Candlestick and Pivot Point Trading Triggers phần 4 pdf

The chart in Figure 3.3 is a spot forex euro currencythat demonstrates the same setup and trigger that would enter a long posi-tion with %K and %D crossing over above the 20 percent line

higher closing high We have not yet discussed candle patterns; but forthose already familiar with that charting method, you will notice that it is ahigher close above the doji high The trigger to go long is on the close or thenext open, once the market makes a higher closing high, which in Figure 3.1would be at 10810

When the market trades near the daily projected resistance, as mined by using pivot point analysis, once prices start to make lower clos-ing lows, which is a clue that helps us identify that the uptrend hasconcluded That is what generates a sell signal at 10838 That would be aprofitable scalp of 28 points at $5 per point, which is $140 on a day tradingmargin of $500, which is what most futures brokerage firms charge

deter-STOCHASTICS CONFIRMS THE TURN

Now looking at the sell signal, we would have an opportunity to go short at

10838 as the market pivots and turns, as I say, off the resistance level as thestochastics confirms with a %K and %D hook sell signal once both linescross and close below the 80 percent line Follow the flow of the marketafter that point: lower highs, lower lows, and, more important, lower clos-ing lows all the way down to a low of 10739 That is a 99-point decline or

$495 per contract—almost a 100 percent return on your day trading margin

As the market declines, we see the stochastics crossing above and backbelow its respective values; but never does it cross back and close abovethe 20 percent line I am asked at what level do you take profits I will goover specific target exit levels later; but for right now, the most simplisticanswer is at the last trading price near 10758 The reason is that this wouldhave been a day trade; and as you can see from the bottom of the chart, theday is running short on time Profit objectives can be based not only onprice targets but also on time limits

Figure 3.2 shows a pattern similar to that in Figure 3.1: a higher closeabove a doji high Candle chart aficionados may see a variation of a morn-ing doji star pattern I keep it very simple; I call it an HCD pattern, which

stands for a high close doji This pattern has specific rules on entry and

exits and will be disclosed in just a bit For now, please focus your attention

on the fast stochastics, as %K and %D both confirm the trigger to go longonce both lines cross and close above the 20 percent line That trigger cor-responds on the close of the candle, which was 10756 As the market moveshigher, follow the flow again as the momentum builds The stochastics doesnot generate a sell signal, as the high was made at 10805 We see acrossover of %K and %D above the 80 percent line, but the stochastics doesnot close back under that line

The 20 percent and 80 percent levels in relationship with the %K and

%D values will help confirm your entries and exits in the markets, cially when you follow the trend or market flow as shown by the candlecharts There is a reason why I have focused on the high close doji signal,

espe-as we shall soon discover from a back-test study on percentile perspective.But once again, this chapter is to help you better understand the confirm-ing power that stochastics offers

Markets need volatility in order to move, and we need markets to move

in order to trade We also need to base our trading plans on reliable signals.Not all times do the setups that trigger an entry work as perfectly as inthese examples, which is why I have other confirming signals to corrobo-rate timing a trade signal I also like to see if the methodology works in a di-verse group, or noncorrelated markets Testing for robustness, or how well

a system or signal responds in different markets, helps validate the bility of that signal The chart in Figure 3.3 is a spot forex euro currencythat demonstrates the same setup and trigger that would enter a long posi-tion with %K and %D crossing over above the 20 percent line with a con-

relia-98 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS

FIGURE 3.2

RealTick graphics used with permission of Townsend Analytics, LTD.

firming higher closing high candle pattern The sell signal also works well

as confirmed when %K and %D both cross over and close back below the 80percent line

TIPS AND TRICKS TO HELP

There are other tips and tricks associated when using stochastics Thereare fast stochastics and slow stochastics The difference is in how the pa-rameters are set to measure the change in price This is referred to as a

gauge in sensitivity A higher rate of sensitivity will require the number ofperiods in the calculation to be decreased This is what “fast” stochasticsdoes It enables one to generate a faster and a higher frequency of tradingsignals in a short time period The previous two examples used the defaultfast stochastics settings, which help you discover the cycles of tops andbottoms faster than the slow stochastics setting will

FIGURE 3.3

RealTick graphics used with permission of Townsend Analytics, LTD.

Stochastics Patterns

One other method in which to use the stochastics indicator is trading off a

pattern called bullish convergence It is used in identifying market

bot-toms—where the market price itself makes a lower low from a previouslow, but the underlying stochastics pattern makes a higher low This indi-cates that the low is a “false bottom” and can resort to a turnaround for aprice reversal Figure 3.4 shows how prices make a secondary low signifi-cantly lower from a primary low, which is posted by a low in the stochas-tics indicator

The reverse of this signal is a trading pattern called bearish divergence.

