5 Rules For Trading A Reversal Hammer

There is a school of thought that a trader should focus on one or two “bread and butter” type set-ups and get as good as they can at them.  It’s something that I used to read about on Trader X and the Wall Street Warrior’s blogs, and I have come to totally agree with.

I have found one of the more reliable intra-day setups is to buy off of a reversal hammer, however there are a few rules I follow in order to raise the percentages is my favor.

1.  There has to be an “aggressive” downtrend preceding the hammer; in fact the more violent and bloody the better.

2.  You want to see a large volume and price spike on the candle before the hammer.  This is key because it usually means that the last group of longs are “throwing in the towel” en masse.

3.  The hammer has to reverse in/at a previous support level.

4.  The hammer has to be green, and the closer to a hammer opposed to a doji the better.

5.  The overall market direction should be up, flat, or slightly down.  Trying to catch a reversal hammer when the broad market is down big on the day is a losing game.

This chart on $AAPL illustrates an almost a perfect reversal hammer set up.  The only negative is that the actual body of the hammer is not as big as I would like it to be.

Some traders think that you should wait for an inside consolidation bar after the hammer before you buy the break, but I don’t agree.  The dynamics of a hammer reversal, with the spike down on volume and price, as well as the long tail of the hammer itself, should mean that all sellers are exhausted, at least temporarily, and price should move back up fairly strongly.

A consolidation bar tells me that buyers are not easily overpowering sellers, and that the hammer may just be a temporary pause before a new round of sellers come in.

Once you have bought the break of the hammer’s high, if you are a conservative trader, you should take a partial when price touches the 9 EMA.  If you are an aggressive trader, you could take a position based upon 50-75% of the hammer’s length instead of the total length, and also take a partial at the 9 EMA.

The most conservative way to play a hammer reversal is to not buy the break of the hammer, wait for price to bounce, settle back down to the support area, and form a second hammer.  You could then buy the break of that hammer.


  • William Pope

    Hey man! I’m a Binary Options trader on the 5 minute charts, and I wanted to let you know that I agree with this system 100%. Nearly all your points are on my “checklist” before I enter a trade; the only difference is that I combine your points with my preferred technical indicators (RSI and Bollinger Bands mainly). Thought I’d share that this works on a 5 minute level as well!

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  • Alex

    Hi Brian .
    Do you take care or not about the catalyst that creates the sell off ?
    ( bad earnings report, new public offering, negative result in a new drug test , FDA not approval, directors changes, fraud investigations , bankrupcy rumors, etc etc )

    thanks in advance

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  • The best execution trigger for the setup you described (in addition to the ones you mentioned) are what I call the setup bar / entry technique.

    Entering on the hammer close opens you up to the risk that you get additional downside if the whole thing turns out to be a bust.

    See example in the SPY a year ago

    One way to greatly reduce this risk is to wait for the hammer (which is now the setup bar, not the entry bar) to officially close, then enter on the next bar at the first tick above the setup bar’s high. This ensures that if the setup’s hypothesis is correct “…that all sellers are exhausted, at least temporarily, and price should move back up fairly strongly” you’ll be in, but if not, you don’t preempt the situation and get stuck in an example like the above.

    If intraday, say on a 5min chart, you’d have to wait for the 5 min increment where the hammer occurred to complete, then enter if triggered on the next bar.

    Here is an intraday upside example

    • Brian Lund

      Good stuff buddy. Thanks for the info.

      • My pleasure! I’m happy I can add to your already supremely excellent blog!

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  • Tommy

    Does this work on daily charts ?

    • Brian Lund

      Because it relies on the intensity of the “volume/price” spike as an important factor, it don’t think that translates as well the more macro you get.

      Thanks for reading.

  • jack barrett

    How does one screen for prospects? TX B

    • Brian Lund

      I have no ability to program so I don’t know the answer to that, but I am sure someone out there could figure it out. For me it is always just observation. I know what stocks I will be looking at the night before, so if that behavior is happening with one of them I will usually see it.

      Thanks for reading Jack.

  • Alex

    This is a good setup, I’ve seen it happen a lot. Usually I am on the side selling at the point when all the sellers are exhausted though. To be clear, you are just day trading this stock, taking on the position at the reversal and selling before the end of the day? Or using it as a method to take on a long position? Sometimes I use intraday charts to TRY and time my entry points on a trade I plan to hold longer term.

    • Brian Lund

      That’s how we find set ups Alex. We see our pain point enough times and then think, “hey maybe I want to be on the other side of that pain.”….lol. Believe me, I took me a long time to figure that out.

      As for the example, I am just using it for a day trade, although if the overall market conditions were right, you could use it to initiate a swing.

  • A nice piece Brian. I like to use the same pattern with similar rules. I like to have targets of 78% InRet or 127% ExRet of the move down as a target.

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Brian C. Lund

Brian C. Lund

Great father. Good friend. Decent trader/writer. Lacking husband. Solid drummer. Sometimes funny. Often A-hole. Terrible poker player. Too smart. Punk rock. Work in an ice cream shop.

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