The second Bullish Setup in our aresenal is Hammer at Support (refer our post on Chart Patterns). Just to recapitulate, it is a 1 candlestick reversal pattern that forms after a reasonable decline. It has a small body near the top of the candlestick with a long lower shadow, resembling a hammer.
To be tradable as per our strategy, the following conditions need to be met, part of trade selection.
The setup should complete on C3 @ 3PM, C4 @ 5PM, or C5 @ 7PM. Setup forming on C2 is not eligible. Trading conditions are mentioned below separately for trades on C4 @ 5pm and trades on C5 @ 7pm. Note : If you recall from the introductory post on chart setups, trade execution @ 5PM or 7PM depends on the US open. The former applies when the US markets open @ 7PM and the latter when the US markets open @ 8PM during winters.
Trades @ 5PM i.e. completion of C4 - The setup should form at C3 or C4. If the setup forms at C3, C4 should not be an adverse red candle or a long green candle.
Trades @ 7PM i.e. completion of C5 - The setup should form at C3, C4 or C5. If the setup forms at C3 or C4, the subsequent 2H candle/s before taking the trade should not be an adverse red candle or a long green candle. In both the situations above, if the setup forms on a 2H candle earlier than the trade execution time @ 5PM or 7PM, the interim candle/s should not violate the setup or run away. A narrow range candle (red or green) or a small doji that indicates consolidation is what we are looking for. Some amount of judgment is required. IF THERE IS ANY DOUBT, DO NOT ENTER.
The longer the lower wick of the hammer, the stronger the setup. Even small hammers are tradable if they form at strong support. Always look for CONFLUENCE of supports to judge the strength of the setup. For example, a setup forming at a confluence of a strong Horizontal and Gap Support would have a higher likelihood of success than one forming at just a Double Bottom (2B). Avoid trade if the hammer forms after a steep fall at no support or weak support.
There should be sufficient room to expand before encountering resistance. A pattern forming very close to strong overhead resistance may not work hence avoid.
Always keep the bigger trend in mind. You should be ready with the weekly and daily view of the chart beforehand. If both are negative, avoid long trades. Take the trade if at least one of these is positive or sideways with a bullish undertone.
As you can notice, points 2 and 3 above are based on identifying the important S&R zones on the charting landscape. Point 4 is about awareness of the long term trend on the daily and weekly charts. All this is part of preparation before the trade (refer the post on Trade Preparation in the section on Trade Mechanics). Points 2, 3 and 4 are part of the Trade Selection process and tool discussed in detail in the subsequent section on Trade Selection.
Note : Click on Navigation Guide at the bottom of the page to navigate to the relevant posts mentioned above.
By the time the candle completes @ 5 PM or 7 PM, you should have already made up your mind whether to take the trade or step aside, very very important. If you cannot make up your mind, it is best to step aside.
Chart Examples : Please study the following chart examples carefully, across commodities, paying attention to the annotations which explain the price action behind the setup. Observe carefully what happens after the trade is executed.
Trade dynamics in terms of number of lots, Stop Loss, Price Targets by lot and the profit/ loss of the trade is also provided in a table below the chart. Please revisit once we have covered these in the section on Strategy as it would make better sense then.
Win Ratio: The table below provides the Win Ratio for this setup for different commodities, a key component for trade selection.
As is clear from the numbers above, the setup is highly tradable on Zinc, Aluminium, Copper and Crudewith a high Win Ratio. Avoid for Natural Gas . While Hammer at Support refers to all support including Double Bottom (2B), there is a big variation in results when we consider Hammer @ 2B separately for Natural Gas and Crude. While NGas shows 100% results, Crude is not tradabale for this specific pattern with only 50% success.
Now that you know the setup, please look for similar setups on the 2H charts for our chosen basket of commodities. Please share your observation in the Comments along with an image of the chart that you are referring to. We will revert with our comments. Please click on "Next Post" to move to the third Bullish Setup - Big Green above Resistance.
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