5 Tips on Trading the Hammer Candlestick Pattern

Written on 01-05-2007 7:54 pm by Craig

I've Been Tagged

I've been tagged by Chris Perruna.

So I guess I have to answer the following questions...

My Five Obsessions?

  1. Going on trips with my wife
  2. Coffee
  3. Gardening/Landscaping
  4. This website
  5. Music (I just bought an HD Radio for my car)

Five Reasons Why I Blog?

  1. Helps to organize my thoughts
  2. Get to meet new people
  3. Learn new trading tips everyday
  4. Great opportunity to help other traders
  5. To achieve search engine dominance (#1 ranking on Google) for the phrase "swing trading" and become King of the Web and eventually, Leader of the Free World.

(Ok, I made that last part up.)

NOW I GET to tag some other bloggers. Hmmmm....How about these:

Written on 06-05-2007 10:36 am by Craig

5 Tips on Trading Hammers to Improve Your Odds

All hammers are not created equal. There are really only a handful of times that this candlestick pattern is actually useful. And, if you traded every single hammer pattern, you would lose money!

In Japanese Candlestick Charting Techniques, Steve Nison says this...

The longer the lower shadow, the shorter the upper shadow, the smaller the real body, the more meaningful the bullish hammer...

That's pretty good, but let's add a few more tips to improve the odds of this classic pattern.

  1. A hammer has to develop after a wave of selling (a pullback) has occurred. If it comes after a wave of buying then it is no longer a hammer - it is a hanging man which is bearish.
  2. Look for the hammer to pull back to a significant support area on the chart. If it is just dangling on the chart with no obvious support to the left, then it is better left alone or you can wait until the following day to see if a reversal takes place.
  3. Look for the shadow (tail) of the hammer to shake out obvious areas on the chart where stop loss orders are clustered. With these traders out of the way, the stock can rally.
  4. Look at the range for the day. Is it greater than the range of the prior candles over the past several days? If so, then the hammer will be more reliable.
  5. Has volume increased from the prior day? If so, then you know that interest is picking up in the stock at the current price level. This falls under the classic technical analysis wisdom that "volume precedes price".

Let's look at a chart:

Perfect Hammer Candlestick Pattern

Now that's a hammer! It has just about all of the qualifications to consider trading it...

  • It has a long lower shadow.
  • It has a short upper shadow.
  • It has a small real body compared to the range.
  • It developed after a wave of selling.
  • It is at a significant support area ($40.00).
  • It fell below the prior swing point low shaking out other traders.
  • The daily range is greater than the prior sessions.
  • Volume has increased from the prior day.

It may be difficult to find "perfect hammers", but you at least want to try to put as many factors in you favor as possible.

Then you can trade them with better odds and more confidence in the expected outcome.

smile

Written on 10-05-2007 7:55 pm by Craig

I'm Leaving on a Jet Plane (don't know when I'll be back again)

I love that song.

Anyway, I'm leaving for my trip to Las Vegas. I can hardly wait!! But, it is going to be a long plane ride so I was trying to think of a book that would keep me entertained along the way.

Hmmmm....

I haven't read Reminiscences of a Stock Operator yet this year. Since I have to read it at least once a year, I decided to take that along for the ride.

A man has to believe in himself and his judgement if he expects to make a living at this game. That is why I don't believe in tips. If I buy a stock on Smith's tip I must sell those same stocks on Smith's tip. I am depending on him. Suppose Smith is away on a holiday when the selling time comes around? No, sir, nobody can make big money on what someone else tells them him to do. I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgement. It took me five years to learn to play the game intelligently enough to make big money when I was right.

Classic!

See ya when I get back...

Written on 16-05-2007 6:12 pm by Craig

Back From Vegas (and a bookstore special)

Well, I made it back in one piece from my little trip to Vegas and I'm trying to get back into the groove. It's amazing how much catching up you have to do after being gone for just a few days!

In case you didn't know, there is a $9.99 bookstore special going on this month in my Traders Bookstore. There you will find page after page of stock market and technical analysis books and DVD's for $9.99 or less. This special lasts until the end of the month.

Next up...

Bollinger Bands

Written on 20-05-2007 9:23 am by Craig

Are Bollinger Bands Useful?

I'll probably catch some heat from all of the Bollinger band fans out there for this post. But what the heck. Feel free to disagree with everything that I am about to say.

First of all, stocks do not "run into resistance" or "find support" at the upper or lower bands. Why would a stock reverse after running into any line that some trader put on a stock chart. That includes moving averages, trendlines, Fibonacci levels, and of course Bollinger bands.

They don't reverse at these lines because that is just not how the stock market works!

Heck, John Bollinger himself says:

...but they do not, as is commonly believed, give absolute buy and sell signals based on price touching the bands.

But how many countless times have you heard Joe Trader say, "XYZ stock just reversed at the Bollinger band!"? If you buy or sell stocks just because it hits one of these bands, YOU WILL LOSE MONEY!

Take a look at the following chart:

stock chart of bollinger bands

At first glance it sure appears that this stock "bounced" off of these upper and lower bands. But if you look real close you will see that in reality they reversed at significant price levels on the chart - areas that you would see without the bands overlaid on the chart.

I'm not totally down on Bollinger bands.

I think they can be a fantastic scanning tool. You can write scans to find stocks that have reached a price extreme. Or you can use them to find stocks that are experiencing low volatility and poised to break out (see the chart above).

So...

I think Bollinger bands can be an incredibly useful tool to use to find stocks that meet a certain criteria. But I wouldn't use them on a stock chart!

Written on 24-05-2007 6:52 pm by Craig

What Do You Look at on Intraday Charts?

Show me your intraday charts and I'll show you mine!

I've had the same setup on intraday charts for as long as I can remember. So I got to thinking: What do other traders look at during market hours? What does their computer screen look like?

I don't spend a whole lot of time looking at real time streaming charts but when I get into a stock, I want to at least get the best possible entry that I can. For this I use QuoteTracker.

Here are the things I look at on intraday charts:

  • Trade Panel: This allows me to type in my orders.
  • Transaction Panel: This gives me a list of all my transactions for the day.
  • Index Panel: This shows the current market action. In this panel, I have the Dow, Nasdaq, S&P, TICK, TRIN, and the Q's
  • Under this I have my symbol list which shows the high, low, open, volume, change, etc. Pretty much the standard things you want to know about a stock.

And then I have my charts:

5 min and 60 min intraday charts

This is obviously a smaller version of what my charts look like (so that it would fit on this web page). I have the 5 minute chart on the left and the 60 minute chart on the right.

On each chart I have the following:

  • moving averages (10, 30, and 200)
  • volume
  • QuoteTracker marks off the previous high and low.

Sometimes I look at the 15 minute chart if the 5 minuted chart is sloppy. Also, I have a time and sales screen open. I have Real Time with my StockCharts.com account so I usually have that minimized in the background.

I would guess that my setup is pretty basic compared to other traders. What do YOU look at on intraday charts? I would love to see how other traders have their intraday charting workspace set up.

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