It is used in identifying market tops—where the market price itself makes

a higher high from a previous high, but the underlying stochastic patternmakes a lower high This indicates that the second high is a “weak” highand can resort to a turnaround for a lower price reversal Figure 3.5 shows

100 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS

FIGURE 3.4

RealTick graphics used with permission of Townsend Analytics, LTD.

how the market makes a secondary high, but the corresponding high in thestochastics is at a lower level than the price charts’ primary high point.This stochastic pattern can alert you to a false breakout Notice the lowclose doji (LCD) off the secondary peak; and then as %K and %D both crossover and close back beneath the 80 percent line, a sell trigger is generated.That signal warns of an impending, prolonged downtrend of substantialproportion Therefore, it is important to monitor for divergence patterns.

Rules to Trade By

The bearish divergence pattern signals that there is an impending price versal ready to occur in a market As I mentioned previously, you can an-ticipate and get ready to place an order to act on the signal; but you shouldnot act until the confirmation of a lower closing low triggers the entry,which would be to act on the close or the next open Here are four rules toguide you to trading a stochastics divergence pattern:

re-FIGURE 3.5

RealTick graphics used with permission of Townsend Analytics, LTD.

1. The first peak in prices should correspond with a peak in the %K and

%D reading above the 80 percent level

2. The second peak must correspond to a significant higher secondaryprice high point

3. If the secondary stochastics peak is less than or under the 80 percentlevel, this signals a stronger sell signal

4. Prices should make a lower closing lower to confirm a trigger to enter

a short position Enter on the close of the first lower closing low or thenext open The protective stop should initially be placed above the high

of the secondary high

Figure 3.6 demonstrates a bearish divergence setup with the rules scribed This is a 15-minute candle chart on the CBOT mini-Dow The sec-ondary high is established at 10940 Both %K and %D make a primary highabove the 80 percent line, and the secondary high in price corresponds with

de-%K and %D below the 80 percent level Once the long dark candle closesbelow the prior low (in fact, it closes below five prior candles lows), a sellsignal is triggered The initial entry is made on that time period close or on

102 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS

FIGURE 3.6

RealTick graphics used with permission of Townsend Analytics, LTD.

the next open, which in this case is 10897 The stop is placed at 10945,above the high of the secondary peak high As you can see, the market con-tinues to decline into the close down to 10836, for a 61-point gain had youexited on the close That equates to a gain of $305 on a day trade margin of

$500 per contract Notice that as the market declines, the stochastics cator remains below the 20 percent line as the %K and %D cross multipletimes but never back above the 20 percent level to trigger a buy signal untilafter the electronic day session close, which is 4 P.M (CT)

indi-MACD

In simplest terms, moving average convergence/divergence is an indicator

that shows when a short-term moving average crosses over a longer-termmoving average Gerald Appel developed this indicator as we know ittoday, and he developed it for the purpose of stock trading It is now widelyused for short-term trading signals in stocks, futures, and forex markets, aswell as for swing and position traders It is composed of using three expo-nential moving averages The initial inputs for the calculations were a 9-pe-riod, a 12-period, and a 26-period The concept behind this indicator is tocalculate a value, which is the difference between the two exponential mov-ing averages, which then compares that to the 9-period exponential movingaverage What we get is a moving average crossover feature and a zero-lineoscillator, and that helps us to identify overbought and oversold marketconditions

I might add that because traders are now more computer savvy thanever before and because many charting software packages such as RealTick allow traders to change or optimize the settings or parameters, it

is easy to change, or “tweak,” the variables in Appel’s original calculations.Traders can increase the time periods in the moving average calculations togenerate fewer trade signals and can shorten the time periods to generatemore trade signals Just as is the case for most indicators, the higher thetime periods used, the less sensitive the indicator will be to changes inprice movements MACD signals react quickly to changes in the market—that is why a lot of analysts, including myself, use it It helps clear the pic-ture when moving average crossovers occur It measures the relativestrength between where current prices are as compared to past time framesfrom a short-term perspective to a longer-term perspective

The MACD indicator is constructed with two lines: One is the 9-periodexponential average (slow line), and the other is the difference between the12- and 26-period exponential moving averages (fast line) In general, whenthe fast line crosses above the slow line, a buy signal is generated; the op-posite is true for sell signals

The MACD also has a zero baseline component, called the histogram,

that is created by subtracting the slower signal line from the MACD line Ifthe MACD line is above the zero line, prices are usually trending higher Theopposite is true if the MACD is declining below the zero line The MACD is

a lagging indicator; that is, it is based off moving averages We want to lookfor the zero-line crossovers to identify market changes and to help confirmtrade entries or trigger action to exit a position As you can see in the e-mini–Standard & Poor’s (S&P) chart in Figure 3.7, the MACD readings crossback above the zero line, indicating a confirmed shift in momentum Thatzero-line cross helped filter out the bottoming process A long positionwould have been initiated at the close of the candle or at the next time pe-riod’s open at 1267.25, which resulted in an immediate price gain, carryingprices up over 1270

