This article describes a short term, day trading strategy for trading hammers and hammer reversal signals. Indicators such as moving averages, oscillators and so on are good at characterizing broad market behavior. But they do have a major drawback. This is done to remove noise and false signals. But hammer the day trader who dips in and out of the market for a period of hours or less these kinds of signals have limited use. For day trading and scalpers a difference of a few pips on trade entry can make the difference between a winning and losing strategy. What is price action? Easily identified, these are usually observed at turning points in the market. These patterns can be thought of as points where a reversal of sentiment is occurring. Figures 2 and 3 below show some classic hammer patterns. The green markers display bullish hammers. The red markers display inverted, or bearish hammer formations. Figure 2 shows the characteristic appearance of hammers at market turning points. Each of these is a short duration swing within an active trend but as shown below they can mark profitable entries for scalp trades. Figure 3 shows a close up view of a three-hammer formation marking the peak-trough of a single wave. Figure 4 shows a formation occurring on a larger scale. This example shows a hammer appearing on the daily time frame as a major downtrend comes to an end. Notice also that the actual trend turning point marked with a vertical line is preceded by a fake hammer 1. The strategy described here can be used as a scalper for both M1 and M5 timeframes. It works exclusively on the hammer signals. Buy side signal — hammer formation: A buy order is placed on the bullish hammer signal. To filter weak signals, I look at the accumulator line over the past n bars where n is an input setting. Strategy is to confirm that a trend reversal is likely to take place. This helps to eliminate entry on false signals see additional confirmations trading. A cut threshold is used so that the buy is only taken if the accumulator is below this absolute value. The indicator will identify both black and white hammers as bullish signals. However a white hammer is considered a stronger bullish signal. Sell side signal — bearish hammer formation: The sell side signal is basically the reverse of the above. In this strategy, I limited the exposure to one single lot placed in each order. So if a buy signal appears when there is an open sell position, the buy is ignored. And vice versa, a sell signal is ignored where there is a current long holding. This means the strategy only holds a single position at a time. Obviously, exposure and risk can be increased to any required amount by increasing the order volumes or trade multiples. The hammer indicator already filters out weak and ambiguous signals. The aggressiveness of this filtering can be adjusted with input settings to the indicator. The remaining signals tend to be quite reliable. However, further confirmations can be used to check the conditions and to eliminate false positives as far as possible. The accumulator is a type of oscillator. This signal can be used as an alternative measure of momentum similar to MACD, RSI or OSMA. The difference though is that it works purely on hammer signals. The signal works as follows:. The signal rises when there are a series of bearish hammers which usually happens in an up trend. The signal falls when there are a series of bullish hammers which are usually seen in a down trend. These usually occur in an upward trend. The accumulator line will increase in this situation because each bearish hammer adds to the signal. In a down trend the reverse happens. Each bullish hammer decreases the signal. So a series of bullish hammers without a correction will push hammer accumulator line downwards indicating that the market is reaching an oversold state. The greater the absolute value of the accumulator line, the more extreme the market position is considered to be. The direction and steepness of the slope is a measure of momentum. When trading on hammer signals the hammer can be useful. It gives an idea of trend strength and the likelihood that a hammer will actually result in a reversal or be a fake signal. Extreme values in the accumulator suggest that more of the hammer signals have been fake and have not preceded a reversal on the scale being examined. The accumulator can also filter out weak or ambiguous signals. For example, bullish hammers appearing when the overall trend is strongly bearish. Or when bearish hammers appear in a strong uptrend. In both cases, trading against the trend may be too risky without further confirming signals. For examples see the figures above. Figure 5 shows the raw accumulator summation of hammer signals. Figure 6 shows the smoothed line. Smoothing is used to filter and reduce noisy signals. Trading the accumulator gives a different perspective hammer it works entirely on hammer formations and strategy independent of classic trend signal and oscillators. As an example see Figure 7. The strong buy signal and the accumulator line suggest that the downtrend is capitulating. Shortly after, a clear upwards breakout happens. Notice that both of the sell hammers trading much weaker than the initial buy signal. Meanwhile the rising accumulator line suggests that the trend is up and reversal hammers are appearing. The fourth hammer is a strong sell signal. Entering short at this point and the previous one would actually result in a small profit. The fifth and final hammer indicates another buy signal, at which point the breakout enters a second wave of upwards momentum. Bearish hammers are often seen in strong uptrends, and likewise, bullish hammers are seen in bearish downtrends. In some cases, these signals can actually result in highly profitable scalp trades. In other situations, the entries may simply be too risky to justify. The following example demonstrates. In Figure 8, the overall trend is upwards, but within this trend, four bearish hammers appear. The hammer strength confirms these as viable sell entries despite the upwards trend. On the other hand, the middle two hammers 2 and 3 are ambiguous. The hammer strength is weaker which suggests these may not be viable entry points. Given the current uptrend, these hammers would be filtered as below threshold. Finally, the fourth bearish hammer produces a strong sell signal and this does indeed precede a deeper retracement. The accumulator line and the strength of the hammer are used to determining this and to separate between signals that are likely to mark the end of a trend or a just a swing. They appear in pairs, or sometimes even in large, messy clusters. Using filtering we were able to reduce the frequency of double and triple hammers to around 1 in In the cases where double hammers do appear these can be used as confirming signals. Often the first hammer to appear is the weaker of the two and is followed by a stronger signal in the next few bars see Figure 9. If a strong hammer is detected above threshold this method looks back over a set bar range to see if a pair occurred. The bar range is usually set between 2 and 10 bars at the current chart period. If a previous hammer occurred, the second signal is used to increase the holding volume. With this method, the stronger signal is usually given a higher lot weighting. For example if the signal strength is double, then twice the lot weighting is used. An entry is made after the k th signal. This method will result in far fewer trades, especially if strong filters are used to remove noisy signals. But a buy would trigger at the first pair, and a sell at the strategy pair. In both cases the entry would trigger on the later hammer signal rather than the less profitable first. I performed a number of back tests to help demonstrate the properties of the hammer signal. The EURUSD run resulted in trades a profit factor of 1. USDJPY run resulted in trades a profit factor of 1. GBPUSD run resulted in trades a profit factor of 1. As a comparison, the same test was run but using the unfiltered hammer signals: That is trading on every candidate hammer that appeared on the chart. This resulted in a loss of -USD 8, Similar results were achieved on the other pairs. Hammer candlesticks are an extremely useful price action real time trading signal. They are also easy to use and understand. Their real time properties make them ideal indicators for a variety of scalping and day trading strategies. The main difficulty in implementing hammer strategies comes from separating these noisy and ambiguous signals from real ones. Systems that trade on raw hammer signals tend to perform poorly over the longer term click to open graph of unfiltered result. I presented several methods for dealing with these problems in this article. The hammer strategy was shown to produce profits under various market conditions of which trend followers and other systems based on lagging indicators can fail. Hello, I just purchase the full version of the hammer. Should I keep trend 10 accumulator period 30? It really depends on your trading goals. But actually hammer strategies can work on any pairs and any timeframes because these are very general signals. Personally I would start with EURUSD. The following settings are what we use for EURUSD with good results:. Hello, I am a big fan of hammer candlesticks. Which pairs are you trading? Leave this field empty. Steve has a unique insight into a range of financial markets from foreign exchange, commodities to options and futures. Start Here Strategies Technical Learning Downloads. Strategies Nov 2, 4. First signal ignored while following two hammer pairs confirm. Want to stay up to date? Just add your email address below and get updates to your inbox. TAGS Breakouts Candlesticks Hammers Price Action Reversal Indicators Scalping. Heikin Ashi Charts and How to Use Them Heikin Ashi is most useful for visually identifying places where the market is trending. The Descending Broadening Wedge The descending broadening wedge is easily spotted on a chart. It looks like a megaphone with a downwards Ascending Broadening Wedge Patterns The ascending broadening wedge is a chart pattern that can be traded in several ways; either as a bullish Is the Bullish Engulfing Candlestick a Reliable Pattern? A bullish engulfing candlestick can be a useful buy signal. But in order strategy trade them we have to be When is it a Strong Reversal Pattern? Trading Strategy for the Falling Wedge Pattern When a falling wedge pattern appears in a forex chart it hints at bullish sentiment. Thank you for your trading. The following settings are what we use for EURUSD with good results: There is a sound alert that can be switched on. Leave a Reply Cancel reply. How, when and why to use it: What is it and how Meta Scalper — A Simple Low Risk Scalping Strategy: Has Anyone Made Money On Zulutrade? How to Arbitrage the Forex Market: What are the Alternatives to the Yen Carry Trade? Covered and Uncovered Interest Arbitrage Explained with Examples. Why Most Trend Line Strategies Fail. Five questions to ask when choosing a trading strategy. Day Trading Volume Breakouts. Keltner Channel Breakout Strategy. Contact Us Timeline FAQ Privacy Policy Terms of Use Home. This site uses cookies:
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