The Art & Science of Active Trend Trading

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1 Candlesticks Looking for U-Turns The Art & Science of Active Trend Trading Copywrite ATTS

2 Disclaimer 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 Copywrite ATTS

3 Big Part of Convergence of Clues? 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 Copywrite ATTS

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

4 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 Other Clues: Extremes on Indicators & Divergence Copywrite ATTS

5 Looking for Clues & 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 Copywrite ATTS

6 Candlestick History Charting method originating In Japan between the 18 th 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 Copywrite ATTS

7 Candlestick Basics 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 Copywrite ATTS

8 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 or pattern 3. The Preceding Trend Copywrite ATTS

9 What s the Difference? Bar Chart vs Candlesticks Bullish Bearish Close High Open Open Low Close Copywrite ATTS

Primary & Best Candlestick Signals There are many, many Candlestick Reversal Patterns but these represent the Primary & Best Indecisive Doji's/Spinning Tops Bullish Hammer Engulfing Patterns

10 Primary & Best Candlestick Signals There are many, many Candlestick Reversal Patterns but these represent the Primary & Best Indecisive Doji's/Spinning Tops Bullish Hammer Engulfing Patterns Piercing Line Harami Inverted Hammer Morning Star Kicker Doji Sandwich Bearish Hanging Man Engulfing Patterns Dark Cloud Harami Shooting Star Evening Star Kicker Doji Sandwich Copywrite ATTS

11 The Dynamic Doji Watch for Small Bodies - Doji s and Spinning Tops show indecision between buyers & sellers Neither side is in control! - 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 Copywrite ATTS

12 Doji/Spinning Top Bullish How Many Clues? Would be comfortable trading this of support at $62? 26%+ Move from Signal to High in one month Series of Doji s at Support & Clue: TSI Cross & Momentum Divergence Copywrite ATTS

13 How Many Clues? 1. Series of Doji s 2. Strong Support? 3. Crossing & Divergent Indicators 4. Break Above 8 day EMA Be a Detective: Search for Clues Copywrite ATTS

14 Hammers & Hanging Men - The Basics Shape Small Body Shadow must be 2X the Body Copywrite ATTS

15 Hammers & Hanging Men Understanding what the line tell us? - Buyers Wrestled control from sellers during the trading period but where it appears is equally important! R - Shows levels & zones of support and resistance What s Important Context & Convergence S 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 Copywrite ATTS

16 Quality of the Signal is determined by: Hammers & Hanging Men 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 Copywrite ATTS

17 Swing High Hammer Only occurs after a downtrend. Shadow must be 2X the Body Expected move back to swing high, trend lines or moving averages Hammer Support Copywrite ATTS

18 Hammer Convergence of Clues Note: The Follow on Bounces Have a Higher Probability of Success AAPL 11/16/12 What Happened Copywrite ATTS

19 Only occurs after an Uptrend. Shadow must be 2X the Body Expected move back to swing low, trend lines or moving averages Hanging Man Resistance Swing Low Copywrite ATTS

20 Hanging Man Convergence of Clues TNA What Happened Copywrite ATTS

21 Poor Quality Hammer or Hammer Failure Two Hammer examples: 1. Too Close to Resistance of Moving Averages 2. Appearing shortly after a new downtrend AAPL 10/2012 Copywrite ATTS

22 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 Copywrite ATTS

23 Secrets of Trading Hammers & Hanging Men Understand the Parts: Resistance Zone 1. Stays in effect until a close violates signal high or low Support Zone Action Points 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!) Copywrite ATTS

24 Secrets of Trading Hammers Opens in Wick Entry 2 Opens above yesterday s candle Entry 3 Stop From Entry 2 or 3 Opens in Wick Entry 1 Max Stop Any Entry Next Day Entries & Stops Hammer 1. Self confirming signals can be entered day of signal Copywrite ATTS

25 Secrets of Trading Hanging Men Max Stop Any Entry Opens in Top Wick Opens in Wick Entry 1 Opens in Lower Wick Next Day Entries & Stops Hammer 1. Self confirming signals can be entered day of signal Opens in Lower Wick Entry 2 Opens Below yesterday s candle Entry 3 Copywrite ATTS

26 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 and plan trade Action Points for Entry & Exit - Count the Clues Copywrite ATTS

27 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, trend lines or moving averages Swing Low Copywrite ATTS

28 Shooting Star What are the Clues? Shooting Star -25% Drop from Signal to Low in 5 Days Clue: Divergent TSI Copywrite ATTS

29 Evening Star Two Day Pattern Resistance Only occurs after a Uptrend. Body inside previous days candle 2 nd Down day closes at least ½ way down candle from 2 days prior Expected move back to swing low, trend lines or moving averages Swing Low Copywrite ATTS

30 Evening Star What are the Clues? Expectations? Evening Star Clue: Divergent Momentum Copywrite ATTS

31 Inverted Hammer Swing High Only occurs after a downtrend. Shadow must be 2X the Body Can be very powerful signal Expected move back to swing high, trend lines or moving averages Hammer Support Copywrite ATTS

32 Inverted Hammer What are the Clues? 28%+ Gain from Signal to High in 6 Weeks Inverted Hammer Clue: TSI Oversold Copywrite ATTS

