Trading Hammers (revisited)

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Quote from capamunt:

Hi Niha,

Excellent thread.

I think many people we needs your advice.

And in the Hammer is specially dangerous any misunderstanding.

At daily chart the Nasd comp is an example

Thanks

Salut
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Hi capamunt,

In your daily chart of the Nasdaq Composit...

The first two highlighted Hammers are dark hammer lines.

Most dark hammer sub-groups requires the following interval to be a white candlestick (Close > Open) that closes above the Open of the dark hammer line.

Your first dark hammer line that's highlighted had such confirmation...

Not your second dark hammer line that's highlighted.

That particular dark hammer line that became a confirmed pattern...fizzled over the next 4 trading days and at worst would have resulted in a breakeven trade for either NQ or QQQQ (swing trading).

White Hammer lines are usually dependent upon the price action before its appearence...

Whereas Dark Hammer lines are usually dependent upon the price action before and after its formation to determine if it traverses into a confirmed pattern.

Your last highlighted Hammer line is a white hammer line...the dip the following trading day allowed for a nice Long entry (swing trading).

The price action before it...their lower shadows and body range were less than the length of the long lower shadow on the White Hammer Line.

This is something I like to see in this particular type of White Hammer sub-group.

Now...if you take a closer look at the 60min chart interval of that particular White Hammer Pattern (April 29th)...

There's a dark hammer line in engulfing range of a white candlestick that appeared two intervals after the dark hammer line...

Strong bullish signal for the Nasdaq Composite @ 1903.82

Nasdaq took off like a rocket.

We'll be lucky to see another White Hammer Pattern the remainder of the trading year via the daily charts.

1 to 3 times per year is about normal via daily charts for that particular White Hammer sub-group.

NihabaAshi
 
Quote from sunnyskies:

...The number is not really what I'm asking but how you arrived to that nmber, you know..
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As you probably already know via seeing me discuss it dozens of times here at ET...

I don't use nor recommend the use of fixed initial stop/loss protection.

What I mean is this...many traders use fixed stops based upon whatever reasons.

Example is 1.00 point stop in ES.

No matter what time of day and no matter what type of trading day it is...

They are using a 1.00 point stop in ES.

The flaw with this is that a fixed stop assumes the price action is always the same...from one trading day to the next.

This is far from the truth.

The market (it's price action) and the reasons behind the price action is different every trading day.

That reason alone is why I use initial stop/loss protection based upon current price action at the time of the trade signal or at the time of the entry signal.

There are many ways of doing this that's been discussed by others at ET.

Here's one particular way I do such...

First I decide what is the key support level (a specific price) below the closing price of the Hammer Line.

In that particular price action for the ES chart in question...

I changed the 5min interval to a 10min interval to look for any prior long lower shadows that hadn't been filled in by the price action that followed it.

Had I not found one on the 10min chart...I would have gone up to the next interval...15min and so on until I found a long lower shadow that had not had its area filled in by the price action that followed that particular interval.

In the ES chart...I found one on the 10min chart and it occurred back on July 21st via the 10min interval that opened at 1450pm est an closed at 1500pm est.

The low of that interval is 1228.00

I like to place my stop 1-2 ticks below the support price I find.

In this case for ES...1227.50

As I mentioned earlier in this thread...

If the stop/loss protection is too much for me to bite on...

I either don't take the trade or I reduce my contract size to a level where I have suitable risk control.

That 1227.50 would have been a suitable risk for me in that particular price action.

Although you didn't answer my prior question...

Here are my questions for you (please don't ignore it)...

* What are your trading instruments ???

* Did you see any Hammer Lines today in your trading instrument or on the day you choose to respond to this question ???

NihabaAshi
 
Hi NihabaAshi,

John Bollinger says on Bollinger Bands:

"Closes outside the Bollinger Bands are continuation signals, not reversal signals. (This has been the basis for many successful volatility breakout systems.)"

I have notticed that if a white candle (the longest the better) closes above the upper band the odds for a continuation increase, but if it's a black candle a reversal is more likely.

I've been trading this method using 15 days charts with 2 hour candlesticks.
 
July 28th Thursday

Forex EurUsd

Body of the Bullish Dark Hammer pattern is engulfed by the white line that showed up in the interval after the Hammer Line...

A multi-candlestick pattern.

Take a look at EuroFX EC and you'll see a similar pattern signal.

Then around 0926am est in EuroFX EC 3min chart...

One of Rickshaw Man's favorite patterns showed up...

Then Forex EurUsd and EuroFX EC drops.

Next...

Help Wanted Index Report @ 10am est is released and 5-6mins later the skid downwards for EurUsd and EC is soon over and a pt3 (profit target) is reached.

NihabaAshi
 

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Quote from NihabaAshi:

July 29th Friday

CME Emini - ER2

Bullish Dark Hammer pattern

NihabaAshi
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NihabaAshi:

Thank your very much for sharing your ideas and experience with us.

I have not spent much times looking at hammer lines, so please excuse the question if it's something that is obvious.

