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The Art & Science of Active Trend Trading
CONNECING THE DOTS
Candlesticks & Convergence of Clues
U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures
and Options trading has large potential rewards, but also large potential risk. You must be aware
of the risks and be willing to accept them in order to invest in the futures and options markets.
Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to
Buy/Sell futures or options. No representation is being made that any account will or is likely to
achieve profits or losses similar to those discussed in this training. The past performance of any
trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN
LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE
RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN
GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF
HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY
TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
All Materials presented are for training purposes only . Traders should paper trade any new method
prior to risk of personal capital.
Disclaimer
Why Connect the Dots?
• Establishing the Convergence of Multiple Clues provides context to the Candlestick signal
• Provides greater understanding of expectations
• Helps Minimize Risk & Maximize Profit
Today’s Objective: Gain a greater understanding of properly analyzing Candlestick Patterns and the amplifying role of the Convergence of Clues
Primary & Best Clues that Must Converge for a
Higher Probability Trade
Horizontal Support Zones
Horizontal Resistance Zones
Trend Lines
Flag Lines
Moving Averages for Trend
Moving Averages for Support
Moving Averages for Resistance
Minor Clue: Extremes on Indicators
Connecting The Dots
Before taking a Bullish Reversal Signal during a Downtrend
o At least three clues must converge (be observable)
Before taking a Bearish Reversal Signal during a Uptrend
o At least three clues must converge (be observable)
During a Uptrend or Downtrend to trade in the direction of the Trend
o At least one additional clue must converge with the candlestick pattern
A Quick Review
Candlestick History
Charting method originating In Japan between the 18th century & late 1800’s
Potentially used by Japanese Rice Traders
Introduced to Western Traders by Steve Nison in the 1990’s
Knowledge base and trading importance expanded by Steve Bigalow
A Quick Review
Candles and Technical Analysis go together
Powerful Tools – Only partially understood by most traders
Immediate feedback on investors sentiment
Greatly improve Reward/Risk on every trade in all time frames
Be a detective – Look for the Convergence of Clues
Presentation Material by: Active Trend Traders
Golden Rule of Candlesticks
Candlesticks and patterns require three criteria for
proper interpretation:
1. A Completed Line (Must wait for the time period to finish!)
2. Shape of the line of pattern
3. The Preceding Trend
What’s the Difference?
Bar Chart vs Candlesticks
Open
Open Close
Close
Bullish Bearish
Low
High
Primary & Best Candlestick Signals
There are many, many Candlestick Patterns but these represent the Primary & Best
Indecisive
Doji/Spinning Tops
Bullish Bearish
Hammer Hanging Man
Engulfing Patterns Engulfing Patterns
Piercing Line Dark Cloud
Harami Harami
Inverted Hammer Shooting Star
Morning Star Evening Star
Kicker Kicker
The Dynamic Doji
- Doji’s and Spinning Tops show indecision between buyers & sellers
- Clues: When present at past support/resistance or moving averages with indicator extended or divergent
- Price Action will tend to move in the direction of the open after a Doji/Spinning Top
Doji/Spinning Top Bullish
Series of Doji’s at Support
Clue: Divergent Stochastics
26%+ Gain from Signal to High in one month
&
How Many Clues? Would be comfortable trading this of support at $62?
26%+ Gain from Signal to High in one month
Be a Detective: Search for Clues
1
2
3
How Many Clues? 1. Series of Dojis 2. Strong Support? 3. Divergent Stochastic
4. Break Above 8 day EMA
Hammers & Hanging Men
- The Basics Shape
Small Body
Shadow must be 2X the Body
Hammers & Hanging Men
Understanding what the line tell us? - Buyers Wrestled control from sellers during the trading
period—but where it appears is equally important!
- Shows levels & zones of support and resistance
What’s Important—Context & Convergence
1. Where the line forms—Uptrend or Downtrend?
2. Quality of the line
3. Magnitude/Range of the line—Bigger Better!
4. Other Clues
5. Defining Expectations & Failure of the Signal
R
S
Hammers & Hanging Men
Quality of the Signal is determined by:
1. Where the Line appears—How long has the preceding trend
been in place? Appearing after longer trends can have
greater meaning
2. The Magnitude/Range of the Line
3. Convergence of other clues include:
Identify Support/Resistance
Proximity to Moving Averages
Indicators
Hammer
Hammer Support
Only occurs after a downtrend.
Shadow must be 2X the Body
Expected move back to swing high,
trend lines or moving averages
Swing High
Hammer Convergence of Clues
AAPL 11/16/12
What Happened
Hanging Man Only occurs after a
Uptrend. Shadow must
be 2X the Body
Expected move back to
swing low, trend lines or
moving averages
Resistance
Swing Low
Hanging Man Convergence of Clues
TNA 5-3-11 What Happened
Poor Quality Hammer or Hammer Failure
AAPL 10/2012
Two Hammer examples: 1. Too Close to Resistance of
Moving Averages
2. Appearing shortly after a new downtrend
Poor Quality Hanging Men or Hanging Men Failure
Two Hanging Man examples: 1. The lower wick entry signal as
never triggered
2. Pattern just coming out of consolidation—uptrend yes but new uptrend
QIHU 4-2013
Secrets of Trading Hammers & Hanging Men
Understand the Parts:
