You might have started trading Forex but still haven’t found a suitable strategy guaranteeing consistent profits.
Worse still, you might already have a trading strategy which you hoped would turn things around but turns out, isn’t so good after all.
Either way, hope isn’t lost.
In today’s post, we discuss the trading strategy that could just be what you were waiting for.
Introducing the Four Candlestick Hammer Strategy.
What is the Four Candlestick Hammer Strategy?
The Four Candlestick Hammer Strategy is a pullback strategy that has been used by hedge fund managers and professional traders to trade for more than 3 decades. It is essentially a trend following strategy.
It works both intraday for day traders and on more extended periods of time for swing traders. However, the strategy is highly recommended in the daily time frame because that way, it yields more profits.
The Four Candlestick Hammer Strategy does not rely on technical indicators. It purely depends on price action.
Price action is the most accurate method of determining trends.
Rules and steps of the Four Candlestick Hammer Strategy.
The Four Candlestick Hammer Strategy has rules which occur in a series following each other like steps. Let us look into each step and rule in detail.
1. Generation of a 20-Candlestick new high.
The market needs to generate or make a 20-Candlestick new high. This is the first step where you need to identify a Market Trend. The Four Candlestick hammer strategy is a pullback strategy and it thus needs a prior trend.
Therefore, you should identify a strong trend that is vigorously moving up.
While you can use technical indicators to identify strong trends, realize that as we said, this strategy relies purely on price action, not indicators.
The 20-Candle is enough and an excellent way to tell that the marking is having a strong trend. It is actually a simple way to spot the trend.
2. Four Candlestick pullback that goes against the prevailing trend.
This step requires you to identify a 4-candlestick pull back going against the trend. The essence of this step is because such a pullback will create an entry opportunity before the market begins resuming the same prevailing trend as it was before a pullback.
The four candlestick hammer strategy will relay again on the price identifying the retracement.
Here you can see that technical analysis can be done even without the use of technical indicators. This is as long as the retracement satisfies the condition of 4 consecutive candlestick retracement/pullback after the 20-Candlestick high.
3. Fifth Candlestick closing above the Fourth Candlestick of the pullback.
The 5th Candlestick which formed after the 4th Candlestick of the retracement must close above that 4th Candlestick’s closing price.
This is a way of identifying that the retracement has ended to quickly swing into action before the prevailing trend resumes and leaves you behind. This means that the upward momentum pick up on the 5th Candlestick.
Note this, we did not say that the 5th Candlestick must close above the 4th Candlestick’s highest price but its closing price. It is enough for the 5th Candlestick to have its closing price above the 4th Candlestick’s closing price. However, the higher the 5th Candlestick closes, the stronger the upward momentum – the stronger the momentum, the better for us.
This 5th Candlestick is very crucial! You can already guess why it is such an important candlestick. It is the Candlestick prior to the possible entry point!!
4. Buy at the close of the Fifth Candlestick.
What a good entry point which is close to the end of the pullback!
Remember also that this is the point where the market is bound to resume the primary prevailing trend. In that case, we buy at the close of the 5th Candlestick or at the opening of the 6th Candlestick.
This entry strategy will not only help you maximize your profit potential but also minimize your level of risk.
5. Place your Protective Stop Loss 10 pips below the Fifth Candlestick.
Most often than not, the lowest risk trades happen when the retracement of a strong trend has ended. This is why we are using such a tight Stop Loss. Placing your Stop Loss at 10 pips below that 5th Candle adds a buffer of 10 pips to protect us in case of false breakouts.
Should I remind you to always use Stop Loss? Traders are taking significant losses simply because they ignored putting a Stop Loss on that one trade!!
6. Take profit equal to three times the distance between your entry price and your Stop Loss.
This is the best way to establish your profit targets – multiply the distance between your entry price and the price where your Stop Loss is by 3. This means, if our stop loss is 10 pips below the entry point then our take profit should be 30 PIPS above the entry point.
You must be wondering how this strategy only works with uptrends and not downtrends, now that we are only talking about things in the upward direction. This strategy works in the downward direction too, but in the opposite manner as we have described for the upward directions.
Do you want to see how the rules will be in a downtrend? Here you go;
- Generation of 20-Candlestick new low.
- Four Candlestick pullback that goes against the prevailing downtrend.
- Fifth Candlestick closing below the Fourth Candlestick’s closing price.
- Sell at the close of the Fifth Candlestick.
- Place your Protective Stop Loss 10 pips above the Fifth Candlestick.
- Take profit equal to three times the distance between your entry price and your Stop Loss.
What you have just gone through is the very strategy you need to enhance your trades this year 2020.
Begin applying the Four Candlestick Hammer Strategy in your trading today and see the difference. Any asset does well with this strategy. Short or Long positions perform well all alike.