Why was the first line invalid ?

Thank you and best wishes.
 
Quote from optionpro007:

NihabaAshi:

Thank your very much for sharing your ideas and experience with us.

I have not spent much times looking at hammer lines, so please excuse the question if it's something that is obvious.

Why was the first line invalid ?

Thank you and best wishes.
More...

Hi optionpro007,

Thanks.

The dark hammer line body (difference between the Open and Close)...

I want to see signs of selling pressure or too much supply and not enough demand.

I can see the beginnings of such when the dark hammer body is greater (more depth) than the small upper shadow.

If the body is equal or less than the upper shadow...it decreases the importance of the long lower shadow.

If that happens...then the body of the confirmation white line that follows gains more emphasis on its depth.

In that particular invalid dark hammer you can see the white line that followed the dark hammer had a body equal the size of the dark hammer body.

That tells me that buying has subsided.

Also, I've already mentioned here that the dark hammer pattern is dependent upon the price action before it and upon the price action of the first interval that occurs after it.

Thus, that first interval after the dark hammer needs to be a white line, needs to close above the open of the dark hammer and needs to have a body greater (more depth) than the body of the dark hammer.

Summary of the price action after this particular type of Dark Hammer Line sub-group:

* Dark hammer line requires a white line in the first interval after the hammer line

* Close of white line > Open of dark hammer line

* Body depth of white line > Body depth of dark hammer line

Now...the above is the relationship of the Dark Hammer Line and its White Line and all by itself does not make it a valid trade signal because there still is the relationship of the Hammer line and the price action before it.

The above is using candlestick analysis as a form of tape reading...

Along with visualizing the shift in supply/demand.

NihabaAshi
 
I notice in this discussion that the time frames vary widely for the posted charts. The Cl chart and Eurusd were 1 hour per candlestick, while the ES was 5 minutes per candlestick, the ER2 was 2 minutes, and the EC was 10 minutes per candlestick.

So what happens when the scaling is changed? The obvious hammer that shows up on the one hour candlestick may not be so obvious if the same chart is changed to another time scale.

Then the next question is, just exactly how does a trader select the time scale in order to extract any useful pattern recognition on a consistent basis if the hammer may or may not exist or be so obvious depending on the time scale chosen?
 
Quote from kowboy:

I notice in this discussion that the time frames vary widely for the posted charts. The Cl chart and Eurusd were 1 hour per candlestick, while the ES was 5 minutes per candlestick, the ER2 was 2 minutes, and the EC was 10 minutes per candlestick.

So what happens when the scaling is changed? The obvious hammer that shows up on the one hour candlestick may not be so obvious if the same chart is changed to another time scale.

Then the next question is, just exactly how does a trader select the time scale in order to extract any useful pattern recognition on a consistent basis if the hammer may or may not exist or be so obvious depending on the time scale chosen?
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Hi Kowboy,

I day trade and swing trade.

In addition, I have a lot of discussions with day traders and swing traders that send me chart examples of something they traded or missed.

Thus, the chart interval diversity you see is a reflection of such.

Your question about the Hammer on one interval and what happens to the Hammer on a different interval...

Obvious, as you noted, there will not be the same Hammer pattern on a changed interval.

However, the reason(s) behind the price action that leads into the Hammer pattern will not change no matter what chart interval you use.

Remember, candlesticks should only be used as confirmation tools to what you already know (the big picture) and just looking for an entry point.

To answer your next question...

There is no best or right chart interval.

Just use whatever your comfortable with and that fits your trading style.

For example, I'm not going to use the 60min chart to day trade because I prefer chart intervals 15mins or less for day trades.

Just the same, I'm not going to use the 5min chart to make swing trade decisions because I prefer chart intervals of 15min or more for such.

This is what's comfortable for me but may not be suitable for someone else.

Next, no matter what interval you see a Hammer pattern...if you lower that chart interval to take a closer look of the price action in that particular Hammer pattern...

You should see commonalities in the price action from one Hammer pattern to the same type of Hammer pattern that appears another trading day.

Simply, don't get fixated on the Hammer Line itself.

The key is the price action that the Hammer Line is involved in.

Something else, I have a multi-monitor setup.

Thus, I have different chart intervals on my monitors because I don't want to get fixated on one particular chart interval that doesn't have a trade signal when there's trade signals appearing on another chart interval.

Just the same...I follow different trading instruments because I don't want to get fixated on one particular trading instrument that doesn't have a trade signal when there's trade signals appearing in other trading instrument.

For example of the latter above...

Review what I said about the relationship between CL and QM or between EuroFX and Forex EurUsd.

This leads back to my point again...

The price action that the Hammer Line is involved within...

It is important and will determine if the Hammer Line traverses to a Hammer Pattern.

Therefore, eventhough one trading instrument doesn't have a Hammer Line...

It's still a trade signal because another trading instrument with almost the exact same price action has a Hammer pattern.

Price action is still the same.

NihabaAshi
 
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