Superior Trading Skills through Education

Hammers and Shooting Stars Print
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Sunday, 19 April 2009 18:46

One of the very best Candle patterns is also the simplest to identify. The Hammer looks a little like one, it has a long lower wick/tail/shadow with a small head. Ideally, it is an up Candle, where the close is higher than the open, but that's not vitally important.

There are two important qualifiers. Firstly, it needs to be found in the right place and there also needs to be evidence of involvement. A Hammer is a reversal Candle, but only when it is found after a decline. At number of prior down bars must precede it. The second qualifier is involvement and that can be seen from observing the volume on futures or stocks, or tick activity with Forex charts. The higher the volume plot the better, but it should be at least greater than the average of the last three plus bars. Why is this? read on...

A Hammer appearing after a down move started out as a trend continuation Candle but as it reached its lows buyers came in and completely overwhelmed the sellers, the greater this volume the greater the agument and the winners, in this case the bulls, have won the argument and so the next move is more than likely to be a continuation of the new trend the Hammer has just started.

The chart below shows a classic Hammer on high volume following the volume rule taht 'Where ever there is a volume spike, look for a reversal'. Immediately afterwards a standard Multi-Point Reversal devleoped signalling the entry point for a useful trade.

Earlier, the chart also show the opposite of a Hammer, a Shooting Star. Not only does it have a large upside tail, but it also engulfs the previous Canlde in its entirety, another very bearish signal, and it does so on much greater volume acitivity than before.


From the blog

Why do we do it....

Why do we do it,

letting small losses become big ones?

Warren Buffet was known to answer the question: What are the most important trading rules?

His standard answer was: Rule one - don't lose money. Rule two: Never forget rule one.

It's all in the interpretation. Did he mean 'Don't lose money on trades' which some may translate as

(A); 'I may have a losing trade on but I'll hold it because it may bounce back into profit and then I've followed rule one'.

Or, (B) perhaps it was just an off the cuff quip, meaning that to survive as a trader or investor we need to make more overall then we lose?

Letting winners run and cut losses short

This is the self evident rule we need to achieve to ensure we can make profits overall. The only problem is that the


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