Trading Hammers (revisited)

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Quote from FuturesTrader71:

NihabaAshi,

I'm following your thread here with great interest. I truly appreciate the time you take to explain things. I am, however, a bit lost. I feel like I have walked in on a 300-level course and I'm a freshman with core courses only. Don't get me wrong... I have plenty of trading experience and know a fair bit about charts and trading in general. I'm getting my feet wet with candlesticks beyond identifying the formations by themselves on a chart. However, I am wondering if there isn't a resource you would recommend to get up to speed (I have Nison's original book) more quickly than going through a whole book.

I have scanned for your prior messages, but there is a ton of information and putting it all together from different threads is quite labor-intensive.

If you can point me to something that would explain the meaning of formations in given setups (prior 3 bar or whatever the case may be) - if such a thing exists, then I would be grateful and so will others trying to follow this thread and your effort.
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Hi FuturesTrader71,

The fact that you made reference to this thread as 300 level classroom means that the thread is where I want it to be.

This thread is not about generic hammer patterns that can be found in any candlestick book or at any candlestick website.

However, there's nothing wrong with that information and I'm sure that's not what your looking for because all of it is easily found by a search engine.

Yet, any trader that doesn't know the following:

* Hammer
* Body
* Shadow

Those generic websites and candlestick books are an excellent introduction into Hammer analysis.

However, none of them will tell you about the different sub-groups of each candlestick pattern.

Let me repeat that again...

None of them will tell you about the different sub-groups of each candlestick pattern nor go into in-depth details about such.

It could be because they don't have the webspace nor time to really dig into this stuff...reason why what we see at most websites and books are isolated to either one webpage or several pages in some chapter.

For example...I've documented over dozen sub-groups of Bullish White Hammer patterns.

I'm only discussing two of those sub-groups in this thread.

In addition, I'm only discussing a few of the Bullish Dark Hammer sub-groups and a few of the Bearish Dark Inverted Hammer sub-groups.

Therefore, I'm discussing in this thread some of the more reliable Hammer sub-groups.

Don't want to waste time with the stuff that were not reliable for my trading style but may be reliable for someone else.

In addition, its one of the main reasons why backtesters trying to code candlesticks will not get very good results because they are testing all the sub-groups (reliable ones and unreliable ones) along with many backtesters testing something they never took the time to understand/learn the price action behaviour of whatever it is they are testing.

It's also the reason why I'm slowly going to post the rules to prevent such mentality and put emphasis on that price action involving the Hammer Lines.

For example...you should already know that price reaction to Key Economic Reports will generate candlestick patterns that have the best follow-through to at least to the first WRB formation after a Hammer pattern...

Called profit target 1 (pt1).

http://online.wsj.com/public/resources/documents/b-econoday.htm

Reason why if someone else that's participating in this thread has a reliable Hammer sub-group...

Please post charts and discuss them because its never too late for me to learn a new edge.

Thus, via the fact that you've been around the block a few times and already have a candlestick book by Nison...

The discussion of the Hammer patterns in this thread will most likely be your best resource of traversing from the generic info to the more advance info about Hammer patterns.

Now...if someone out there knows about an advance resource about Hammer patterns that has helped them in any way shape or form and can be used as a supplement to this thread or vice versa...

Please pm or email FuturesTrader71.

NihabaAshi
 
Quote from FuturesTrader71:

Also, I was wondering if you can elaborate on your exit strategy as shown on the DAX chart you attached. I understand from your prior response that you base your exit on a WRB and may go to a smaller interval to pinpoint it before the bar closes. I was wondering, however, what would trigger an exit. Do you also watch T&S? Do you wait for a pull-back of a certain degree?

If this is proprietary info, then please disregard. I still appreciate the info you are sharing.

Thanks.
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As soon as the interval becomes a WRB (time to take some profits)...

If I see any type of bearish price action or its a WRB at the time of a scheduled key market event (economic report, greenspan speaking et cetera)...

I'll bank some profits.

Also, depending upon the type of bearish price action...I may dump my entire position.

There was no key U.S. economic reports on Aug 19th Friday so once the DAX got moving upwards...