1. Stays in effect until a close violates signal high or low
2. Both are self confirming signals
3. High is Top of a Resistance Zone
4. Low is Bottom of a Support Zone
5. Hammer—expect testing of the wick
6. Hammer use low of body as a stop after a break out or with Long legged Hammers
7. Hammer middle of wick can be early entry
8. Violating Low is max stop loss
9. Hanging Man violating high is max stop loss
10. Both May Appear with other candlestick reversal patterns in series (Pay attention to this!)
Support Zone
Resistance Zone
Action Points
Secrets of Trading Hammers
Next Day Entries & Stops Hammer
1. Self confirming signals
can be entered day of signal
Opens in Wick Entry 2
Opens in Wick Entry 1
Max Stop Any Entry
Stop From Entry 2 or 3
Opens above yesterday’s candle Entry 3
Secrets of Trading Hanging Men
Next Day Entries & Stops Hammer
1. Self confirming signals
can be entered day of signal
Opens in Top Wick
Opens in Wick Entry 1
Max Stop Any Entry
Opens Below yesterday’s candle Entry 3
Opens in Lower Wick
Opens in Lower Wick Entry 2
Clue: Dissect Each Candlestick Signal
- Every Candlestick Signal can be broken down just like the
Hammer & Hanging Man
- Use the small bodies to your benefit to plan trade Action
Points for Entry & Exit
- Count the Clues
Break Be Back in 15 Minutes
Shooting Star
Resistance Only occurs after a Uptrend. Body
inside previous days candle
Wick must be 2X Body
Color of candle doesn’t matter
Expected move back to swing low,
trend lines or moving averages
Swing Low
Shooting Star
-25% Drop from Signal to Low in 5 Days
Shooting Star
Clue: Divergent Stochastics
What are the Clues?
Evening Star—Two Day Pattern
Resistance Only occurs after a Uptrend. Body
inside previous days candle
2nd Down day closes at least ½ way
down candle from 2 days prior
Expected move back to swing low,
trend lines or moving averages
Swing Low
Evening Star
Clue: Divergent Stochastics
What are the Clues? Expectations?
Evening Star
Inverted Hammer
Hammer Support
Only occurs after a downtrend.
Shadow must be 2X the Body
Can be very powerful signal
Expected move back to swing high,
trend lines or moving averages
Swing High
Inverted Hammer
28%+ Gain from Signal to High in 6 Weeks
Inverted Hammer
Clue: Stochastics Oversold
What are the Clues?
Morning Star—Two Day Pattern
Hammer Support
Swing High Only occurs after a downtrend.
Body inside previous days candle
2nd Down day closes at least ½ way
down candle from 2 days prior
Expected move back to swing high,
trend lines or moving averages
Morning Star
11%+ Gain from Signal to High in 2 Weeks 13%+ Gain from Second Signal in 2 Weeks
Morning Star
What are the Clues? How many do we need? Does the Morning Star
really matter?
Bullish Engulfing—Two Day Pattern
Only occurs after a downtrend. Completely
engulfs the previous days body.
Expected move back to swing high, trend lines
or moving averages
Support
Swing High
Bullish Engulfing
Bullish Engulfing
Clue: Divergent Stochastics
12.8%+ Gain from Signal to High in 6 weeks
What are the Clues?
Bearish Engulfing
Resistance
Only occurs after a Uptrend. Completely
engulfs the previous days body.
Expected move back to Swing Low, trend
lines or moving averages
Swing Low
Bearish Engulfing
Bearish Engulfing
Clue: Divergent Stochastics
12.8%+ Gain from Signal to High in 6 weeks
What are the Clues?
What’s This?
Piercing Line
Support
Only occurs after a downtrend. Must
open below and close more than ½
way up preceding candle.
Expected move back to swing high,
trend lines or moving averages
Swing High
Piercing Line
70%+ Gain from Signal to High in 2 Months
Piercing Line
Clue: Oversold Stochastics
What are the Clues?
Dark Cloud
Resistance Only occurs after a uptrend. Must
open above and close more than ½
way down preceding candle.
Expected move back to swing low,
trend lines or moving averages
Swing Low
Dark Cloud
-9% Drop from Signal to Low in 2 days
Dark Cloud
Clue: Weak Stochastics
What are the Clues?
Bullish Harami
Only occurs after a downtrend.
Body inside previous days candle
One of the most powerful signals
Only Two Clues Needed
Color of candle doesn’t matter
Expected move back to swing high,
trend lines or moving averages
Swing High
Bullish Harami
13%+ Gain from Signal to High in 4 Weeks
Bullish Harami
Clue: Oversold Stochastics Turning Up
What are the Clues?
Bearish Harami
Swing Low
Only occurs after a Uptrend. Body
inside previous days candle
One of the most powerful signals
Color of candle doesn’t matter
Only Two Clues Needed
Expected move back to swing low,
trend lines or moving averages
Bearish Harami
-20% Drop from Signal to Low in 5 Weeks
Bearish Harami
Clue: Divergent Stochastics Turning Down
What are the Clues?
Kicker Signal
• Rare but very powerful
• 2 Day Pattern
• Investor Sentiment:
o Bullish Kicker: Downtrend, a capitulation like move down, followed the next day by a gap up move
o Bearish Kicker: Uptrend, Exhaustion move up, followed by a gap down move the next day
• Strong Reversal Clue: Clues Needed Two
Kicker
Swing High
Only occurs after a downtrend. Can
follow sell off gap down.
Very Powerful Signal
Next day opens up with a gap
Expected move back to swing high,
trend lines or moving averages
Gap up
Kicker—Bullish
13%+ Gain from Signal to High in 4 Weeks
Bullish Kicker
Clue: Stochastics Oversold
What are the Clues? How Many Are Needed?
Bearish Kicker
Swing Low
Only occurs after a uptrend. Can
follow exhaustion gap up.
Very Powerful Signal
Next day opens down with a gap
Expected move back to swing Low,
trend lines or moving averages
Gap Down
Kicker—Bearish
-19%+ Gain from Signal to 100 day SMA in 26 days
Bearish Kicker
Clue: Stochastics Divergence
What are the Clues? How Many Are Needed?
Live Examples
GO to the Charts!!