The ‘hidden smash day’ setup relies on exactly the same notion of a failed buy or sell signal as the naked smash days, but the specific pattern that we’re looking for is different. Hidden closes look exactly the same as the candlestick formations known as hammers and shooting stars, and this is precisely how many market participants will read them. But once again, we will be waiting to cash in on the failure of this signal when the very next day price continues and breaks out from the hidden close day’s long shadow.
It’s worth noting here that the Japanese candlestick methods and this setup are not at odds here. Properly executed, both these techniques for reading price action require correct timing – waiting for the market to properly show its hand before entering. You’ll remember from the section on candlesticks that the reversal signal of a hammer is only confirmed when the next session closes above the highs of the hammer, and that all of this must occur in the context of a mature downtrend and close to key support. Fortunately for us, many amateur traders will try and jump the gun, taking a position before the signal is confirmed, and when price doesn’t move the way they were hoping they become trapped in a losing trade.
Because hidden smash day setups occur when a trend resumes, they can also provide a good entry strategy for trend-following (unlike naked smash days) – in that case you’ll want to ignore the exit parameter given below.
Hidden Smash Day - Buy Setup
Day two closes above day one’s close but within the lower 25% of day two’s range. Ideally day two should also close below its open.
On day three price makes another bullish move as the uptrend is resumed, and the trade sets up when price trades at the highs of day two.
Hidden Smash Day - Sell Setup
Day two closes below day one’s close but within the upper 25% of day two’s range. Ideally day two should also close above its open.
On day three price makes another bearish move as the downtrend is resumed, and the trade sets up when price trades at the lows of day two.
Parameters for buy orders (sells are reversed)
It’s worth noting here that the Japanese candlestick methods and this setup are not at odds here. Properly executed, both these techniques for reading price action require correct timing – waiting for the market to properly show its hand before entering. You’ll remember from the section on candlesticks that the reversal signal of a hammer is only confirmed when the next session closes above the highs of the hammer, and that all of this must occur in the context of a mature downtrend and close to key support. Fortunately for us, many amateur traders will try and jump the gun, taking a position before the signal is confirmed, and when price doesn’t move the way they were hoping they become trapped in a losing trade.
Because hidden smash day setups occur when a trend resumes, they can also provide a good entry strategy for trend-following (unlike naked smash days) – in that case you’ll want to ignore the exit parameter given below.
Hidden Smash Day - Buy Setup
Day two closes above day one’s close but within the lower 25% of day two’s range. Ideally day two should also close below its open.
On day three price makes another bullish move as the uptrend is resumed, and the trade sets up when price trades at the highs of day two.
Hidden Smash Day - Sell Setup
Day two closes below day one’s close but within the upper 25% of day two’s range. Ideally day two should also close above its open.
On day three price makes another bearish move as the downtrend is resumed, and the trade sets up when price trades at the lows of day two.
Parameters for buy orders (sells are reversed)
- Identify a hidden smash day buy setup on a daily price chart.
- Place a buy stop order one point above the highs of the day.
- Use a stop loss equal to 30% of the Average True Range.
- Exit your position at the first profitable opening.