Nothing to prompt anybody to do an early exit.

Also, an example of one type of bearish price action could be a Bearish Dark Inverted Hammer pattern on a lower chart interval.

However, if DOM or Times & Sales is a key component of your methodology (its not in my own)...

I can't imagine why it should not be used to determine if you should exit when the WRB forms or stay longer in the trade to capture the WRB expanding into a bigger WRB before the interval completes.

NihabaAshi
 
Quote from FuturesTrader71:

Finally, I wanted to ask the following:

1. Where in the hammer formation do you enter after it has closed? I'm assuming you wait for it to close prior to initiating a trade.

2. Is your stop beneath the hammer shadow plus a tick (I know you don't use fixed stop values)?

3. What happens if you don't react fast enough to a hammer formation like the one shown on the DAX chart? Do you use another setup to enter while it is trending up with minor retracements?

As always, your insight is appreciated. I'm learning to look more at the charts now rather than to be a pure DOM / T&S scalper, so this another threads you have contributed to have caught my attention.

Best regards.
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Answer 1: Always and only in the first interval after the Hammer pattern signal and only if I can get a better entry price in comparison to the pattern signal closing price.

Thus, never enter a Hammer pattern before its a confirmed pattern.

I remember a particular journal where the guy was taking some consistent losses via doing such with all kinds of candlestick patterns.

He finally concluded that candlesticks wasn't reliable. :D

Actually, he was right but only via his trade methodology (how he traded candlestick patterns).

I know some that only enter if its a breakout above the Hammer high in any intervals after the Hammer pattern signal (discussed by them in the prior Hammer thread).

I know others that only enter when price action retraces down into the range of the lower shadow.

Simply, there's different entry methodologies out there being used...

Use what fits your trading style.

Answer 2:

Already answered in this thread via a response to sunnyskies.

Answer 3: My reply to your question 1 partly answers this.

In the DAX chart your talking about...

That's a 5min chart.

That first interval after the confirmed Bullish White Hammer pattern is the entry area.

That's almost an entire 5mins...plenty of time to stop scratching my butt and get ready to trade. :p

Actually, my live-recording reveals there was only about 3min 15sec window of that 5min interval to get Long in the DAX.

Now...lets say I missed getting a better entry price (less than the Pattern signal price for the Bullish White Hammer pattern)...

It happens and its no big deal and the market will be here tomorrow.

Therefore, I just wait for the next trade signal to appear in the DAX or in another trading instrument.

Also, if the price keeps going up...I only enter if I get another trade signal...

Reversal signal off the lows of a price pullback or continuation signal...a trade decision that has nothing to do with the missed trade signal.

By the way...there was another bullish reversal candlestick pattern (not by anything I'm discussing in the thread) on DAX 3min chart via the time on my charts of 15:45 at a price of 4911.00

That could have been used to get Long had someone missed the Bullish White Hammer pattern on the 5min chart and looking for another trade signal to get Long or looking for another trade signal to ADD to their current Long position had they not missed that Bullish White Hammer pattern on the 5min chart.

NihabaAshi
 
Quote from sunnyskies:

...Now a crucial question. If I'm long via some pattern - then I look for WRBs that occured above in the past. Suppose I find one. Where will the actual target be? At the high of WRB, at the low, at the close, midline, where?
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My primary WRB to look for as a profit target is the current WRB and not via the current price action traversing into the range of a prior WRB of the past.

Using WRBs of the past is beyond the scope of this thread and is something I call candlestick s/r levels which is more reliable than traditional s/r levels we see being discussed here at ET.

* WRB analysis

* Long Shadow analysis

* Volume spike analysis

Maybe someday I'll go into in-depth details about it here at ET but don't hold your breath waiting for such type of discussion because its something much bigger than this thread.

Quote from sunnyskies:

And in how many pieces do you scale out at the profit targets? Do you scale out in thirds or?
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Usually in thirds.

Will dump it all in a heart beat is price action requires such (breaking world news event, my primary method gives me a trade signal et cetera).

However, if I think I caught a trend for whatever reasons...

I'll try to exit in 1/4 or 1/5.

