Hammer Style Trading

OrderFlowDashPro

Member
76 9
I've decided to share a trading style that I've dubbed "Hammer Style" trading. First, this is not a low risk trading methodology and is not a strategy for beginners. But, I believe it combines some unique ideas in trading and can produce some really phenomenal gains for the high performance discretionary trader. Also, I still consider this an experimental strategy. I've combined some elements from another program which I won't mention because that trader feels I don't understand his methods and his methods aren't discretionary.

What is hammer style trading and what does it involve? Hammer style trading combines the concept of going long and short the same instrument at the same time and overlapping that. Now, most people will say going long/short at same time (hedging) is the same as being flat and they are technically correct. But, let me explain furthermore what this strategy entails to do. This is useful to do if the market tends to hit your stop loss and reverse.

Again, this is a difficult strategy too pull of because your are always having to make new trades. It is pretty crazy because you'll end up at times wanting the market go both up and down. My thesis for why it can work is that basically, if you imagine each trade being a system then it is similar to having multiple profitable systems running on the same instrument with different holding times. It also tends to keep the trader focused on the market and not get tied to any position. Again, It works best on choppy instruments.

First, it assumes you have some ability to predict direction but it also opens the possibility that your timing may be off. It also does not use stops but instead uses the concept of hedging by going long/short -- which you can't actually do in futures due to regulations -- we know this but I'm describing the conceptual framework.

The ideal way to trade this with index futures would be to "virtual clone" the instrument, so if you trade the ES then you'd have ES1, ES2, and maybe ES3. I believe that NinjaTrader can manage long/short same instrument?

In practice, here is how it works, at start of day let's say your read of the market suggest it will go down, so you short in ES1. But, the market heads up to your stop with a momentum surge.

Now, you know that the market is going up. Most people would either take a stop loss or reverse. But, in hammer style trading as long as we still feel prediction 1 was valid, we will take the new trade in a cloned instrument. So basically, you are scalping out profits all day.

The goal with this sort of strategy is to build up closed profits as rapidly as possible while at the same time allowing what would be stop losses to recover. So basically, the goal is to scalp faster profits out of the market then it runs against your "open losers".

What tends to happen is that if you are good at calling the market then you'll close out a lot of closed trades profits and then your "stop losses" will recover say 50% or 100% and that will increase your profit even further.

However.. it works best with certain types of randomness and if the market runs (trends too strong) then you may not be able to recover the losses. Although, it is possible if your new prediction realizes that a trend is formed too still be profitable by holding the new open trade for a greater profit then the virtual open loss (the actual closed loss, lol).

Another simpler way to use this strategy is to hedge the momentum surges around stop loss points instead of taking the stop loss. This would be accomplished in this methodology by opening a new cloned instrument long position while holding the short. With traditional trading (i.e non virtual), it would be accomplished by closing your trade, reversing too long, scalping out a long profit, and immediately reversing back to short. I also like weighting the trades based on my confidence. The other way to attempt this strategy is to find correlated instruments but that requires a lot more work for the scalper-- computing position sizes and so it is not as good.

One more thing, I forgot to mention, we don't simply forget about the other trades. So, we track all the trades we are in and monitor them. The reason I call it hammer trading is that closing the hedge is akin to "dropping the hammer" which is a great feeling when you get it right.
 
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OrderFlowDashPro

Member
76 9
Let me add some more information for those who want to understand. Weighting the trades is important because (at least for me) when I'm really confident then I tend to be more right then when I'm less confident. If you don't have ability to know how good/likely your trade is to work then it will be harder to trade this method. It again assumes you are already a strong trader.

Also, this trading strategy can be viewed as a spread strategy by spreading an instrument against itself across time. So, as you monitor each trade, it can be viewed as a leg of spread.

I really like this trading style for certain types of days. It doesn't make sense to use stop loss or trade loss limits with this style but you can use a daily loss limit, advised.

The downside to this strategy is that you don't have true hedge protection and it relies on your skill to call each reversal. If one were able to get a mix that provided for true hedge protection then that could push the returns for this type of strategy into the astronomical range (depending on skill of trader, of course). Part of the motivation for this strategy was the knowledge/realization of how much stop losses hurt ones profits.

As for how exactly one obtains true hedging, this is something I'm not sure on but it would involve rolling the losses to an options book. The idea is similar how to some traders have cheated at firms by rolling the losses off the book, instead -- it would roll the losses into a loss limited position.

For example, if you think about it in a bull market -- if you are trading/scalping intraday then theres a good chance that within a few days any long loss you have could be closed at a break even or profit and if you were structured with a risk limited position.
 
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