Introduction
London stands as the financial centre of UK, and represents one of the largest, if not the largest, forex markets in the world. Consequently, the start of trading in the London forex exchange (7:00 or 8:00 GMT based on daylight savings time) is met with extremely high volatility. London’s market ‘sets the bar’ for what is to be expected in the market and how the market will flow. It is possible to utilize and take advantage of this fact, and this occurs predominantly in the gold trade. The London Hammer technique is generally effective within the first 1-3 hours of opening.
Application
The chart must be viewed as a candlestick chart instead of a line chart. (Usually the 15-minute chart)
It is very helpful to construct resistance and support lines first, as it can serve as a basic indicator whether to buy or sell. A general resistance and support line can be used, such as lines that have been tested several times, or one can employ more technical indicators such as the Fibonacci indicator to use in conjunction with this technique.
As a rule of thumb, a bearish hammer is an indication to short, and a bullish hammer is an indication to long. In practice, however, the candlestick chart should be accompanied with various pivots (i.e. monthly, yearly) to justify orders.
The graph above shows various potential entry points for this trading strategy. The blue dotted line represents a weekly pivot, while the green dashed line represents a monthly pivot. From the left, circles 1 & 3 show a bullish hammer, while circles 2, 4 & 5 show a bearish hammer. A short position at circle 5 would have yielded a surprisingly high return.
A limitation is that the technique relies on a very active trading approach, and orders must be placed within seconds. Prices fluctuate very fast, and a good opportunity can turn into a bad one in a matter of seconds. Although the London opening provides opportunities for high returns, investors will need to be able to read the market, and place orders accordingly and swiftly, to utilize those opportunities.