In this post, we'll delve into the Hammer at Support setup, single candlestick reversal pattern that forms after a significant decline. It has a small body near the high of the candlestick with a long lower shadow, resembling a hammer.
(Fig 1.1 - Chart example of Hammer at Support)
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 red candle or a long green 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 Hammer Setup
Lower Wick:
The longer the lower wick of the hammer, the stronger the setup.
It's even more favourable if the low of the wick dips below strong support and then price rises to close above support, indicating a sell failure.
Formation at Strong Support:
Seek setups forming at prior support levels for added confirmation of the setup's strength.
A confluence of supports is ideal. For example, a setup at the intersection of strong horizontal and gap support has a higher success likelihood than one at a simple double bottom (2B).
Avoid trades if the hammer forms after a steep decline at no or weak support.
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 Hammer at Support on Nifty Futures)
(Fig 1.3 - Chart example of Hammer at Support 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 87% based on backtesting past data for the last 2 years.
Please click on "Next Post" to move to the third Bullish Setup - Big Green above Resistance.
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