All hammers are not designed equal. There are definitely only a handful of instances that this candlestick pattern is really valuable. And, if you traded every single single hammer pattern, you would shed money!
In Japanese Candlestick Charting Procedures, Steve Nison says this…
“The longer the decrease shadow, the shorter the upper shadow, the smaller sized the actual physique, the extra meaningful the bullish hammer.”
That is fairly fantastic, but let’s add a handful of extra recommendations to strengthen the odds of this classic pattern.
- A hammer has to create just after a wave of promoting (a pullback) has occurred. If it comes just after a wave of purchasing then it is no longer a hammer – it is a hanging man which is bearish.
- Appear for the hammer to pull back to a considerable help region on the chart. If it is just dangling on the chart with no apparent help to the left, then it is far better left alone or you can wait till the following day to see if a reversal requires location.
- Appear for the shadow (tail) of the hammer to shake out apparent regions on the chart exactly where cease loss orders are clustered. With these traders out of the way, the stock can rally.
- Appear at the variety for the day. Is it higher than the variety of the prior candles more than the previous various days? If so, then the hammer will be extra trustworthy.
- Has volume enhanced from the prior day? If so, then you know that interest is selecting up in the stock at the present cost level. This falls below the classic technical evaluation wisdom that “volume precedes cost”.
Let’s appear at a chart:
Now that is a hammer! It has just about all of the qualifications to think about trading it…
- It has a lengthy decrease shadow.
- It has no upper shadow.
- It has a compact actual physique compared to the variety.
- It created just after a wave of promoting.
- It is at a considerable help region ($86.00).
- It fell beneath the prior swing point low shaking out other traders.
- The everyday variety is higher than the prior sessions.
- Volume has enhanced from the prior day.
You will not often uncover excellent hammer candlestick patterns like this one particular but you at least want to attempt to place as quite a few variables in you favor as attainable.
Then you can trade them with far better odds and extra self-assurance in the anticipated outcome.