The power of the almighty hammer

[brownsfan019 17]

As I browse through some charts - stocks, etf's, futures - one thing really jumped out at me - how powerful some of these hammers on the daily charts are. Is it really as easy as finding the high volume hammer after a down move? I don't know, but it's worth watching in my opinion. We can find some great charts and others that failed miserably, so the question is can high volume hammers on daily charts make money in the long run? And can you play enough of them so that the statistics stay in your favor? That's probably the biggest question - finding high volume hammers is easy, but how much capital would it take to maximize the return here and minimize the risks?

 

Maybe we can make this a thread about hammers with some examples - both good and bad - and perhaps this can help a trader or two out with a rather simple 'system'.

 

There's a few words of caution when playing these kind of trades:

 

1) You may have to take 3 hammers before one works. Part of trading hammers.

 

2) In order to get a 'qualified' hammer, there must be a down trend. In other words, you will be trying to pick off the bottom of the down move.

 

3) Depending on the size of the hammer, the initial stop can be large if placed at the low of the hammer.

 

4) Entries are also important - once we see hammer, do we enter at the market the next day? Somewhere in the body of the hammer? Or only after price clears the high of the hammer? See this thread for more info.

 

5) And obviously how we exit is important as well. There's plenty of charts where in hindsight the hammer did pick off that bottom, but it may have taken days/weeks/months for it REALLY to deliver. I'm talking about significant move from the entry. Of course, any type of trail or whatever would be taken out more often than not.

[Reaver 10]

Thor would be proud man.

[james_gsx 16]

One problem I continually run into is the entry. If I exit on the close of the hammer, it seems that it doesn't work :o

 

When I enter during the middle of the confirmation candle after the highs have been cleared, I seem to find myself in a trap that gets taken out rather quickly. But if I wait for the close of the confirmation candle to enter, then it seems as if the move is already done since those are always the big moves. Obviously I need more experience on when to enter, but I think if we could bounce some ideas around that would really help.

[stanlyd 10]

I find a hammer after a confirmed swing high gives more confirmation to the signal.

[brownsfan019 17]

One problem I continually run into is the entry. If I exit on the close of the hammer, it seems that it doesn't work :o

 

When I enter during the middle of the confirmation candle after the highs have been cleared, I seem to find myself in a trap that gets taken out rather quickly. But if I wait for the close of the confirmation candle to enter, then it seems as if the move is already done since those are always the big moves. Obviously I need more experience on when to enter, but I think if we could bounce some ideas around that would really help.

 

James,

As illustrated here, there are 3 possible entries if you play the hammer. Basically, once a hammer is formed and confirmed by whatever you use, you have to act. Waiting for the close of the NEXT candle, esp on a daily is just waiting too long in my opinion. Sooner or later, action must be taken when you see the hammer.

 

Once a confirmed hammer is seen, the entries can be:

1) Buy @ market next day

2) Buy if price the following day is somewhere in the body of the hammer (you are trying to get a 'better' price)

3) Buy as soon as price clears the high of the hammer

 

I realize there's other ways to enter, such as waiting for a candle after the hammer to confirm your bullish movement. Problem is, as you've seen James, how long do you wait? At some point, you are no longer playing a hammer. If you get a large bullish WRB the next candle, now you are playing an engulfing candle or some other pattern. The hammer pattern by itself requires action to be taken the following day.

[brownsfan019 17]

I find a hammer after a confirmed swing high gives more confirmation to the signal.

 

stanlyd - feel free to post some charts so we can visually see what you are talking about.

[Nick1984 10]

I've got one question on Hammers which may seem very simple but has confused me none the less.

 

Lets say that you've established that there's a down trend and suddenly there is a hammer....does it matter if the hammer closes lower than the open (red candle) or for it to really be bullish does it have to be close above its open (green)?

 

As for entries, I think brown is 100% on that one, you have to strike pretty soon. If you're waiting for confirmation of an uptrend why don't you place a limit order a few ticks above the high on the hammer, if the move is just some short covering you may not get filled. If the hammer is genuine then you can get in at a relatively good price.

[brownsfan019 17]

I've got one question on Hammers which may seem very simple but has confused me none the less.

 

Lets say that you've established that there's a down trend and suddenly there is a hammer....does it matter if the hammer closes lower than the open (red candle) or for it to really be bullish does it have to be close above its open (green)?

 

 

For me Nick, I don't care what color the hammer is. I see a bullish price candle, regardless of color. That could be a screen for hammers though and maybe others have found otherwise.

[TinGull 10]

One way to enter after a hammer is to wait for a low volume "test" to enter on. Wait until you see that there for sure isn't any supply in the market and it's free to rise.