...do you watch EuroFX EC or U.S. Dollar Index while trading Forex EurUsd ???

If not...what do you use to help with your trading of EurUsd ???

Also, I want to post a few comments about that prior chart of yours that's a Bullish White Hammer pattern but not the sub-group I've been discussing.

http://www.elitetrader.com/vb/attachment.php?s=&postid=894977

Here's what I don't like about that particular chart...

The prior three intervals are three consecutive down intervals with lower closes.

In addition, two of them had very long upper shadows (resistance).

Also, two of them had their lows within the range of the White Hammer long lower shadow.

The above implies its a very weak White Hammer pattern sub-group.

Confirmation of that weakness were the following hints:

* White Inverted Hammer Line soon followed the White Hammer Line.

* Body of White Inverted Hammer Line gets engulfed by the body of the dark line you have annotated as Position Reverse.

Therefore, it was a price action that was able to easily shake out any weak longs.

Mark
(a.k.a. NihabaAshi) Japanese Candlestick term

Hi NihabaAshi.

I am a new student and am excited more and more each minute by your work.

While I do plan to submit and let go of what I think I know in order to more clearly learn what you are teaching , I do have a question.

It is my personal contention that PRICE ACTION (and volume) tells the story. If one could learn to read the candles-representations of the supply/demand dynamic and order flow, one could trade without regard to the candle patterns.

In the above quote, for example, couldn't one with an understanding of the supply/demand dynamic see that the market was weak and simply look to get short?

There is another example where the second WRB(b) does not close below the first WRB (a), while this confirms the strength in the market and keeps one from using a contingency plan (there was a valid bullish white hammer pattern as discussed in this thread prior to the second WRB), couldn't one use the sum total of the candles to see market strength?

In other words, the pattern's existence is secondary to the actual underlying supply and demand dynamics which are seen thru the sum total of the Price Action.

Rather then learning the well defined patterns themselves, can one learn the Price Action that creates them only? The PRICE ACTION that encompasses the pattern(s): the intervals prior to the hammer line, the hammer line itself and sometimes the interval following therefore would be the "signal". But not in a pre-defined "pattern x" way, rather in an overall understanding of what price is doing at that time.

 

[NihabaAshi]

Hi KPCURRENCY,

Quote from KPCURRENCY:

Hi NihabaAshi...

It is my personal contention that PRICE ACTION (and volume) tells the story. If one could learn to read the candles-representations of the supply/demand dynamic and order flow, one could trade without regard to the candle patterns.

I strongly agree and I've discussed such in this thread via saying things like if we don't understand what's occurring in the price action prior to the appearance of a Hammer pattern signal or any pattern signals that has nothing to do with Japanese Candlesticks...

It's not a valid pattern signal.

(Note: There are substitutes for volume such as volatility.)

I've also stated many times in this thread that we shouldn't use a pattern signal to define (tell us) what is occurring in the price action.

You should have also notice a few times early in this thread where I stated I'm not going to reveal all the rules for these particular pattern signals in one post nor early in the thread because I want to force traders to spend most of their time trying to understand what is causing the formation of the pattern signal.

Simply, trading any pattern signal without knowing what's causing the price action is trading at a disadvantage.

Further, most newbie traders tend to use whatever came with their realtime charting program...

Indicators and its how these programs are marketed.

Think about it, have you ever seen a charting program marketed for price action only traders???



Thus, the money for data vendors is too market all those indicators (cci, macd, stoc et cetera) including some that specialize in candlestick formations that have been coded (tradestation).

My point is that many newbie traders will spend a bulk of their early years concentrating on whatever is included in their software package and less time on learning what's causing price to do what it does.

Yet, as the months or years pass by, newbie traders that are lucky to be still trading will began to understand the market and spend less time with all the stuff that data vendors market/promote as a road to profits.

Further, its very rare to see newbie traders begin their retail trading careers as price action only traders especially with all the indicator stuff they see in their charting programs.

Quote from KPCURRENCY:

...In other words, the pattern's existence is secondary to the actual underlying supply and demand dynamics which are seen thru the sum total of the Price Action.

In many ways, you can view Japanese Candlestick patterns or price action only patterns as indicators.

That's one of the reason why I've stated throughout this thread and in my opening first statement in this thread about Japane Candlestick Analysis...

Quote from NihabaAshi:

...I do not recommend using candlestick analysis all by itself and it should be only used as a confirmation to what you already know or believe is occurring in the the current price action...

However, you need to be very careful here and it relates to how this thread is traversing.

The reality of trading is that the market never goes straight up nor straight down without shifts in supply/demand.

Therefore, we may know with high probability that the market is weak and its time to be looking for a short entry...

We still need to know when to short to stay within risk management parameters et cetera because there will be times when we are wrong and those are the times where you don't want to suffer heavy losses or worst (account blowouts).

Quote from KPCURRENCY:

There is another example where the second WRB(b) does not close below the first WRB (a), while this confirms the strength in the market and keeps one from using a contingency plan (there was a valid bullish white hammer pattern as discussed in this thread prior to the second WRB), couldn't one use the sum total of the candles to see market strength?

Can you post the link to the chart in this thread that prompt this question...

Thanks.

Quote from KPCURRENCY:

...Rather then learning the well defined patterns themselves, can one learn the Price Action that creates them only? The PRICE ACTION that encompasses the pattern(s): the intervals prior to the hammer line, the hammer line itself and sometimes the interval following therefore would be the "signal". But not in a pre-defined "pattern x" way, rather in an overall understanding of what price is doing at that time...

Yes.

Most are unwilling nor do they have time for such because such can take many years for most traders.

This also involves intuition trading and should only be done by someone that's experience and a consistent profitable trader.

Just remember that one of the purpose of trading via a well defined trading plan is to give you time to learn how to be a discipline trader and to manage your emotions as you interact with the market.

Therefore, a well defined trading plan helps prevent blowing out your trading account.

In fact, every newbie trader I've met that started trading without a well defined trading plan while trying to trade what they thought was occurring in the price action and its price direction...

They all failed because its too difficult of a task for most newbie traders.

They need to map out their trading from A to Z like most things involving winning and losing.

If you've ever played competitive sports...you'll understand what I'm talking about having a well defined game plan because those your competing against (especially the successful ones)...

They have a well defined game plan.

Once again, its a YES but not for a newbie trader because its too difficult of a task while trying to learn to be a discipline trader while managing their risk from trade to trade.

It becomes less difficult to learn to trade the price action without a well definded trading plan as we gain more tradidng experience that includes being consistently profitable.

Look mom, no indicators

Conclusion:

You need a well defined trading plan to keep you in the trading game as you learn the many different dynamics of price from one trading instrument to another trading instrument.

Most traders will never make it to that level of trading either because they failed while trying or do not want to travel that road (satisfy with another route).

Mark
(a.k.a. NihabaAshi) Japanese Candlestick term

 

[belmondo]

Hi NA,

on page 32 you have YM chart. all rules are there but you said that the shadow should be bigger than 3 prior candle bodies. but on this example shadow is not bigger than the prior body.
thank you in advance