Hi Janis, I recommend you continue to use volume until you completely understand WRB Analysis (a topic separate from this thread about Hammer patterns). Simply, WRB Analysis elimates the need to do Volume Analysis while at the same time WRB Analysis represents changes in supply/demand. Therefore, if you are already using volume or anyone else reading this thread.... Continue to use it because I do not go into details in this thread about WRB Analysis other than what I've already mentioned about it. As for trend reversal trading versus counter-trend trading...here's my prior discussion in case someone reading this is unfamiliar... In this thread I've talked briefly about some invalid or not reliable Hammer patterns. For example...I've talked about one particular price action that involves a White Hammer Line that occurs after three consecutive dark lines in a price decline. That particular price action is a counter-trend pattern because there's no shift (change) in supply/demand unless the Close of the White Hammer Line > Open of the most recent prior Dark Line. Thus, yes, trend reversal patterns are more reliable than counter-trend patterns. Also, the trade management (initial stops, trailing stops and contingency plans) is much easier with trend reversal patterns in comparison to counter-trend patterns. As for your reference to double tops/bottoms...it's not part of my trade methodology although some Hammer patterns can occur in such types of price action. However, if there's no shift or change in supply demand when that Hammer pattern appears... It's counter-trend trading. Also, lower lows or higher highs can be either trend continuation patterns, trend reversal patterns or counter-trend patterns. The key is if its a shift in supply/demand and not if its a double top/bottom, higher high or lower low. I don't recommend counter-trend trading to new traders or to traders new to a particular strategy. Only those traders that understand position size management, use position size management as part of their trading plan and are profitable traders... They can counter-trend trade but with a reduced position size and only if they've identified a market tendency that puts the odds in their favor that the counter-trend trade has more of a chance to be profitable instead of a loss. The reality is that most traders that counter-trend trade do not have a specific trading plan for such. I mean...they don't sit down and review their trading plan with the knowledge its a counter-trend plan. Thus, those that counter-trend trade tend to do such either as intuition trades, misunderstanding of volume analysis, misunderstanding of volatility analysis, discipline problems, shooting from the hip (feeling of being invincible), trading something that looks familiar, inability to admit when their wrong et cetera. By the way, holiday trading or any other light trading day are notorius for wrecking havoc on counter-trend traders. With all that said, I've never met a profitable trader that mainly trades counter-trend patterns. I've met profitable traders that mainly trade trend reversal patterns. Mark (a.k.a. NihabaAshi) Japanese Candlestick term
Mark, Thanks a lot for such a detailed answer. It cleared for me one thing: I actually don't understand what you mean by "shift in supply/demand". I always thought that by analizing price action (chart patterns, candlesticks), volume and such we try to evaluate the supply/demand pressure on the markets. You say that you see a shift in supply/demand, but it's not the volume, nor it is chart patterns. What do you use to see a shift in supply/demand? Janis
All the above at the same time. WRB Analysis, price patterns, time of day, key market events, chart patterns, candlestick patterns (you can use bar charts if you prefer) et cetera. This helps me to evaluate supply/demand. Simply, its not one specific thing all by itself. It's several variables coming together to form the price action. Yet, I know some traders that only use one specific thing to identify the changes in supply/demand... Volume. I myself need to see a lot more than just volume because volume analysis has its own nuances. As for what is the meaning of the phrase shift in supply/demand. To keep it simple...there's a point (price action zone or area) where the price action either changes from supply to demand (prices going higher) or changes from demand to supply (price going lower). Also, it involves a change in volatility when we are in the demand phase and the demand suddenly increases or we are in the supply phase and supply suddenly increases... Such is often associated with either rising volume and/or rising volatility. As I mentioned before...this is an area that's beyond the scope of this thread and there's other threads here at ET that gives an excellent basic understanding of supply/demand. You can use ET search menu to look up stuff like Price Volume Analysis or Supply Demand. http://www.elitetrader.com/vb/showthread.php?s=&threadid=29005 http://www.elitetrader.com/vb/showthread.php?s=&threadid=33766 WRB Analysis is a little more advance especially since it replaces the use of volume... Not intentionally but to understand wide range bodies is to no longer be dependent upon volume analysis. Mark (a.k.a. NihabaAshi) Japanese Candlestick term
Oh I see! So it's more like discretional perception of price action in general, including everything that can be seen from charts rather than exact price behaviour patterns applied mechanically, right?
Everybody seems to have their own definition of discretionary perception and exact price behaviour patterns applied mechanically. Lets put it this way...there's no subjectivity involved in the price action. There are specific rules (rule based approach), specific things that must occur to validate the price action... To validate what I see in supply/demand. However, the only subjectivity occurs if I want to act upon what is occuring. Simply, Hammer patterns I trade have specific rules to validate the pattern. If one rule isn't validated...its not a valid pattern even if it misses being valid by one tick. If you plan on approaching the markets from the supply/demand side of town... I highly recommend you read those prior threads by others about supply/demand and price/volume analysis... Then (after the above) combine that info with this Trading Hammers (revisited) thread instead of trying to understand supply/demand through this Hammer pattern thread. Once you begin to learn and understand supply/demand...you can then sit down and remove all the subjectivity out of it and design your own specific steps that must occur for you to take a trade. Mark (a.k.a. NihabaAshi) Japanese Candlestick term
Hi Mark, First I'd like to thank you for the great thread.... I've went through the entire thread taking notes along the way. I'm in the process of defining the rules for each sub-group that I can use as a reference. Currently I'm finishing up with the "Bullish White Hammer Pattern". While going through my notes I came across a statement that you made that I'm hoping you can elaborate on a little. Someone had asked you to verify a Bullish White Hammer Pattern, and you told them it was an invalid pattern and gave them the following reason. I'm sorry I don't have the exact post, but I can find it if that will help. ------- Here's your response... Understanding the price action. I don't like the fact that the White Hammer Line closed above the highs of two of its prior three intervals... After the below had occurred. In addition, I don't like it that all the lows of the prior three intervals are less than the Open of the White Hammer Line... -------- Do you have a specific rule that relates to this? Thanks again for your help! Brent
Hi forex2stay, When I said I don't like all the lows of the prior three intervals are less than the Open of the White Hammer Line... I had posted a rule (similar to the below statement) that explains that via the following... * Low of White Hammer Line < Lows of each of the prior three intervals There's another rule that deals with the length of the lower shadows. * Long Lower Shadow of White Hammer Line is longer (its length or range) than the lower shadows of each of the prior three intervals. Now...getting back to my statement about not liking White Hammers that close above the highs of two of the prior three intervals... The rule for that is basically this (its been posted before I think)... * Close of White Hammer Line < or = Highest High among the prior two candlestick lines The point with the above specific rules is to prevent trading what I call a rising Hammer Line that's very susceptible to retracing and its really not a White Hammer Line... Its really a White Hangman. Mark (a.k.a. NihabaAshi) Japanese Candlestick term
Thanks Mark, I think I have everything now. Can you verify the attached chart for me? I have it being a Bullish White Hammer Pattern based on the rules I created. Thanks again, Brent