33 Morning Star Two Day Pattern Swing High Only occurs after a downtrend. Body inside previous days candle 2 nd up day closes at least ½ way up candle from 2 days prior Expected move back to swing high, trend lines or moving averages Hammer Support Copywrite ATTS

34 Morning Star What are the Clues? How many do we need? Does the Morning Star really matter? 11%+ Gain from Signal to High in 2 Weeks 13%+ Gain from Second Signal in 2 Weeks Morning Star Copywrite ATTS

35 Bullish Engulfing Two Day Pattern Swing High Only occurs after a downtrend. Completely engulfs the previous days body. Expected move back to swing high, trend lines or moving averages Support Copywrite ATTS

36 Bullish Engulfing What are the Clues? 12.8%+ Gain from Signal to High in 6 weeks Bullish Engulfing Clue: Divergent TSI Copywrite ATTS

37 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 Copywrite ATTS

38 Bearish Engulfing What are the Clues? Bearish Engulfing 12.8%+ Gain from Signal to High in 6 weeks What s This? Clue: Divergent TSI Copywrite ATTS

39 Piercing Line Swing High Only occurs after a downtrend. Must open below and close more than ½ way up preceding candle. Expected move back to swing high, trend lines or moving averages Support Copywrite ATTS

40 Piercing Line What are the Clues? 70%+ Move from Signal to High in 2 Months Piercing Line Clue: TSI & Momentum Copywrite ATTS

41 Dark Cloud Resistance Only occurs after a uptrend. Must open above and close more than ½ way down preceding candle. Expected move back to swing low, trend lines or moving averages Swing Low Copywrite ATTS

42 Dark Cloud What are the Clues? Dark Cloud -9% Drop from Signal to Low in 2 days Clue: Weak TSI & Momentum Copywrite ATTS

43 Bullish Harami Swing High Only occurs after a downtrend. Body inside previous days candle One of the most powerful signals Only Two Clues Needed Color of candle doesn t matter Expected move back to swing high, trend lines or moving averages Copywrite ATTS

44 Bullish Harami What are the Clues? 13%+ Gain from Signal to High in 4 Weeks Bullish Harami Clue: TSI & Momentum Copywrite ATTS

45 Bearish Harami Only occurs after a Uptrend. Body inside previous days candle One of the most powerful signals Color of candle doesn t matter Only Two Clues Needed Expected move back to swing low, trend lines or moving averages Swing Low Copywrite ATTS

46 Bearish Harami What are the Clues? Bearish Harami -20% Drop from Signal to Low in 5 Weeks Clue: Divergent TSI & Momentum Copywrite ATTS

47 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 Copywrite ATTS

48 Swing High Kicker Only occurs after a downtrend. Can follow sell off gap down. Very Powerful Signal Next day opens up with a gap Expected move back to swing high, trend lines or moving averages Gap up Copywrite ATTS

49 Kicker Bullish 13%+ Gain from Signal to High in 4 Weeks What are the Clues? How Many Are Needed? Bullish Kicker Clue: TSI & Momentum Copywrite ATTS

50 Bearish Kicker Only occurs after a uptrend. Can follow exhaustion gap up. Very Powerful Signal Next day opens down with a gap Gap Down Expected move back to swing Low, trend lines or moving averages Swing Low Copywrite ATTS

51 Kicker Bearish What are the Clues? How Many Are Needed? Bearish Kicker -19%+ Gain from Signal to 100 day EMA in 26 days Clue: TSI & Momentum Copywrite ATTS

52 Doji Sandwich Very Powerful 2 Day Pattern Bullish or Bearish Investor Sentiment: o Bullish: Strong move up and a pause with a doji then a new strong move o Bearish: Strong move down and a pause with a doji then a strong move down Strong Clue: Clues Needed Two Copywrite ATTS

53 Doji Sandwich Bullish Uptrend Underway Doji forms after a large bullish candle Doji Next day forms a doji If prices open up the 3 rd day will likely move an equal distance as day 1 Copywrite ATTS

54 Doji Sandwich Bearish Swing High Down Trend Underway Doji forms after a large Bearish candle Doji Next day forms a doji If prices open down the 3 rd day will likely move an equal distance as day 1 Copywrite ATTS

55 Doji Sandwiches Bearish DS Bullish DS Copywrite ATTS

Dennis W. Wilborn, P.E. Founder, President Active Trend Trading dww@activetrendtrading.

Co-Host Weekly Market Stock Talk Webinar Show - Tech Tips at Market Tech Talk Channel - Affiliate with Market Technician Association - Trading

56 Dennis W. Wilborn, P.E. Founder, President Active Trend Trading Ph: Chief Technical Analyst for ATTS - Leads: Bay Area Money Makers for 8 years - Certified Candlestick Technician - Co-Host Weekly Market Stock Talk Webinar Show - Tech Tips at Market Tech Talk Channel - Affiliate with Market Technician Association - Trading System Researcher - Trading stocks since Trading Options since BS of University of Texas: Aerospace Engineering - MS s of Cal: Civil Engineering and City Planning Copywrite ATTS

The Art & Science of Active Trend Trading

CONNECTING THE DOTS Candlesticks & Convergence of Clues The Art & Science of Active Trend Trading Copyright ATTS 2007-2015 1 Dennis W. Wilborn, P.E. Founder, President Active Trend Trading dww@activetrendtrading.com