The Bull hammer and Support reversal strategy is based around a candle stick detection near an area of support. You should look for a bullish hammer candle at the bottom of a downtrend, and when the candle closes or the tail of the candle hits an area of support. There is an additional two indicators that signify a potential entry point – the Stochastic and the ‘Parabolic Plus’ custom indicator.
This strategy can be applied to a number of scenarios:-
a. A reversal candle near an area of support.
b. This strategy can be used effectively after the start of the opening bell. I would advise waiting for 30-45 minutes to get an initial direction before entry. Often the first 30 mins of opening trading session can be choppy.
Chart Setup & Trade
This is a chart of the US SP500 on a 15 minute time frame at 10.15am GMT, after the UK market open. The thick red line at the top is the weekly resistance. The green dashed line shows a minor horizontal support area.
The two lines below are the Stochastic indicator which is an oscillator indicator and shows oversold and over bought areas. The blue line on the chart is the custom ‘Parabolic Plus’ indicator created by ForexPlusTrader, which is the trigger indicator for entry.
First, a Doji candle is detected which is around the area of support. The low of the candle hits the support level and bounces back up forming a long Doji / Hammer candle. Following 3 more green 15 minute candles, the Parabolic Plus indicator crosses down through the price. This is the decision candle and signals an entry to go long. The trade is entered long @2422.
You may wish to wait for further confirmation before entering, and waiting until a close above the decision candle – in this trade, a break of the upper bollinger band.
The move upwards then follows a stair step pattern shown by a large green 15 minute green candle, then a period of consolidation, then a further push upwards. The first take profit zone is around S1 support, although some traders may want to add to their trade just after here on a 5 min candle breaking above the previous candle. The trade extends upwards hugging the upper bollinger band showing a bullish continuation trend. The trade is then closed at @2442, when the ‘Parabolic Plus’ indicator crosses up through the price, on a red 15 minute candle. In total a 200 pip winning trade.
How to Trade this Strategy
Time frames: 15min, 30min, 1 Hour
Indicators: Stochastic 14,7,7, Parabolic-Plus
Long Entry Rules
Initiate a buy order if the following indicator or chart pattern is indicated:
- If a bullish hammer candlestick pattern is detected, it is a signal that price could be heading for a reversal, but confirmation is needed first.
- Stochastic %K must be above the %D line
- The Parabolic-Plus custom indicator (blue line) must cross down below the price.
- You can enter early as in (3) above, or wait until a further green candle that closes above the high of the decision candle.
Stop Loss for Buy Entry: Place stop loss below support or below the previous 15 minute candle.
Exit Strategy/Take Profit
Exit or take profit if the following is true:
- If a bearish reversal price pattern is indicated, for example an Inverted hammer minute candle an exit or take profit is recommended.
- If the price closes below the blue line of the Parabolic-Plus custom indicator during a bullish trend, it is advisable to exit or take profit.
The US economy is slowing down as shown by the flattening of the yield curve and the reluctance of the 10 Year Treasury Yields to rise, caused by a series of average-poor economic data over the past week.
The NASDAQ has never really recovered from its 240+ point sell-off earlier this month, The NASDAQ got hit hard after a brief initial rally yesterday, and this was felt during the Asian session with further drops. The price is at the lower Bollinger Band extremes on the 4 hourly chart. Still don’t want to be short the SP500 today until it breaks a further lower support. Internally the market was fine with the McClellan Oscillator showing a positive reading of +28 after been negative for most of the past week.
Recently the SP500 has shown a robust rebound after a sell off and this is the expected move upwards for a long trade.