FOUR CANDLE HAMMER STRATEGYStep #1: The market needs to make a 20-candle new high
The first step is to identify the market trend. This makes sense since the four candle hammer strategy is a pullback strategy it needs a prior trend.
The first and the most important thing are to identify a strong trend that is moving vigorously up. Identifying strong trends can be done through technical indicators. However, our retracement strategy doesn’t use any technical indicators and rely solely on price action.
Price action is the most accurate way to determine trends and hedge fund managers know this best.
The 20-candle high rule is an excellent way to identify markets that are having a strong trend and is it’s rather a simple way to spot the trend.
Step #2: Identify a 4 candle pullback that goes against the prevailing trend.
As a general rule, the second part is to spot a pullback that moves against the prevailing trend. This step is quite important because the pullback will create our entry opportunity before the market starts resuming the prevailing trend.
The four candle hammer strategy will relay again on the price to identify the retracement. Technical analysis trading can be done even without indicators. However, the retracement still needs to satisfy some trading conditions.
Namely, we want to see 4 consecutive candle retracement in a row after the 20-candle high was put in place.
Step #3: The 5th candle closing price needs to be above the 4th candle closing price
It’s our job to identify when the short-term retracement will end and jump on the wagon before the dominant trend resumes and leaves us in the dust.
On the 5th candle, we’re looking for the market to put an end to the retracement. The upside momentum should pick up on the 5th candle.
The stronger the momentum at this stage, the better.
Note* It’s sufficient for the 5th candle closing price to be above the 4th candle CLOSING price. Please note that we didn’t say the 4th candle HIGHEST price. The rule is that the higher the 5th candle closing price is, the better.
This is a crucial day because it’s the candle prior to our possible entry point.
Step #4: Buy at the close of the 5th candle of the pullback
Our retracement strategy is offering us a good entry point that is close to the end of the pullback. This is also the point where the market will begin resuming the primary trend.
In this regard, we buy at the close of the 5th candle of the pullback. Or you can say that we buy at the opening of the 6th candle.
Our entry strategy will help you maximize your profit potential and minimize your risk level.
Step #5: Place protective Stop Loss 10 pips below the 5th candle low
Usually, the lowest risk trades happen when the retracement of a strong trends end. This is the reason why we’re able to use such a tight stop loss.
Place your protective stop loss 10 pips below the 5th candle low. We’ve added a buffer of 10 pips to protect ourselves in case of any false breakouts.
Note* Remember to always use SL because not using stop loss is the number 1 reason why traders take significant losses.
Step #6: Take Profit equals 3 times the distance between your entry price and your stop loss price
The best way to establish your profit targets is to multiply the distance between your entry price and your stop loss price by 3. In other words, we want our profit target to be 3 times greater than our stop loss giving us a positive risk to reward ratio of 1:3.
Note** the above was an example of a BUY trade using technical analysis trading. Use the same rules for a SELL trade – but in reverse.
