Contents:
1.) The strategy behind the bullish hammer candle
2.) Using the strategy to identify market trends and develop trades
3.) Identification and areas of confluence
4.) Patience in waiting for the trigger and allowing the trade to play out
5.) Strike-rate and Risk/Reward data on how this trading method works
One of our first strategies posted here will be the bullish hammer candle and the bearish hanging man.
The strike rate is over 60% and if you combine it with additional variables and confluence the strike rate could be even higher. Remember, as traders you should be keeping detailed records; edgewonk is a program that tracks these types of strategies and records them for you.
*Sometimes candles will be referred to as pin bars*
Identification
This is a hammer candle of the bullish variety. I have often found these candles to be most effective on the daily chart in confluence with a trending market as seen below.
Trigger
There are 2 triggers for entry on this type of strategy. The first is a retrace of about 25%-50% of the pin bar. Be patient sometimes markets take some time to retrace the midway point of a hammer candle.
The second trigger is a break of its top. You will be able to buy with momentum.
This trigger can be modified by traders in a couple of ways, you can execute with half position size saving some bullets for the retrace of the wick. Since you are buying with momentum some traders can keep a tighter stop loss for trigger number 2.
This leads us into our next section, risk and reward.
Risk and Reward
The stop loss on hammer candles should be below the wicks. I have found this to be a safe distance most of the time. As always keep detailed records; some traders prefer to give a little bit extra distance between the wicks. It depends on your trading style.
The reward is at minimum 2:1 your money. If you risk $1000 you will earn $2000. For beginners and those new to trading, I find that targeting 2:1 on your money allows new traders to build confidence and reduces exposure in the markets. The ideal ratio for these setups is 3:1.
Time Period
This strategy works across all timeframes, with the most consistent strike rate on the daily timeframe. Higher timeframes are also very effective, just remember the trigger will take longer to play out.
The next most consistent strike rate is on the 4h timeframe, where you should go for a more precise entry.
Everything under the 4h will work as well, however, the consistency is lowered and your holding time should also decrease.
Archive
Hammer Identification.
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