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Here is a picture for Brownsfan019: remember this discussion ? 
Note that we have a valid Bullish White Hammer pattern form on the 5 minute chart.
Now, most people would want to place their stop at the low of the candle or just a pip or two below that. That area creates the "Logical Stop Area". The problem is, while the area is logical, it is also a prime target for the Big Boys to hunt stops.
Hence placing one's stop just below the low of the hammer line is not the ideal place to put it. Unless it also coincides with some other strong support area. Like WRB or Value Area Pivot for example.
In this case, BF we see our dilemma: do we exit or do we wait until our stop gets hit to prove us wrong? There is yet another option that we did not touch on; A contingency plan that would tell us to stop and reverse. Said plan would not necessarily need to be triggered by our initial stop being hit, rather by changed conditions in the Price Action itself.
At any rate, the key here is that we should be careful of placing our stops in the obvious (logical) places in terms of Candle Patterns.
P.S. Everything here comes from Mark's(NA) thread on elitetrader.com |
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Pivot - here's my take on this particular chart - I place my stops at the 'logical' area. Why? B/c if that hammer low is broken, that hammer is no longer a valid trade in my opinion. The question then becomes how much lower do you go to place your stop away from the logical area? If today 5 ticks works, tomorrow it will fail. So then you bump it to 6, then 7... We've all been there.
The other consideration is how big of a stop are you willing to stomach? I love hammers, but also know that some can result in very large stops (at least for me). A smaller chart timeframe will normally fix this, which is why I probably trade on smaller VBC's (Volume Based Candles).
See my attachment for what I see...
1) Valid hammer that looks to have a large stop. It may have delivered a profit target depending on what you use to exit.
2) An even better hammer than the first - smaller stop needed, a better 'looking' hammer (nice clean line with a textbook looking hammer). The end result was no threat to your logical stop whatsoever.
So I see 2 trades here with one that did not produce much and one that delivered nicely.