In this post, we'll delve into the Reverse Hammer at Resistance setup, single candlestick reversal pattern that forms after a significant advance. It has a small body near the low of the candlestick with a long upper shadow, resembling a reverse hammer or a shooting star.
(Fig 1.1 - Chart example of Reverse Hammer at Resistance)
To be considered tradable within our strategy, the setup must meet specific criteria:
Setup Conditions:
Formation Timing: The setup should complete on C3 at 12 PM, C4 at 1 PM, or C5 at 2 PM. A setup forming on C2 is not eligible.
Trading Conditions:
Trades at 1 PM (Completion of C4): The setup should form at C3 or C4. If the setup forms at C3, C4 should not be an adverse green candle or a long red candle. Look for a narrow-range candle (red or green) or a small doji indicating consolidation.
Trades at 2 PM (Completion of C5): The setup should form at C5.
The setup should meet the trade selection criteria (refer to the "Trade Selection" section for details)
Key Elements of a Strong Reverse Hammer at Resistance Setup
Upper Wick:
The longer the upper wick of the reverse hammer, the stronger the setup.
It's even more favourable if the high of the wick rises above strong resistance and then price declines to close below resistance, indicating a buy failure.
Formation at Strong Support:
Seek setups forming at prior resistance levels for added confirmation of the setup's strength.
A confluence of resistances is ideal. For example, a setup at the intersection of strong horizontal and gap resistance has a higher success likelihood than one at a simple double top (2T).
Avoid trades if the reverse hammer forms after a steep advance at no or weak resistance, particularly if the hammer is small compared to prior advance.
By 1 PM or 2 PM as the case may be, you should have decided whether to take the trade or step aside. If you’re unsure, it’s better to step aside. Avoid chasing momentum at unfavourable prices when the market becomes fast.
Chart Examples:
Carefully study the provided chart examples, paying attention to annotations that explain the price action behind the setup. Observe the results after the trade execution.
(Fig 1.2 - Chart example of Reverse Hammer at Resistance on Nifty Futures)
(Fig 1.3 - Chart example of Reverse Hammer at Resistance on Nifty Futures)
Win Ratio: The Win Ratio, a critical input for Trade Selection, is simply the number of successful trades divided by the total trades. The Win Ratio of this setup is around 69% based on backtesting past data for the last 2 years. This setup is modestly successful but tradable.
Please click on "Next Post" to move to the third Bearish Setup - Big Red below Support.
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