Clues that identify shifts in momentum as the market moves from oneextreme to another or from overbought to oversold to trigger a trading op-portunity can be identified with the aid of MACD readings in both the mov-ing average and the histogram component While profits are higher when

104 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS

FIGURE 3.7

RealTick graphics used with permission of Townsend Analytics, LTD.

buying the absolute bottom, that is a haphazard guessing game to play.Trading based on a set of rules and using a confirming indicator to identify

a change in price direction and then following that price movement are thekeys to making money in the markets Figure 3.8 shows an e-mini–S&P ex-ample; the intraday trend is established to be higher by 10 A.M., as the sym-metry of higher highs and higher lows exists The MACD confirms an HCDtrigger as the histogram bar crosses above the zero line, initiating a long at1234.75 Notice that the histogram bars continue to expand higher, con-firming that the bullish momentum is accelerating Identifying a zero-linecross is a powerful tool in confirming entries, and watching the progression

of the histogram bars may help you maintain a winning position

It is not in every single instance that we see the MACD signals work actly the same as Figure 3.9 demonstrates The histogram was not underthe zero line; therefore, a zero-line cross did not trigger However, observ-ing that the histogram bars move higher as prices start to advance wouldcertainly help confirm the strength of the uptrend

ex-FIGURE 3.8

RealTick graphics used with permission of Townsend Analytics, LTD.

RELY ON THE PATTERNS

Another method useful with the MACD indicator, and one that is more able for determining a trend reversal, is to identify the pattern called bull-ish convergence This is where the market price itself makes a lower lowfrom a previous low, but the underlying MACD pattern makes a higher low,

reli-as shown in Figure 3.10 This indicates that the second low is a weak, or

“false,” bottom and can resort in a turnaround for a sharp price reversal.This is similar to stochastics; however, since it is developed from movingaverages, the timing of the shorter-term versus the longer-term moving av-erages can delay such a signal There is a high probability that MACD andstochastics work more so than other indicators with this pattern

As you can see in Figure 3.10, which is a five-minute chart on Intel, themarket made a lower low in the next trading session where the MACD his-togram makes a higher low Notice the HCD signal Then as the price starts

to appreciate, the MACD histogram triggers or confirms a long positionwith a zero-line crossover, and the progressively higher histogram bars con-

106 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS

FIGURE 3.9

RealTick graphics used with permission of Townsend Analytics, LTD.

firm the positive momentum right into the close of the day The MACD is avery useful tool as a confirming indicator once you have entered in a posi-tion, especially by following the histogram readings.

The MACD has the same principles as far as a sell signal with what isknown as bearish divergence This is where the market price itself makes ahigher high from a previous high, but the underlying MACD crossover linesmake a lower high This indicates that the second high is a “weak” high andcan resort to a turnaround for a lower price reversal In Figure 3.11, a dailychart in the FX spot euro currency, the MACD histogram helps identifyboth bearish and bullish divergence patterns

One other useful method in using MACD is to follow as stated the

di-rection of the histogram bars to help confirm a turn or a change in trend.

Figure 3.12 shows the price advance in the e-mini–S&P as the market closes

in on a pivot point resistance level, and the market moves from a bullishcondition as prices move higher or in an overbought state and the his-togram readings start to expand over 300 As the market price conditionschange, as the close is below the open, and as the market makes the firstlower closing low, especially near the pivot resistance line, the histogram

FIGURE 3.10

RealTick graphics used with permission of Townsend Analytics, LTD.

bars start rolling down or making lower highs as well In a weak or trending market, the bars should also be making lower highs; and in thiscase, they are confirming a sell signal from the change in market condition

down-as well down-as the moving average crossover down-as prices trade under the movingaverage lines This last example is what we will be going over in later chap-ters as we combine pivot point analysis with candle patterns

