To build a trading system really only requires three ingredients.
An entry point – A rule set to get you in the market.
A stop point – A rule set to get you out of the market when the market is not doing what you anticipated.
A exit point – A point at which you exit the market with profits
This is really pretty straight forward and should be easy to do one would think. In my honest opinion a strict rule set for all three is absolutely necessary, without this you are doomed to failure. There is still discretion involved but the market needs to meet a set requirement for you to act. So lets look at each ingredient and some examples that would fit each ones needs. Read the full story
Patterns like this don’t form all the time but when they do they can be profitable. My approach with a trade like this is await a retrace to the bottom trend-line and then look to add some more size to the position. As this is a risk free trade if it gets stopped out well no gain but the potential is worth the risk of losing nothing and maybe the possibility of building a large position.
I am not going to go into to much depth about the history or design of the candlestick chart. Just Google candlestick charting and you will be inundated with information on this style of charting. Here is a link to a site I feel defines it quite well so feel free to peruse this page before reading the rest of this post. Candlestick Charts
Just on the subject of color, with today’s charting packages you can change the colors of the candles to anything that takes your fancy. I generally use red candles to define a bear candle (sellers are in charge) and blue, green or white to define a bull candle (buyers are in charge). I tend to change these colors regularly as it just changes the appeal of the chart. It can get a bit stale looking at the same colors all of the time.
I primarily look at candlesticks to identify reversals in price. Preferably I like to see price retrace against the trend and then form a reversal at a significant level. This I feel is an ideal place for me to enter a position because it identifies two things for me.
Firstly it identifies a turning point in the market
Secondly, as I am assuming this is a market turning point, then it also gives me an ideal place to place my stop loss order. I generally place it 10 to 15 pips below the lowest point of the reversal pattern.
I have two patterns that I use consistently that I have found to be reliable enough to use as additional indicators in my weight of evidence strategy. I say this because I don’t use any one indicator in a vacuum as such. What I look for in my trading is multiple key indicators to line up at the one time. These indicators then complement each other and reinforce my decision to take a trade. The two patterns I prefer are:
The first, I refer to as twin towers because this is what they look like to me. It is where one candle is the same size as the previous candle or completely engulfs the previous candle. What I am really looking for is a complete reversal of control. For example, a large bull candle indicates the bulls are in charge, but if this is then followed by an equally large bear candle, this signifies that the bulls have completely lost control and the bears are now in charge. Here are some examples on a chart to help identify these patterns.These are not complicated patterns and are very easy to identify. Just pull up any candlestick chart of any instrument. Pick a time frame and observe for yourself, just how reliable this pattern is and then form your own conclusions. For me it is a no brainer.
click image for larger view
The second pattern has a lot of names, it can be called a pin bar, a lwc (long wicked candle), a shooting star, a hanging man and the list goes on. I like to call them pin bars because that is what they look like, A PIN. This is a single candlestick pattern whereas the twin towers is a multiple candlestick pattern. Both these patterns signify the same thing, the transfer of control from the bulls to the bears or vice versa. I use this pattern exactly the same way I use the twin tower pattern so I will insert a chart depicting this particular pattern.
I prefer the wick of the candle to be at least three times the length of the body and negligible on the other side, candles 1 and 4 are great examples of this.
These are the only two patterns that I regularly use in my trading. There are literally dozens of candlestick patterns and no doubt all very effective used in the right way. I try to keep my trading as simple as I can and thus limit myself to just the two of these patterns.
Candles do play an important role in a lot of traders trading and therefore are definitely worthwhile further researching. Some books that are definitely worth a read are:
There are many ways to define the trend of an instrument, following are the methods I use to determine the trend and ultimately the direction I am looking to place my trades.
The first tool I use is straight from Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets. It is a 30 period simple moving average. When it is rising, the trend is up. When it is falling, the trend is down. When it is flat, the trend is neither up or down.
The second tool I use is to observe the price chart and take note of where the highs and lows are formed on the chart. If price is forming Higher highs and higher lows, it is trending up.
A downtrend is the exact opposite of an uptrend. Price will be forming lower lows and lower highs. I prefer both these tools to be in unison prior to placing a trade. For example, for a long position, I want the moving average to be rising and price to be forming higher lows and higher highs.
The only question we still have to ask now, is how do we know when the trend has changed. This is a relatively simple process as well. Imagine price is currently forming higher lows and higher highs. What we would look for is price to form a lower high and then a lower low. Generally by the time this has happened, the 30 period simple moving average will be moving down also. The following chart shows this clearly.
These are very basic strategies for determining the trend but also extremely effective. Note that the above chart is a weekly chart of the Dow Jones Industrial Average and also note that the trend changed about January 2008. Imagine if the so called experts or the general public utilized these methods to trade the stock market. I am confident that anyone using these methods during the 2008/09 financial crisis would have experienced positive outcomes. If you haven’t read Stan’s book I highly recommend it.
. It is a 30 period simple moving average. When it is rising, the trend is up. When it is falling, the trend is down. When it is flat, the trend is neither up or down.
