BTCUSDT- Price Action Strategy I: Bullish Hammers
Hi guys, I would like to start sharing some educational charts concerning price action strategies, something I feel that is often overlooked by a lot of traders on here. While a lot of indicators can be cool and give you confidence in your trades, oftentimes they are quite ambiguous in nature, leading to some questionable trades at times. Not only that, but it's often times hard to make consistent trades based off of indicators; if you hope to employ a consistent trading strategy, how can you do that through indicators? What constant exists that allows for consistent results? Unfortunately, there isn't one. By following many indicators, you have no defined rules for trade entries, stop losses, or take profits. You're just hoping that you may win big with each trade, and hoping you lose small. While winning big is certainly plausible, losing big is just as, and if not, MORE plausible using this sort of strategy. Wouldn't you like to be able to set a consistent strategy up for yourself where you risk no more than X amount of money per trade, while being able to win at least X amount of money per trade? Enter price action trading strategies.
Price action strategies are often quite simple, although they can sometimes be complex- the premise of trading based on price action is seeking out particular candle shapes that have been historically shown to result in a favorable outcome more often than not. Some common trade signal candles you may see are the bullish hammer, the hanging man, the inside bar, the inverted hammer, the bullish/bearish engulf, etc. The more familiar you become with these candlestick shapes, the easier it becomes for you to start executing certain trade set ups. Now it can be quite overwhelming to learn all of these candle shapes, but under the "Indicators" section of your chart, you can find a script set up by author JustUncleL called "Price Action Candles v0.3". He has done a wonderful job capturing many of the relevant candle shapes you may want to employ in your trading strategies. What I would suggest is to use this script in conjunction with some chart back testing, that way you can start making some notes about what does and doesn't work, and try to get a feel for the rate of consistency. I know sometimes it seems like patterns do whatever they please, but the more you begin to understand the variability of one particular pattern, the more you understand how to act during these trades. Within this idea I'm posting here today, I have decided to include three potential scenarios involving the bullish hammer candle shape.
The reason trading price action candles is powerful is because of the consistent set ups you can do with them. They typically involve a fixed entry point and stop loss, which in turn allows for consistent strategies. I find that fibonacci structures and Elliot waves complement this very well, because it helps you confirm the possibility of the trade being successful or not.
To trade the bullish hammer, your standard set up will be as follows:
1) Set your entry just above the top of the hammer. The logic used here is that this is confirmation of a continuation in bullish momentum. If subsequent candles are to fail to break above the hammer, then you may ascertain that it is potentially a fake out. With price action, it is important to set your entries at some point above the close of the candle shape in question, but never at the exact level; doing so is the easiest way to get trapped in a poor trade set up.
2) Set your stop loss at some point just below the "handle", or wick of the hammer. The logic we may use is that a hammer is considered to be a strong bullish reversal signal, so if price were to fall below the handle, then our trade set up is invalidated. The stop loss will thus allow you to continue to follow the trend, rather than trade against it.
3) You can set your take profit at wherever you desire as per your risk management strategies, but my advice is to set it at a distance that is equal to or twice as large as the distance of your stop loss from your entry. So if you were to set a 2% stop loss, your take profit point would ideally be AT LEAST 2%, but most favorably 4%. As long as your reward exceeds your risk, you set yourself up for a growing portfolio.
Non-traditional bullish hammer set up:
1) This is where other tools such as Fibonaccis, Elliot waves, Support/Resistance, triangles, and structures will come in handy. There are often times instances where the standard set up will result in getting stopped out. If you find that the trend is a bit shaky at the moment, or appears to want to show continued bearish momentum, you will want to follow the same set up as a standard set up, but the timing of your entry will differ.
2) For whatever reason you may be weary about entering a trade based on a bullish hammer, you can choose to wait for price to pull back to a point BELOW the "handle" first, and THEN create your trade set up. This may be a common set up whenever your bullish hammer has just broken out of a triangle pattern, which 9 out of 10 times will pull back before rallying. Other instances may be during retesting of structures, supports, or Elliot retracement waves. This is one of the reasons why such trading strategies require extensive back testing before being executed in real time, so that you may begin you really get a feel for the situational applications. Below is an example.
Bullish Hammer Set-Up With Entry After Pull-Back:
Invalidated bullish hammer set up:
1) So let's say that you've just set up a non-traditional bullish hammer trade. You waited for the pull back, and you entered accordingly. You ultimately have found that despite these efforts, your trade has failed. This again will play into the environment surrounding the price action.
2) In this particular example seen below, the price had just started consolidating following a massively impulsive down wave. For those familiar with Elliot waves, we know that this area of consolidation was our II wave, which we could have expected to pull back to the .618 region; unfortunately, it didn't pull back that far, and had it done so, our bullish hammer set up might have been validated. Unfortunately, plans do not always play out accordingly, and this ties into the fact that it's absolutely crucial to really back test these ideas and make sure they work well for you in a live setting.
3) This example trade I've included below is also a very good example of how we choose to minimize downside risk. Yes, we lost, but as long as your are always aware of the trend, losses may only be temporary, because they do nothing more than prepare us for massive wins that will make up for our losses with ease. It's most important to be weary once a trade fails, however, as too many failed trades defeats the purpose. Oftentimes, one or two failed trades will be enough to start giving you an idea of what you need to do to make big gains. Remember to stick out your trades, and don't let emotions get the best of you. Consider your loss as a learning experience, and study it so you know what to avoid in the future.
Invalidated Bullish Hammer Set-Up:
Well there you have it, guys! I hope to do quite a few more of these over the coming weeks, I really believe it will help people in their daily trading efforts. Have a great day!
Price action strategies are often quite simple, although they can sometimes be complex- the premise of trading based on price action is seeking out particular candle shapes that have been historically shown to result in a favorable outcome more often than not. Some common trade signal candles you may see are the bullish hammer, the hanging man, the inside bar, the inverted hammer, the bullish/bearish engulf, etc. The more familiar you become with these candlestick shapes, the easier it becomes for you to start executing certain trade set ups. Now it can be quite overwhelming to learn all of these candle shapes, but under the "Indicators" section of your chart, you can find a script set up by author JustUncleL called "Price Action Candles v0.3". He has done a wonderful job capturing many of the relevant candle shapes you may want to employ in your trading strategies. What I would suggest is to use this script in conjunction with some chart back testing, that way you can start making some notes about what does and doesn't work, and try to get a feel for the rate of consistency. I know sometimes it seems like patterns do whatever they please, but the more you begin to understand the variability of one particular pattern, the more you understand how to act during these trades. Within this idea I'm posting here today, I have decided to include three potential scenarios involving the bullish hammer candle shape.
The reason trading price action candles is powerful is because of the consistent set ups you can do with them. They typically involve a fixed entry point and stop loss, which in turn allows for consistent strategies. I find that fibonacci structures and Elliot waves complement this very well, because it helps you confirm the possibility of the trade being successful or not.
To trade the bullish hammer, your standard set up will be as follows:
1) Set your entry just above the top of the hammer. The logic used here is that this is confirmation of a continuation in bullish momentum. If subsequent candles are to fail to break above the hammer, then you may ascertain that it is potentially a fake out. With price action, it is important to set your entries at some point above the close of the candle shape in question, but never at the exact level; doing so is the easiest way to get trapped in a poor trade set up.
2) Set your stop loss at some point just below the "handle", or wick of the hammer. The logic we may use is that a hammer is considered to be a strong bullish reversal signal, so if price were to fall below the handle, then our trade set up is invalidated. The stop loss will thus allow you to continue to follow the trend, rather than trade against it.
3) You can set your take profit at wherever you desire as per your risk management strategies, but my advice is to set it at a distance that is equal to or twice as large as the distance of your stop loss from your entry. So if you were to set a 2% stop loss, your take profit point would ideally be AT LEAST 2%, but most favorably 4%. As long as your reward exceeds your risk, you set yourself up for a growing portfolio.
Non-traditional bullish hammer set up:
1) This is where other tools such as Fibonaccis, Elliot waves, Support/Resistance, triangles, and structures will come in handy. There are often times instances where the standard set up will result in getting stopped out. If you find that the trend is a bit shaky at the moment, or appears to want to show continued bearish momentum, you will want to follow the same set up as a standard set up, but the timing of your entry will differ.
2) For whatever reason you may be weary about entering a trade based on a bullish hammer, you can choose to wait for price to pull back to a point BELOW the "handle" first, and THEN create your trade set up. This may be a common set up whenever your bullish hammer has just broken out of a triangle pattern, which 9 out of 10 times will pull back before rallying. Other instances may be during retesting of structures, supports, or Elliot retracement waves. This is one of the reasons why such trading strategies require extensive back testing before being executed in real time, so that you may begin you really get a feel for the situational applications. Below is an example.
Bullish Hammer Set-Up With Entry After Pull-Back:
Invalidated bullish hammer set up:
1) So let's say that you've just set up a non-traditional bullish hammer trade. You waited for the pull back, and you entered accordingly. You ultimately have found that despite these efforts, your trade has failed. This again will play into the environment surrounding the price action.
2) In this particular example seen below, the price had just started consolidating following a massively impulsive down wave. For those familiar with Elliot waves, we know that this area of consolidation was our II wave, which we could have expected to pull back to the .618 region; unfortunately, it didn't pull back that far, and had it done so, our bullish hammer set up might have been validated. Unfortunately, plans do not always play out accordingly, and this ties into the fact that it's absolutely crucial to really back test these ideas and make sure they work well for you in a live setting.
3) This example trade I've included below is also a very good example of how we choose to minimize downside risk. Yes, we lost, but as long as your are always aware of the trend, losses may only be temporary, because they do nothing more than prepare us for massive wins that will make up for our losses with ease. It's most important to be weary once a trade fails, however, as too many failed trades defeats the purpose. Oftentimes, one or two failed trades will be enough to start giving you an idea of what you need to do to make big gains. Remember to stick out your trades, and don't let emotions get the best of you. Consider your loss as a learning experience, and study it so you know what to avoid in the future.
Invalidated Bullish Hammer Set-Up:
Well there you have it, guys! I hope to do quite a few more of these over the coming weeks, I really believe it will help people in their daily trading efforts. Have a great day!