Yet, more often than not...I'll just increase my chart interval after I dump some at pt1 and based the exits of the remainders on the higher chart interval (already discussed in this thread).

A big trade for me would be if I capture a pt4 level and above after having increased the chart interval.

The DAX chart pt levels was based all on the 5min chart interval...lot easier on me for my one chart per trading day posting instead of printing multiple charts in one day to try an explain some concept and application of such.

NihabaAshi
 
Quote from NihabaAshi:

Answer 1: Always and only in the first interval after the Hammer pattern signal and only if I can get a better entry price in comparison to the pattern signal closing price.
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And how do you know if you're gonna get a better price to enter on the next bar than at the hammer's close?
 
Quote from sunnyskies:

NA, I decided to concentrate only on White Bullish Hammer patterns for now. I'm posting a bunch of charts to see if my identification of them is correct so far.

http://charts.dacharts.com/2005-08-20/1h.png
http://charts.dacharts.com/2005-08-20/2h.png
http://charts.dacharts.com/2005-08-20/3h.png
http://charts.dacharts.com/2005-08-20/4h.png
http://charts.dacharts.com/2005-08-20/5h.png
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sunnyskies,

Who's the data vendor of those charts ???

Chart 1h: Valid Hammer pattern via what I'm discussing in this thread.

The one you have labeled as Invalid has the Upper Shadow > Body...

The Body should be > Upper Shadow

Also, the Low should be < Lows of the prior three intervals via the price action on that chart.

Yet, there's a dark WRB among that price action of the prior three intervals.

That means the Low needs to also be less than the lows of the three intervals prior to the dark WRB.

Chart 2h: The above answer what's wrong with the Invalid Hammer pattern.

Chart 3h: Valid Hammer sub-group but not one of the sub-groups I'm discussing in this thread.

Chart 4h: Valid bullish hammer patterns being discussed by me in this thread.

Valid Pattern Signal: Yes
Valid Entry Signal: No

Thus, would have never had an opportunity to take those two trade signals (see my prior discussions with FuturesTrader71)...

http://www.elitetrader.com/vb/showthread.php?s=&threadid=52880&perpage=1&pagenumber=104

Chart 5h: My reply for this is the anwers above about the invalid patterns.

Thanks for the charts to correlate with your Hammer pattern analysis.

NihabaAshi
 
Quote from NihabaAshi:

In the DAX chart your talking about...

That's a 5min chart.

That first interval after the confirmed Bullish White Hammer pattern is the entry area.
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And White Hammer pattern is confirmed when the hammer candle closes or when?
 
Quote from sunnyskies:

And how do you know if you're gonna get a better price to enter on the next bar than at the hammer's close?
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There's no guarantee that an entry price will be available that's less than the Bullish White Hammer pattern signal price.

Market will do whatever it wants.

(Note: The live-recordings will determine if you have a valid entry signal or not unless you have one heck of a memory about the live action of that particular price action.)

Like I said before, if the opportunity doesn't present itself...

No trade signal and there's always tomorrow because the market will be there.

As a reminder, without live-recordings...

Hindsight chart analysis will allow for a very slow and possible difficult learning curve.

Thus, hingsight charts cannot give you that other key component...

A feel for the pattern development as it occurs in realtime.

This also answers part of a prior question by FT71 about not being fast enough to take the trade.

I talked about the problem of reaction lag caused by only studying hindsight charts in another thread...

You can use ET seach menu for that discussion.

http://www.elitetrader.com/vb/search.php?s=

Just type in the search...NihabaAshi Reaction Lag.

NihabaAshi
 
Quote from sunnyskies:

And White Hammer pattern is confirmed when the hammer candle closes or when?
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Yep...

Pattern is either confirmed or not confirmed upon completion of the interval.

Confirmation means the White Hammer Line has traversed into a Bullish White Hammer Pattern.

Entry Signal is the stuff after the pattern signal and will determin if I should/can trade the valid pattern signal.

Simply, not all valid pattern signals are tradable via how I like to trade them.

Yet, that doesn't mean they aren't tradable via someone else methodology as I've mentioned today when I talked about what other traders looked for that's different from what I look for in an Entry Signal.

NihabaAshi
 
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