SUMMARY

In conclusion, all oscillators, indicators, and most moving average studieswill give confirmation when a market shifts direction; and knowing thesesignals will help you identify a trading opportunity They also will help giveyou a clue when a market is in an extreme price condition, described asbeing overbought and oversold Therefore, as a trader, you need somethingthat gives you a better idea of entering a trade The next few chapters willreveal ways by which you will learn how to identify shifts in momentum be-fore looking at an indicator as confirmation Impossible, you say? Well,there are certain patterns such as the high close doji, the jackhammer can-dle pattern, a low close doji, or the shooting star formation that, when upagainst a projected pivot support or resistance line, will alert you to a tradeentry faster than using these traditional indicators When I introduce you tothe concept of using a pivot point moving average component as was used

in Figure 3.12, then you will see how it is possible

C H A P T E R 4

Momentum Changes

How to Spot Divergence

or Convergence

The battle to identify when a trend ends or when a trend will start is

one of the key elements on which traders make their bread and butter When a market reaches an unsustainable price extreme either

up or down, we want to be able to be prewarned so we can set up our ing account with the right contract sizes and preset the buy or sell orderand then wait for the trigger to act We have the traditional indicators that

trad-we trad-went over in Chapter 3 with stochastics and MACD (moving averageconvergence/divergence), but there is one more measure of data we havethat stock traders and longer-term futures traders have been using for over

a hundred years That one bit of data is called volume The one

disadvan-tage that foreign exchange (forex) traders have is that there is no way tomeasure volume data unless you “borrow” it from the futures markets, as Ishared in Chapter 1

VOLUME IS THE BEST PRICE CONFIRMATION

TOOL AND TREND INDICATOR

In Chapter 1, we went over the basic rule structure for volume analysis Buthow can we apply that to help confirm market price extremes? This is ac-tually fairly simple, if you know what to look for That is what this section

is designed for It does not matter what market you are trading, whether it

be stocks, futures, or forex The principles are the same and apply to allthree markets Remember that a good trader has a reason for entering a

trade A great trader waits until the signal triggers and then acts on that

sig-nal Just because a market goes up and is “too high” in value does not mean

it is going down, at least not until the signals are present Market price tremes are generally a reflection of high volatility; and with high volatilitycomes increased market participation or action, and that action is mea-sured or reflected by high volume

ex-OVERBOUGHT MARKET CONDITION—

A DEAD GIVEAWAY

If you drop a boulder off a cliff, it falls at a speed that is much greater thanthe speed of the boulder being pushed up a hill That is the analogy of whathappens when a bull market or uptrend stretches too far too fast, or is

“overbought.” So we look for these types of conditions in which to ride theprice direction if we are looking to establish a short position or we want toexit a long position before the boulder falls Using volume analysis in con-junction with indicators is a powerful tool to help you determine whether amarket price trend may continue Look at Figure 4.1 This chart on Amazon

112 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS

FIGURE 4.1

Used with permission of www.GenesisFT.com.

is a dead giveaway that the price appreciation was unsustainable; as wesee, the market moved from a bullish trend to a consolidation phase withhigher highs However the volume levels were declining, giving a directclue that the price advance was unsustainable When combined with thelow close doji pattern, which we will disclose in Chapter 8, and a shootingstar, there was no reason to stay long this market Notice that as pricesstarted to depreciate, the volume increased, which reflected sellers’ activeparticipation, which attracted more selling.

THE “COMEBACK” KID STOCK

In Figure 4.2, we see one of the greatest success stories in 2005 for any pany, Apple Computer It just could do no wrong, except when the price ofthe stock advanced too far too fast, culminating in an overbought unsus-tainable price extreme The fundamentals were quite rosy, as holiday saleswere through the roof on iPods and accessories You want to talk about a

com-FIGURE 4.2

Used with permission of www.GenesisFT.com.

racket; this company has products on top of products that accessorize theaccessories, none of which are inexpensive What a gold mine! Holidaysales were strong, and the market blasted off In fact, notice the gap up,then notice the gap down, leaving what we technicians call an island top.

(This formation is covered in Technical Trading Tactics on page 75.) It

also formed the low close doji pattern It really is the volume that helpedconfirm the market’s overbought condition As prices broke out of the side-ways pattern, from a high near 75 as it went onward to over 85, see the volume decline showing fewer market participants wanting to join theprice advance As the sell-off materialized, like a boulder falling off a cliff,more participants started selling as volume increased, signaling a strongprice reversal

BLOW-OFF TOPS ON VOLUME SPIKES

Volume levels help confirm the true strength of a price move if the marketdemonstrates a price increase If volume does not confirm the market’snew assigned value, something is wrong and a price reversal is imminent.Volume is also a great indicator of blow-off tops, or what is called an ex-haustion rally Volume spikes or surges can and do indicate price reversals,especially after a price advance on declining volume is preceded by a lack

of price follow-through As we study the chart in Figure 4.3, you see that thehuge price advance is accompanied with abnormal or heavier than usualvolume You would anticipate that a breakout to sharply higher levelswould occur The high volatility reflects the increased volume levels; and asthe next time frame shows, there is no follow-through to back the price ad-vance This is a clear sign of a price reversal The low close doji trigger alsoseals the deal that this was simply a one-day wonder rally that failed, and aprice reversal was to be expected

114 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS