Tag Archives: hammer

Platinum hammer

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A nice hammer formed on Platinum futures on 21-May-2010. It’s not a perfect one, but I would say it is an acceptable one to take with limited risk. Here’s the chart with my support and resistance levels marked.

Platinum futures daily (click to enlarge)

Blue lines are support/resistance pivots, white line is a trend line, yellow is the 365 day EMA and the red line the 200 day EMA. The 365 EMA provided support on 20-May-2010 but did not on 21-May-2010. The 200 EMA seems to be providing resistance now on 21-May-2010 as price could not rise above it, although the day closed slightly higher than the open and significantly higher than the low with a nice hammer formation. The hammer’s tail has rejected the support/resistance level and confirms to be a reversal pattern and a signal to go long.

Entries

Entries on the daily PL Futures (click to enlarge)

Using my refined hammer entry method, I’d like to bid at 1481 on one third of the position as that is half way down the hammer. A buy stop of another third is placed at 1520. I will then look to add another third around the 1580 area and if we have a full position at this point start looking for exits. If we don’t have a full position (if the limit order on the candle wasn’t filled) look to add around 1630.

Exits

Again, I’m unclear as to where I should exit this trade – how could I do this?

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Hammer thoughts

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I’ve been thinking about my hammer trade on the euro and how I could have avoided that huge loss (I didn’t actually take a loss with real money I’m just using this blog to think out loud right now).

Scaling In

I am reading lots of trading books at the moment and one thing that struck me from the pros (especially after reading New Market Wizards) is that in order to succeed in trading you must cut your losses and let your winners run. I know that people in general know this, but it’s starting to really sink in with me after observing the markets for a short time. There’s a difference between intellectually knowing this and knowing it with your gut after observing the markets for a while. If I get stopped out for a small loss, so what? Take the next trade and let it run. The Euro trade I looked at on the hammer required a 200 pip stop. A way of tackling this is to “test the water” with a reduced position size and once it goes my way, add to it and scale in to full position size. The way I am currently trading (that my gut instinct doesn’t like) with the Furquad strategy is to go all-in and then scale out. That feels very wrong to me now because if I am wrong, the market spanks me hard on my full position. If I am right, then I am scaling out and reducing my profits. It just feels wrong, although my back-testing of Furquad is showing very healthy profits indeed.

So, to heed the advice of the market wizards and trying to apply the advice into a strategy that could be used on my euro hammer trade (and my gold trades) I have come up with the following idea.

The refined hammer set-up

Ensure that a trend is in place on the daily chart: there must be a “strong” move currently on this time frame. For this example let’s assume the move is down. Wait for a hammer candle to form on the daily chart with confluence to a key support/resistance pivot. If this pivot also coincides with a fib retracement level, then all the better. At the close of this candle, place a limit order of a third of the intended position half way down the candle with a stop underneath the candle a few pips/ticks away. Also place a buy-stop a few ticks/pips above the candle with a third of the position to scale in the next third. If the limit order is filled then we are in the trade with a small position – great. If the sell-stop under the candle gets hit, then we were wrong about the market direction and we take a very small loss and cancel all outstanding orders for this trade. If we are right, then the limit order is filled and then the market starts to move in our favour by retracing back to the top of the hammer. If the market continues in our direction then the buy-stop gets hit and we are scaled in with two-thirds of the position. At this point move the stop on the first third to break-even (half way down the hammer candle). As the market moves in our favour look for another pullback to add the final third of the position and adjust the stops below so that the first third of the position is in profit (with the stop), the second third is a break-even stop and the final third has a logical stop under price action (under the last swing low). When the market continues to move in our favour we have a heavy position making lots of money which has been built up with limited risk. At this point move the stop on the final third to break-even and move the stops from the other positions to the same price (to preserve gains made so far) and start looking for an exit with the idea of holding the position as long as possible.

EURUSD example

EURUSD Refined hammer trade thoughts

Gold futures example

Gold hammer trade thoughts (click to enlarge)

Exits

This is the crucial bit I have to figure out next. :-) I am thinking maybe to use either Elder’s SafeZone stop, use parabolic SAR, a divergence, maybe a multiple of risk, a key support/resistance level or some other price action exit signal. I’m not sure yet, so if you have any helpful suggestions please let me know in the comments or the contact link at the top of the blog. There are lots of ways of exiting and I’d like to exit all-out and not scale out.

Credit where credit is due

A lot of ideas in this post were gleaned from my studies into price action lately. I would like to credit trader_dante on trade2win.com, james16 from forexfactory.com, Nial Fuller from learntotradethemarket.com (I’m not a member here, but watched his free youtube videos), Martin Pring, Alexandar Elder, Jack D Schwager and other people in my trading bookmarks. I have taken ideas from lots of different sources and am trying to condense them down into my own strategy which may look similar to, but slightly different to other people.

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Daily hammer on the Euro

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Looking through some of the longer term charts today of the euro revealed that the euro is sitting on an old congestion area on the monthly chart. In 2004 and 2006 the upper level of the congestion area is right where price is now at the 1.2300 – 1.2400 area. This also coincides very nicely with support from mid 2008 – mid 2009.

EUR/USD Monthly at May 2010

It would not be unreasonable to expect price to react to this area right now and bounce higher. If we switch to the daily charts we can see that a nice hammer has formed into monthly support. This is telling me that the market is rejecting lower prices and I now expect in the short term (daily chart) for the euro to rise. Here’s the daily chart today as of 17th May 2010.

Hammer into Monthly support

An entry here above the high of the 17th May at around 1.2420 with a stop below the candle at 1.2220 looks like an attractive play to me right now. Look for targets around 1.2520 for half the position and 1.2800 for the other half. Let’s see how this observation plays out over the next few weeks…

UPDATE 1

I have just noticed a similar play set up on GBP/USD.

Hammer on daily GBPUSD

UPDATE 2

This trade didn’t work out and would have given a 200 pip loss. So, why didn’t this work? We are in a downtrend on the daily and weekly charts which makes this trade a counter-trend trade. A better trade would have been to take the shooting start short on 10th May 2010 however that trade would have required a 350 pip stop. Perhaps the solution for the shooting star is to drop to a lower time frame, say the 240 or 60 min chart and take a short entry there. Here’s the daily chart showing the failed hammer and the shooting star:

Shooting star and hammer entries

Looking at the 60 min chart, there is a nice shooting star formation there at 10:00 on my chart (GMT+2). A short entry at say 1.3025 (2 pips below the low) with a stop above the shooting star at 1.3095 (1 pip above) gives a nice tighter 70 pip stop for a large potential gain. As you can see from this chart the market moved to 1.2815 without a single bullish candle (open higher than close).

Shooting star on 10th May 2010

Thinking about this a little more – the entry on the 60 min chart would only have been taken if I was already trading the 60 min chart. The daily shooting star doesn’t form until the close of that day. So to be true to my original analysis a short trade on the 60 min could only be initiated after 10th May. Looking at the 60min chart after the 10th May does not show me any potential entries. Hmmmm…..

60 min chart with 11 May Highlighted

Any thoughts on this analysis? Let me know in the comments, thanks.

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Potential trade on Gold

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If we take a look at the monthly charts for Gold Futures (GC) we can see a very strong uptrend starting all the way back in 2001.

Strong uptrend in Gold

A look at the dailies shows us a potential long entry with the monthly trend on a hammer candle.

GC Daily - hammer entry

Price descends to 50% of a recent retracement and is powerfully repelled. Also at this level (around $1163) we have a support resistance pivot which is confluent with the fib retracement. This gives me confidence to go long Gold on 6th May 2010 at the high of the hammer candle ($1178.00) with a stop at the low of the candle ($1156). Quite a wide stop on gold, but if proper money management is employed it is the amount risked on the trade with the expected return on the risk that matters. Even with a $22 stop, if the risk is only 2% of the account, with an expectation of at least 1:1 R:R then the trade would be fine with me.

I would be looking for an upside target of the high on 4-May-2010 ($1192) for half the position and then holding the other half to around $1227 (just under all time highs). This is not a recommendation to trade (you’d be silly taking my recommendations), I am just observing what various markets are doing in reaction to support/resistance and candlestick patterns.

Will be interesting to see what happens over the next few weeks. I would expect to hold this trade for 2-3 weeks to hit the targets.

UPDATE

As I suspected, the market rallied after I spotted this trade and hit the first target on the first day with a profit on half the position of 14 points ($1400 per contract). The second target was hit on 11th May 2010 with the second half of the position with a profit of 49 points ($4900 per contract). So with just two contracts traded, the profit would have been $6300. The risk for this trade was $2200, so an almost 3:1 reward:risk. Here’s the chart with the entry, stop and targets marked:

Stop, entry and targets marked.

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