Daily Candlestick Triggers

[MrPaul]

Hey Everyone,

I'm going to post a chart here every time a valid day trade-able candlestick trigger appears on the Russell 2k futures. This thread is intended for people who want to learn about day trading with candlesticks and also because I am bored easily and this is fun for me.

All charts I post here will be off actual signals I take during the trading session so thats why it will be mostly limited to the ER2 contract. But if anyone has any other ideas feel free to post up.

First chart May 13th 2007 10min period ER2

Within the red circle we see a shooting star candle, confirmation of this bearish candle is made with the second red arrow 2 candles later. This is important; In order for the shooting star candle to be deemed valid it must have a candle close below it, not just penetrate the lows "intra-candle". The stop is placed mentally above the shooting star.

If you miss that because you were takin' a pee and then your grandma called and you had to chat just for 40 minutes that's okay because there was a continuation pattern OR for you a second chance signal made by a doji and a close below it marked by the third and fourth red arrows. Remember for any signal to be made valid a CLOSE must be made by the candle after it. This is the technical signal to take action. The stop here is a few ticks above the doji high.

Second chart May 13th 2007 30min period (for you patient people:p )

A spinning top/Doji type candle form showing indecision among us traders exemplified by the blue arrow. The next candle makes a close below that low signaling a short. Why is this? Because doji's show indecision and we have made up our minds that price is better off below that point by closing it below the doji (there are still many of us waiting to join in that sentiment!) shown by the green arrow.

Notice that on the 30 minute price never closes above it's previous 30min high!


Okay, thats it for today these post should get better as time goes on and I become less stupid...

[walterw]

Nice and simple Mr Paul, as at this point I am thirstie of simplification... I atach another setup there... could that also be valid ? cheers Walter.

[trader273]

I'd be careful of using candle patterns as reversal of the trend. I did this for a while and got killed. Had some ups, but mostly downs. The trick is to use the candle patterns to go with the overall trend. It is weird since all the books and websites show candle patterns as calling tops and bottoms. But if you look at a chart they do call tops and bottoms, but how many false signals were in between. If you fight the path of the train you will get run over.
Just my .02

[walterw]

trader you have a good point, now candles patterns is one of the many ways to see price action, if you add to that volume analisis plus key levels I believe you would have something more robust.... now unfortunatly more complicated too... jejejeje what Mr Paul is showing is how the overrall market sentiment was clearly talking thru price action.... not necesarily a candle pattern... I think there is a great diference to look for price action THRU candle patterns than looking just for candle patterns by itself, we all know it want make you succesfull... cheers Walter.

[MrPaul]

Thanks for the input guys

I will typically only take a reversal trade on a confirmed long wicked hammer,shooting star, or engulfment at a cluster of S/R, pivot levels, or range fade.

I have a good example from Friday. Range bound day with premarket news. Market forms a high wave and then shooting star candle (blue arrow) indicating lacking demand for higher prices, I wait until a lower close confirms the star (red arrow) and go short.

Price trades down until long wicked hammer forms showing demand accelerating and supply drying up near that area, price trades up until a bearish engulfing (blue arrow) takes over indicating that supply is greater than demand and short sellers have stepped in. I will typically trade the close of an engulfing candle but in a low volume environment it is often best to get extra confirmation of momentum through a closing candle (red arrow).

Once again price trades down unto an area of known temp support and a hammer forms(blue arrow) confirmation is made a couple candles after that (red arrow) and short sellers get squeezed into the close.

Hope that helps the people who are still getting an idea of how to use candles intra day. The important thing Walter and Trader273 mentioned was that price is not reacting to the candles and you always must consider the overall sentiment and trend of the market.

Price does not reverse because of a hammer, thats just the imprint price leaves behind when an overwhelming number of buyers enter the market and the sidelined players then join in to fuel the momentum upward.

The secret to candlestick trading is not just being able to identify a hammer vs a flying zebra (haha), it is knowing when to use them as a tool in an overall scheme.

[MrPaul]

Today was a great day to be using Candlestick and volume analysis. There were many setups today that could have been taken, some very high probability,some medium...Looking at a few charts here you may notice something interesting.

First chart May 14th 2007 5min period ER2

Right at the open on a 5 minute chart we see a rejection of price formed by a hanging man candle (red arrow). A hanging man candle shows that although price traded lower during that period long positions were accumulated by some of us and if price trades any lower we might have to liquidate therefore fueling any downward momentum. In the case of a hanging man it is essential like all other candle patterns that you wait for confirmation. That confirmation was made by a close below the low of the hanging man (blue arrow), basically putting any one who was long in a bad spot. A good place to take profits was when the supply started to dry up and demand began to pick up forming a hammer like candle near the bottom on the swing.

The next pair of red arrows shows us that higher prices are not really making us feel good and we wanted to wait and see what might happen before committing too much money. A few narrow range candles kept us waiting until we finally decide that lower prices is where it's at. This is indicated by a close below the doji (blue arrow).

Second chart May 14th 2007 10min period

Lets look at that second trade on a 10min chart, it's much more clear and is the reason I like to monitor the 5,10,15, and 30 minute charts at the same time. You never know on what time frame the best signal will appear. On this chart we see much more clearly a doji candle form (red arrow) and a close below it (blue arrow) indicate a trigger to sell. It is also very clear that price at that level was not attracting the attention it wanted because volume was like "See ya later, I'd rather be headed South..catch ya' then". Of course if your charts actually talk to you that may be a cause for concern.

None the less I wanted to stress the importance of watching multiple time frames in real time together to find where the clearest signals for that day are being produced throughout the day.

Third chart May 14th 2007 30min period

Speakin' of, remember yesterday where the 30min popped off a doji and never closed above it's last period highs after closing below it? Today it was on vacation and didn't feel like giving much indication at all. The 30 minute time frame trader was left scratching their head while the 5 and 10 minute traders were filling bank bags. Much the opposite of yesterday...

Oh and on a side note some of you may be thinking well that's great but what about all that other action that happened after the moves you pointed out! Well all I can say is that movement really caught me off guard and as I read on Dr. Steenbargers blog earlier today you shouldn't be confusing market movement with market opportunity.

[walterw]

Very good stuff MR Paul ¡¡¡ simple and powerfull, the best of two worlds perfectly combined.... Candles (price action) and Volume (Smart money analisis ).... in a very neet simple presentation.... I perfectly agree on looking on multiple time frames, you know, probably this week has been the first in years I am looking and enjoying time based charts... they show much better this candle and volume patterns.... I honestly enjoy the 5 min chart as I like to trade more small time frames... please keep sharing, very good educational inputs ¡¡ thanks Walter.

[walterw]

Mr Paul : can you add on the next charts you post the S&R levels you are taking into acct... (horizontal lines of pivots, mp levels, etc) that could show the entire trio... S&R, Candle and Volume... cheers Walter.

[Robert2617]

I just bought this book.

Candlestick Charting Explained: Timeless... - Google Book Search

[walterw]

you can also find a very simple and clear introduction to candles here Chart Analysis - StockCharts.com