The Japanese candlesticks are one of the techniques of charts most used in the world of trading in general, whether it is forex, futures, stocks CFDs, binary options or vanilla options.
In fact, I would say that these candles are the most used, much more than lines or bars.
Almost everybody uses candlesticks.
I have to reckon that they are very good for charts and easy to grasp.
One of the techniques used with these candlesticks is that called Hammer.
In fact it is one of the most famous technical indicators for short-term trading and its variations like scalping.
This strategy is quite simple.
Basically we need to wait until one trend ends.
These candles are characterized by a maximum or minimum further than the last closing price either in a bull or a bear trend.
Using these candles we can think of taking profits after a big trend or trying to start a trade looking for the end of a trade.
The truth is that trends usually have an end and also it is true that the Hammer usually coincides with these ends.
It is also true that there are many cases of false signals.
Of course there lays the question of whether this is going to work or not.
It is an indicator that I particularly do not dislike, in the sense that it is not formed by different combinations of price, but it is based in qualitative factor, so to speak, difficult to measure. Factors in which the “eye” is more important than the calculator.
However, I would not use this system for myself, no more than some backtesting to see how it “goes”.
Let us see some charts with this strategy to notice that there are cases either favourable or contrary to this strategy.
It seems that they worked this time but we have to take into account that depending on the win/loss objective we can have different outcomes.
For example, in the second case of the chart we would not win if our profit taking was of more than 30 pips or if our stop was of 15 pips.
Depending on how we move those numbers we will have more winning and losing trades.
This I have just described is a fundamental problem of day trading.
Eventually it does not matter how much you move the objective down or up because after thousands of trades you will lose.
Here we can see how all the intents of entering the market with hammer candlesticks resulted in failures in the bearish trend, except the last one.
Unless we did scalping in the first ones taking 5 or 10 pips as profit.
Although using that sort of scalping we will not go very far.
This graph has been of 5 minutes candlesticks, one of the scalpers favourite time frames.
Let us have a look to other graphs of bigger duration, with daily candlesticks.
In this case the GBPJPY gives us a sell signal in the middle of a huge bull market. The final result of that was not very good obviously.
That signal did not mean the end of the primary trend.
Later, however, we had a good signal for a reversal.
As we can see with the GBPJPY we can encounter good and bad signals in the same market.
Nevertheless doing trading in the medium and long-term you can have mistakes and still survive.
Another thing is with the short-term trading.
Hammer strategy for scalping
The biggest problem with this strategy is that it is used by a lot of people trying to do scalping, although many do not even know what it is.
In those cases the practical majority of traders end up going belly up.
The backtest with a 50% monthly profit fail quickly when faced with real conditions.
As usual it is very typical seeing many systems based in this strategy in the different scalping communities online, using Metatrader for Forex, especially.
In these cases I fear that it usually happens that the only ones who make money are those who promote their systems and sell them to the ignorant public.
How can something so good be so cheap?
As a general rule I would tell you to stay away from scalping whether with hammer strategy or not.