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1-2-3-4

This is the basis of my favorite stock trading systems, The Three Day Hammer. This is a pattern written about by both Laurence Connors and Jeff Cooper. It solves the problem of stock trading systems of when and how to enter runaway markets. To read more about this method, I recommend Jeff Cooper's Hit And Run Trading and Laurence Connor's Advanced Trading Strategies.

Richard Wyckoff and W.D. Gann, technicians from more than 70 years ago, noticed that very strong and very weak markets usually do not correct for more than three days. By identifying these strong markets, waiting for a three day pause, you jump aboard the selected stock picks for the climb to new levels.

Setup for Longs

  • 14-day ADX must be greater than 30. For those unfamiliar with ADX, go to the discussion of ADX.

  • The 14-day +DI must be greater than the 14-day –DI.

  • Wait for a 3 day correction. This means that the stock must make three consecutive lower lows or any combination of two lower lows and an inside day.

  • Buy on day 4 only if the stock moves .10 above the day-3 high.

  • If filled, place a protective stop .10 below the day-3 low.

  • If the position moves in your favor, use a trail stop.

  • Use of proper candlestick formations in the third bar will increase probability of a profit. See The Three Day Hammer.

Setup for Shorts

  • 14-day ADX must be greater than 30. For those unfamiliar with ADX, go to the discussion of ADX.
  • The 14-day -DI must be greater than the 14-day +DI.
  • Wait for a 3 day correction. This means that the stock must make three consecutive higher highs or any combination of two higher highs and an inside day.
  • Short on day 4 only if the stock moves .10 below the day-3 low.
  • If filled, place a protective stop .10 above the day-3 high.
  • If the position moves in your favor, use a trail stop.
  • Use of proper candlestick formations in the third bar will increase probability of a profit. See The Three Day Hammer.

General Thoughts

Near the close of day one, if the stock appears to be closing down for the longs or up for the shorts, I generally close out the position. I find the best stock picks from these trades are profitability from the start.

If you are not stopped out by close of day 5, close the position.

Most important – For all stock trading systems, you must use proper money management. Without the proper stock size to portfolio, you are doomed. This is discussed in detail in The Three Day Hammer.

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