London Hammer Trades

Wondering how to trade the London forex open and beyond? Here’s a suggestion…

What with the volatility and indecision that has characterised many of the European trading sessions lately, I haven’t had much success finding good Bladerunner trades at the London open. I’ve been experimenting with a new strategy for these conditions based around the way price zigzags from one edge of a tight range to the other.

At the moment this strategy is based on my favourite candlestick: The Rejection Bar or Hammer. I’m looking for rejection bars that form at resistance after price has moved out of a narrow range. I then sell or buy depending on the direction of the hammer, with a tight stop not far behind the tail of the hammer. I aim for a 2 to 1 profit/loss ratio, moving my stop to breakeven once price has moved in profit equal to the amount of risk I have in the trade.

The chart below shows the entire day’s trading session here in Asia, beginning with the start of the week at the extreme left. Note the first hammer forming as the final candle of last week’s trading. Price gapped at the open in Asia this morning and mostly drifted sideways. The blue section towards the right of the chart indicates the open of the European session.

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When London opened, a hammer rejection formed almost immediately from the daily central pivot. Note also the succession of failures just to the left of that pivot. These failures occurred at a level where the weekend gap in price had been filled, adding conviction to my feeling that price may reverse from here.

I tried to enter with a limit order two pips below the hammer candle, but mis-timed my entry slightly and ended up getting in three pips after the break below the hammer. You can see the tiny horizontal bar where my stop loss went in the white circle. I set a take profit limit at the weekly pivot indicated by the blue horizontal line, and was taken out for the full 2:1 profit quite quickly.

The third circle indicates a possible entry on a bullish hammer after price had come down and formed a bottom, rejecting three times from a monthly pivot (the dashed line at the bottom of the chart). As a side note, it is interesting how often price will come down to one level of resistance – in this case the weekly pivot – and kind of “eat” through that to be finally stopped at a second level of resistance. I left this second opportunity alone, as I’m still testing and observing, rather than actively trading this new forex strategy.

I’ll post more on the strategy as I formalise the entry and exit parameters. As ever, any comments and feedback are welcome.