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 Ph: 808-366-0397 - Chief Technical Analyst for ATTS - Leads: Bay Area Money Makers for 8 years - Certified Candlestick Technician - Co-Host Weekly How to Make Money Trading Stocks Webinar Show - Tech Tips at Market Tech Talk Channel - Affiliate with Market Technician Association - Trading System Researcher - Trading stocks since 1987 - Trading Options since 1999 - BS of University of Texas: Aerospace Engineering - MS s of Cal: Civil Engineering and City Planning Copyright ATTS 2007-2015 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 2007-2015 Copyright ATTS 2007-2015 3
Why Connect the Dots? 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 Copyright ATTS 2007-2015 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 Minor Clue: Extremes on Indicators & Divergence Copyright ATTS 2007-2015 5
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 Copyright ATTS 2007-2015 6
A Quick Review 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 Copyright ATTS 2007-2015 7
A Quick Review 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 Copyright ATTS 2007-2015 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 of pattern 3. The Preceding Trend Copyright ATTS 2007-2015 9
What s the Difference? Bar Chart vs Candlesticks Bullish Bearish Close High Open Open Low Close Copyright ATTS 2007-2015 10
Primary & Best Candlestick Signals There are many, many Candlestick Patterns but these represent the Primary & Best Indecisive Doji's/Spinning Tops Bullish Hammer Engulfing Patterns Piercing Line Harami Inverted Hammer Morning Star Kicker Bearish Hanging Man Engulfing Patterns Dark Cloud Harami Shooting Star Evening Star Kicker Copyright ATTS 2007-2015 11
The Dynamic Doji - Doji s and Spinning Tops show indecision between buyers & sellers - 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 Copyright ATTS 2007-2015 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 Copyright ATTS 2007-2015 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 2 1 3 Copyright ATTS 2007-2015 14
Hammers & Hanging Men - The Basics Shape Small Body Shadow must be 2X the Body Copyright ATTS 2007-2015 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 Copyright ATTS 2007-2015 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 Copyright ATTS 2007-2015 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 Copyright ATTS 2007-2015 18
Hammer Convergence of Clues Note: The Follow on Bounces Have a Higher Probability of Success AAPL 11/16/12 What Happened Copyright ATTS 2007-2015 19
Only occurs after a Uptrend. Shadow must be 2X the Body Expected move back to swing low, trend lines or moving averages Hanging Man Resistance Swing Low Copyright ATTS 2007-2015 20
Hanging Man Convergence of Clues TNA 5-3-11 What Happened Copyright ATTS 2007-2015 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 Copyright ATTS 2007-2015 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 4-2013 Copyright ATTS 2007-2015 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!) Copyright ATTS 2007-2015 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 Copyright ATTS 2007-2015 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 Copyright ATTS 2007-2015 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 to plan trade Action Points for Entry & Exit - Count the Clues Copyright ATTS 2007-2015 27
End of Part 1 Copyright ATTS 2007-2015 28
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 2007-2015 Copyright ATTS 2007-2015 29
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 Copyright ATTS 2007-2015 30
Shooting Star Shooting Star What are the Clues? -25% Drop from Signal to Low in 5 Days Clue: Divergent Stochastics Copyright ATTS 2007-2015 31
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 Copyright ATTS 2007-2015 32
Evening Star What are the Clues? Expectations? Evening Star Clue: Divergent Stochastics Copyright ATTS 2007-2015 33
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 Copyright ATTS 2007-2015 34
Inverted Hammer What are the Clues? 28%+ Gain from Signal to High in 6 Weeks Inverted Hammer Clue: Stochastics Oversold Copyright ATTS 2007-2015 35
Morning Star Two Day Pattern 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 Copyright ATTS 2007-2015 36
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 Copyright ATTS 2007-2015 37
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 Copyright ATTS 2007-2015 38
Bullish Engulfing What are the Clues? 12.8%+ Gain from Signal to High in 6 weeks Bullish Engulfing Clue: Divergent Stochastics Copyright ATTS 2007-2015 39
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 Copyright ATTS 2007-2015 40
Bearish Engulfing What are the Clues? Bearish Engulfing 12.8%+ Gain from Signal to High in 6 weeks What s This? Clue: Divergent Stochastics Copyright ATTS 2007-2015 41
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 Copyright ATTS 2007-2015 42
Piercing Line What are the Clues? 70%+ Move from Signal to High in 2 Months Piercing Line Clue: Oversold Stochastics Copyright ATTS 2007-2015 43
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 Copyright ATTS 2007-2015 44
Dark Cloud What are the Clues? Dark Cloud -9% Drop from Signal to Low in 2 days Clue: Weak Stochastics Copyright ATTS 2007-2015 45
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 Copyright ATTS 2007-2015 46
Bullish Harami What are the Clues? 13%+ Gain from Signal to High in 4 Weeks Bullish Harami Clue: Oversold Stochastics Turning Up Copyright ATTS 2007-2015 47
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 Copyright ATTS 2007-2015 48
Bearish Harami What are the Clues? Bearish Harami -20% Drop from Signal to Low in 5 Weeks Clue: Divergent Stochastics Turning Down Copyright ATTS 2007-2015 49
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 Copyright ATTS 2007-2015 50
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 Copyright ATTS 2007-2015 51
Kicker Bullish 13%+ Gain from Signal to High in 4 Weeks What are the Clues? How Many Are Needed? Bullish Kicker Clue: Stochastics Oversold Copyright ATTS 2007-2015 52
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 Copyright ATTS 2007-2015 53
Kicker Bearish What are the Clues? How Many Are Needed? Bearish Kicker -19%+ Gain from Signal to 100 day SMA in 26 days Clue: Stochastics Divergence Copyright ATTS 2007-2015 54
Follow Thru approximately same range as candle prior to the doji Doji Sandwich Rare Signal: Appears after strong up move Price movement pauses gives back very little of large gain forms a Doji Rule of the Doji price goes the direction of the open Doji Price moves up approximately the same range as candle prior to the Doji Daily & Weekly Patterns Bearish Doji Sandwiches also work! Strong Move up Copyright ATTS 2007-2015 55
Doji Sandwich What are the Clues? How Many Are Needed? Doji Sandwich 5.4% Gain to Breaking 8 day EMA and Flag Trend What s This? Clue: TSI Positive Copyright ATTS 2007-2015 56
Live Examples GO to the Charts!! Copyright ATTS 2007-2015 57