Using a Hammer to Nail the Market – Candlestick Math

A hammer can be a pretty handy tool, ask anyone from a construction worker to a farmer and even Thor. It turns out that hammer candlestick formations are also very handy when it comes to trading the markets, especially binary options trading.

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I recently came across a video about “candlestick math” by the guys over at Big Mike Trading and I found it to be fascinating, but it’s an hour and a half long, so here’s the short version. You’re welcome to watch the whole thing below if you want.

These are the candlestick patterns that are deemed to be the most reliable candlestick patterns by traders, whether it be Forex, stocks or indices:

  • Harami Candlestick Pattern
  • Hammer Candlestick Pattern/ Shooting Star Candlestick Pattern
  • Engulfing Candlestick Pattern
  • Piercing Candlestick Pattern/ Dark Cloud Candlestick Pattern

These are all strong bullish candlestick patterns when found at the end of a bearish downward move:

candles-1

And these are their equivalent bearish candlestick patterns that are strong when found at the end of a bullish upward move:

candles2b

That’s a lot to remember, so let’s just go with the hammer candlestick pattern.

The really cool thing is that the hammer candlestick pattern is all we need. When the candles for the Harami, Engulfing and Piercing candlestick patterns are combined using some candlestick math, they all end up being hammer candlestick patterns on one time frame higher.

This is what I mean – these end up all being bullish hammer candlestick patterns:

candles-1-combined

Remember that a candle body consists of the open and closing prices, and in this case, we are are combining two candles, and the dotted lines indicate the opening and closing prices of the first and second candles, respectively. When they are combined, they all end up being hammer candlestick patterns. Using the power of candlestick match is pretty cool!

And here we have the combined bearish candlestick patterns:

candles-2b-combined

The great thing about these patterns are that they all clearly show the market movement and struggle between the bulls and bears in the market. For the bullish candles the market moved down initially, and then the bulls took over and pushed the price back up. It means that there is a lot more upward pressure in the market than downward, and when you combine that with the fact that you are looking at market extremes where prices are likely to reverse in any case, you get a strong signal.

Here are some examples of bearish hammers, also referred to as inverse hammer or shooting star candlestick patterns.

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One of the easiest ways of determining if you are at a point where the market is at a potential extreme is to look at Bollinger bands. Typically when prices are outside of the outer Bollinger bands, they are either in an area where they are trending or going to reverse soon.

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Bollinger bands measure how for prices are deviating from the standard, so although it is not entirely scientifically two standard deviations from the norm, it is usually close to the outer 20% of recent price movement.

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When you combine that, with the fact that we have a hammer-based pattern where we clearly had the bulls and bears fighting for supremacy in the market, we know that we have a very good potential trend reversal.

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In some cases, the price reversal might be short-lived, but for Binary Options trading, that is not a problem, as long as you get the direction correct. Another little trick you can use here in cases where the market is obviously ranging, you will see that we had about three candlesticks before it hits the other side of the Bollinger bands, so we could expect it to take roughly the same time to complete the reversal – which it does.

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Here we have a lot of noise in the market, but the moment we see hammer, we know that the market will move up.

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Realizing that all of these candlestick patterns are basically just different versions of the hammer candlestick pattern, makes it much easier to identify what the market is doing, and it also makes it a lot clearer why patterns such as the dark cloud cover and piercing candlestick patterns act to indicate market reversal points.

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2 thoughts on “Using a Hammer to Nail the Market – Candlestick Math

  • August 30, 2015 at 1:44 AM
    Permalink

    Great article about the hammer variations candlestick and how you can incorporate other candlestick patterns with it. It’s true that candle and can be implemented in any trading strategy since its considered as one of the strongest candlestick patterns to determen/forese the continuation way of the market!

    Reply
    • August 31, 2015 at 9:57 AM
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      Thanks! I agree, the hammer candlestick pattern is one of the easiest to follow and very reliable.

      Reply

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