I was reading the "Tradin Hammers" thread and it seems many folks here really like that signal... but I have a book with a bunch of statistics in it that look at several years worth of data for all of the CS patterns, and the hammer and its bearish reversal counterpart (i forget the name) both have only about a 50% success rate (without confirmation, just every occurance). The only two simplistic and common patterns that have a decent chance of success (70%) are the inverted hammer and hanging man, where the tail of the pattern points in the direction of reversal as opposed to the direction of trend. Does anyone else have success trading with these? My picks have almost always been good when I stuck to the criteria.
How you program what a hammer is will have significant impact on your computer generated back tested results. That's the problem with candles and trying to hard code them - if your definition is not fully met, the system passes on the trade even though it could be a great hammer, just not textbook per say. Candles, esp intraday, need to have flexibility. Too many looking for the grail give up on candles b/c their computer code said it doesn't work. They work quite well if you can be open and flexible to what a candle really is.
Yea, I agree, that is why I scan my stocks using my eyes as opposed to using the computerized candlestick scan. The statistics in the book, Candlestick Charting Explained, I trust though because it looks at many years worth of data, so even if a lot of patterns are being ignored because they aren't the perfect textbook example, there is enough there to produce reliable statistics.
Hi axiom49, For clarity, you can not compare the Trading Hammers (revisited) thread to what you have read in books because they are not the same patterns. For example, the authors have their own version (rules) of what is a Hammer pattern and they tested those rules with what ever trade managment was suited for their trading style. In fact, some of the trade management rules used seem to be counter productive for the pattern they were testing. My point, I too can change the criteria for the pattern signal and trade managment to reduce their reliability. Also, you do realize that the Inverted Hammer is a different pattern than the Hammer pattern. Thus, some traders assume its the inverse version when in fact they are completely different. That explains why they don't have similar like reliabilities. To answer your other question, as stated in the Hammers thread... I have success in trading Inverted Hammers as do other traders I know that trade them. However, we aren't using them exclusively. Thus, there are other things involved in understanding the price action prior to the appearance of any Hammer pattern. Simply, when you dig deeper into the trading methodology of those traders successfully trading Hammers... You will see that its not all about Hammers even though they are a great place to start in developing a trading plan. Mark (a.k.a. NihabaAshi) Japanese Candlestick term
The two patterns I mention in the subject are something that I am managing to have some success with. They occur frequently enough that I'm USUALLY able to find one to suit my needs. Though I've not forgotten about the other patterns, and I do keep my eyes out and observe their behavior. I have found that in order to successfully work with any pattern, like you mention, you need to take into account quite a few factors... I've been burned many times when I didn't pay attn or ignored price action or other indicators that proved to be instrumental to determining the success of the pattern. Thanks for your input on this I'll be doing more reading here in the coming days and weeks so hopefully I can continue to learn more about these patterns.