connecing the dots candlesticks &...

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


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


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

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


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


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,


Swing Low

Shooting Star

-25% Drop from Signal to Low in 5 Days

Shooting Star


What are the Clues?

Evening Star—Two Day Pattern

Resistance Only 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 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


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%+ 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.



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

What are the Clues? How Many Are Needed?

Live Examples

GO to the Charts!!

connecing the dots candlesticks &...

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