CONNECTING THE DOTS Candlesticks & …...Primary & Best Candlestick Signals There are many, many...

The Art & Science of Active Trend Trading

CONNECTING THE DOTS

Candlesticks & Convergence of Clues

Copyright ATTS 2007-2015 1

Dennis W. Wilborn, P.E.

Founder, President

Active Trend Trading

[email protected]

Ph: 808-366-0397

- Chief Technical Analyst for ATTS

- Leads: Bay Area Money Makers for 8 years

- Certified Candlestick Technician

- Co-Host Weekly “How to Make Money Trading Stocks” Webinar Show

- Tech Tips at Market Tech Talk Channel

- Affiliate with Market Technician Association

- Trading System Researcher

- Trading stocks since 1987

- Trading Options since 1999

- BS of University of Texas: Aerospace Engineering

- MS’s of Cal: Civil Engineering and City Planning


mailto:[email protected]

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.

All Materials Copyrighted ATTS 2007-2015

Disclaimer


Why Connect the Dots?

• Establishing the Convergence of Multiple Clues provides objective measurements for trades with improved probabilities

• Provides greater understanding of expectations

• Helps Minimize Risk & Maximize Profit

Today’s Objective: Provide a simple means of grading potential set ups before pulling the trigger! Combining the clues of candlesticks, support/resistance, momentum and moving averages


Primary & Best Clues that Must Converge for a

Higher Probability Trade

Price Related Clues: Major Clues

Horizontal Support Zones

Horizontal Resistance Zones

Trend Lines

Flag Lines

Moving Averages for Trend

Moving Averages for Support

Moving Averages for Resistance

Candlesticks

Minor Clue: Extremes on Indicators & Divergence


Connecting The Dots

Before taking a Bullish Reversal Signal during a Downtrend

o At least two or three clues must converge (be observable)

Before taking a Bearish Reversal Signal during a Uptrend

o At least two or 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

OpenClose

Close

Bullish Bearish

Low

High


Primary & Best Candlestick Signals

There are many, many Candlestick Patterns but these represent the Primary & Best

Indecisive

Doji's/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: TSI Cross & Momentum Divergence

26%+ Move from Signal to High in one month

&

How Many Clues?

Would be comfortable trading this of support at $62?


Be a Detective: Search for Clues

12

3

How Many Clues?1. Series of Doji’s2. Strong Support?3. Crossing & Divergent

Indicators

4. Break Above 8 day EMA


Hammers & Hanging Men

- The Basics ShapeSmall Body

Shadow must be 2X the Body



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 Candlestick

3. Magnitude/Range of the line—Bigger Better!

4. Other Clues

5. Defining Expectations & Failure of the Signal

R

S



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.


Expected move back to swing high,

trend lines or moving averages

Swing High


Hammer Convergence of Clues

AAPL 11/16/12


Note: The Follow on

Bounces Have a Higher

Probability of Success

What Happened

Hanging ManOnly 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 5-3-11What 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!)

SupportZone

ResistanceZone

ActionPoints


Secrets of Trading Hammers

Next Day Entries & Stops Hammer

1. Self confirming signals can be entered day of signal

Opens in WickEntry 2


Max Stop Any Entry

Stop From Entry 2 or 3

Opens above yesterday’s candleEntry 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


Max Stop Any Entry

Opens Below yesterday’s candleEntry 3

Opens in Lower Wick

Opens in Lower WickEntry 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


End of Part 1


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.

All Materials Copyrighted ATTS 2007-2015

Disclaimer


Shooting Star

ResistanceOnly 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,


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

ResistanceOnly occurs after a Uptrend. Body


2nd Down day closes at least ½ way

down candle from 2 days prior



Swing Low


Evening Star


What are the Clues?Expectations?

Evening Star


Inverted Hammer

Hammer Support



Can be very powerful signal



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




Morning Star

11%+ Gain from Signal to High in 2 Weeks13%+ 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


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


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.



Swing High


Piercing Line

70%+ Move from Signal to High in 2 Months

Piercing Line

Clue: Oversold Stochastics

What are the Clues?


Dark Cloud

ResistanceOnly occurs after a uptrend. Must

open above and close more than ½

way down preceding candle.



Swing Low


Dark Cloud

-9% Drop from Signal to Low in 2 days

Dark Cloud

Clue: Weak Stochastics

What are the Clues?


Bullish Harami


Body inside previous days candle

One of the most powerful signals

Only Two Clues Needed




Swing High


Bullish Harami


Bullish Harami

Clue: Oversold Stochastics Turning Up

What are the Clues?


Bearish Harami

Swing Low

Only occurs after a Uptrend. Body


One of the most powerful signals


Only Two Clues Needed




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



Gap up


Kicker—Bullish


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,


Gap Down


Kicker—Bearish

-19%+ Gain from Signal to 100 day SMA in 26 days

Bearish Kicker

Clue: Stochastics Divergence



Doji Sandwich

Strong Move up

Rare Signal: Appears after strong up

move

Price movement pauses gives back

very little of large gain forms a Doji

Rule of the Doji—price goes the

direction of the open

Price moves up approximately the

same range as candle prior to the Doji

Daily & Weekly Patterns

Bearish Doji Sandwiches also work!

Doji


Follow Thru approximately

same range as candle prior to

the doji

Doji Sandwich

5.4% Gain to Breaking 8 day EMA and Flag Trend

Doji Sandwich

Clue: TSI Positive



What’s This?

Live Examples

GO to the Charts!!


CONNECTING THE DOTS Candlesticks & …...Primary & Best Candlestick Signals There are many, many...

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Transcript of CONNECTING THE DOTS Candlesticks & …...Primary & Best Candlestick Signals There are many, many...