Lighting the Way: Using Candlestick Patterns The Art & Science of Active Trend Trading
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.
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
Candles and Technicals Candles Show Us When! Techncials show us how much! $$$$ Powerful Tools Only partially understood by most traders Immediate feedback on investors sentiment Clarify Misconception and Simplify Candle Usage Greatly improve Reward/Risk on every trade in all time frames Be a detective Look for the Convergence of Clues Presentation Material by: The Candlelight Trader
Patterns and Trade Set Ups Part 1
Golden Rule Candlesticks and patterns require three criteria for proper interpretation: 1. A Completed Line 2. Shape of the line of pattern 3. The Preceding Trend
Basic & Best Candlestick Signals Best Candlestick Reversal Signals Doji/Spinning Tops Engulfing Patterns Hammer/Hanging Man Piercing Line Dark Cloud Harami Shooting Star Morning Star Evening Star Inverted Hammer Kicker
Supporting Clues Non Candlestick Supporting Clues Moving averages (8 EMA, 20 SMA, 50 SMA) Trends Support/Resistance Stochastics (12/3) Voided Patterns Daily & Weekly Charts
Basic Trading Checklist Trade Top Quality Growth Stock from IBD 50, Leaderboard or other IBD sources Define Support & Resistance (Horizontal) Define Trend Define Trading Timeline Look for Convergence of Clues Establish Reward/Risk on every trade (it s easier than you think) Establish Targets and Proper Exits Be very careful TRADING BEFORE NEWS or NUMBERS
Sample Patterns Single Candles & In Context
What do Candlesticks tell us immediately? - Single Candlesticks tell us immediately, who won the battle that day (Buyers or Sellers) - This translates to being able to visually determine investor sentiment - What does this do for you and your planning your trades? - In combination with trend, other candles, moving averages, i.e.; other clues they are predictive of potential trend reversals or pauses in existing trend
What do Candlesticks tell us immediately? - Every Single Candlestick tell us immediately, who won the battle that hour, day, week or month Close High Open Open Low Close Buyers Sellers
What do Candlesticks tell us immediately? - Single Candlesticks tell us immediately, who won the battle that day Who Won the Battle? Bulls Bears Indecisive Trend tells us Who s Winning the War
Presentation Material by: The Candlelight Trader Comparison
Doji/Spinning Tops - Doji s show indecision between buyers & sellers - Clue: When present at past support or moving averages potential trend reversal or break out - Price Action will tend to move in the direction of the open after a Doji/Spinning Top Indecision: More than one shows greater Indecision
Doji/Spinning Top Bullish 26%+ Gain from Signal to High in one month Series of Doji s at Support & Clue: Oversold Stochastics
Doji/Spinning Top Bearish Series of Doji s at Resistance Notice how after the series of doji s resistance was tested and then failure Clue: Overbought Stochastics & Divergent -15% drop from signal to stop
Bullish Engulfing 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
Bullish Engulfing 12.8%+ Gain from Signal to High in 6 weeks Bullish Engulfing Clue: Divergent Stochastics
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 Clue: Divergent Stochastics
Hammer Swing High Only occurs after a downtrend. Shadow must be 2X the Body Expected move back to swing high, trend lines or moving averages Hammer Support
Hammer 21%+ Gain from Signal to High in 6 weeks Hammer Clue: What s the other clue? Clue: Oversold Stochastics
Hanging Man Resistance Only occurs after a Uptrend. Shadow must be 2X the Body Expected move back to swing high, trend lines or moving averages Swing Low
Hanging Man Hanging Man: Two of them & More. -17% Drop from 2 nd Signal to Low in 2 weeks Clue: Overbought Stochastics
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
Piercing Line 70%+ Gain from Signal to High in 2 Months Piercing Line Clue: Oversold Stochastics
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 high, trend lines or moving averages Swing Low
Dark Cloud Dark Cloud -9% Drop from Signal to Low in 2 days Clue: Overbought Stochastics
Bullish Harami Swing High Only occurs after a downtrend. Body inside previous days candle One of the most powerful signals Color of candle doesn t matter Expected move back to swing high, trend lines or moving averages
Bullish Harami 13%+ Gain from Signal to High in 4 Weeks Bullish Harami Clue: Oversold Stochastics
Bearish Harami Only occurs after a Uptrend. Body inside previous days candle One of the most powerful signals Color of candle doesn t matter Expected move back to swing high, trend lines or moving averages Swing Low
Bearish Harami Bearish Harami -20% Drop from Signal to Low in 5 Weeks Clue: Divergent Stochastics
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 high, trend lines or moving averages Swing Low
Shooting Star Shooting Star -25% Drop from Signal to Low in 5 Days Clue: Divergent Stochastics
Morning Star Swing High Only occurs after a downtrend. 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 high, trend lines or moving averages Hammer Support
Morning Star 11%+ Gain from Signal to High in 2 Weeks Morning Star Clue: Stochastics @ Support
Evening Star 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 high, trend lines or moving averages Swing Low
Evening Star Evening Star Clue: Divergent Stochastics
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
Inverted Hammer 30%+ Gain from Signal to High in 6 Weeks Inverted Hammer Clue: Stochastics Oversold
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 Reverse signal at for a bearish Kicker
Kicker Bullish 13%+ Gain from Signal to High in 4 Weeks Bullish Kicker Clue: Stochastics Oversold
Kicker Bearish Bearish Kicker -7%+ Gain from Signal to Low in 2 Weeks Clue: Stochastics Divergence
Test Yourself
What would you do? Buy, Sell or Hold?
What would you do? Buy, Sell or Hold?
What would you do? Buy, Sell or Hold? Candle Line?
And Now? What would you do? Buy, Sell or Hold?
Want to go again?
Now what? Buy or Wait?
Confirmation?
Left Right Combo
Take a Break Part 2 begins in 10 Minutes
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