Trading a hammer

Intermediate · 2 min

Enter on the confirming close, put the stop under the hammer's low, and size the trade so that stop costs what you planned.

A hammer gives you something most setups do not: an obvious price at which you are wrong. If the share closes below the hammer's low, the buyers who made the hammer have been beaten, and the reason you bought has gone. That makes the exit easy to set before you enter.

Wait for a day that closes above the hammer's high. Buy at that close, not during the hammer.
Put your stop loss just below the hammer's low.
Set a target at twice the distance from your entry to your stop.
Size the trade so that hitting the stop costs the amount you decided in advance.

A hammer on a ₹400 share, with ₹1,00,000 in the account

Hammer day: open, high, low, close: ₹390, ₹396, ₹380, ₹394
Body and lower wick: ₹4 and ₹10 — the wick is 2.5 times the body
Next day's close, above the ₹396 high: ₹402 — your entry
Stop, just under the hammer's low: ₹378
Risk per share: ₹24
Target, twice the risk above entry: ₹450
Most you will lose: 1% of the account: ₹1,000
Shares: ₹1,000 ÷ ₹24: 41, costing ₹16,482

The stop decided the number of shares, not the other way round. A hammer with a longer wick puts the stop further away, which means fewer shares for the same ₹1,000 of risk.

The same illustrative chart continuing after the hammer and its confirming candle. A shaded red band below the entry marks the stop and a taller shaded green band above it marks the target. The price drifts sideways for a while, then climbs up through the target band, with an arrow labelled Rallies Towards Target. — The same illustration a few weeks on. The red band is the risk below the entry, the green band the target at about twice that. The price goes sideways first, then reaches the target.

Notice the sideways stretch before the rise. A trade that is working often does not look like it is working. Holding through that is what the stop is for: you stay in while the price is above it, and you leave when it closes below, without arguing with yourself either way.

Try this in the app

Calculators — work out position size from your stop

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Works with

Candlestick charts — Each candle packs a whole day of trading into one shape.
Stop losses — The price you decide, before you buy, at which you will admit you were wrong.
Where to put the stop — Put it where the reason you bought stops being true.
How much to put in one trade — Decide what you can afford to lose first, and let that set the size.