Candlestick and pivot point trading triggers setups for stock forex and futures markets 2007 phần 4 pot

higher closing high. We have not yet discussed candle patterns; but for those already familiar with that charting method, you will notice that it is a higher close above the doji high. The trigger to go long is on the close or the next open, once the market makes a higher closing high, which in Figure 3.1 would be at 10810. When the market trades near the daily projected resistance, as deter- 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 has concluded. That is what generates a sell signal at 10838. That would be a profitable scalp of 28 points at $5 per point, which is $140 on a day trading margin of $500, which is what most futures brokerage firms charge. 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 the stochastics confirms with a %K and %D hook sell signal once both lines cross and close below the 80 percent line. Follow the flow of the market after 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 back below its respective values; but never does it cross back and close above the 20 percent line. I am asked at what level do you take profits. I will go over specific target exit levels later; but for right now, the most simplistic answer is at the last trading price near 10758. The reason is that this would have been a day trade; and as you can see from the bottom of the chart, the day is running short on time. Profit objectives can be based not only on price targets but also on time limits. Figure 3.2 shows a pattern similar to that in Figure 3.1: a higher close above 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 long once 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 moves higher, follow the flow again as the momentum builds. The stochastics does not generate a sell signal, as the high was made at 10805. We see a crossover of %K and %D above the 80 percent line, but the stochastics does not close back under that line. The 20 percent and 80 percent levels in relationship with the %K and How to Read Oscillators to Spot Overbought or Oversold Conditions 97 c03.qxd 9/25/06 8:22 AM Page 97 %D values will help confirm your entries and exits in the markets, espe- cially when you follow the trend or market flow as shown by the candle charts. There is a reason why I have focused on the high close doji signal, 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 in these 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 relia- bility of that signal. The chart in Figure 3.3 is a spot forex euro currency that 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- 98 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 3.2 RealTick graphics used with permission of Townsend Analytics, LTD. c03.qxd 9/25/06 8:22 AM Page 98 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 80 percent line. TIPS AND TRICKS TO HELP There are other tips and tricks associated when using stochastics. There are 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 of periods in the calculation to be decreased. This is what “fast” stochastics does. It enables one to generate a faster and a higher frequency of trading signals in a short time period. The previous two examples used the default fast stochastics settings, which help you discover the cycles of tops and bottoms faster than the slow stochastics setting will. How to Read Oscillators to Spot Overbought or Oversold Conditions 99 FIGURE 3.3 RealTick graphics used with permission of Townsend Analytics, LTD. c03.qxd 9/25/06 8:22 AM Page 99 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 previous low, 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 a price 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 pattern makes a lower high. This indicates that the second high is a “weak” high and 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. c03.qxd 9/25/06 8:22 AM Page 100 how the market makes a secondary high, but the corresponding high in the stochastics is at a lower level than the price charts’ primary high point. This stochastic pattern can alert you to a false breakout. Notice the low close doji (LCD) off the secondary peak; and then as %K and %D both cross over and close back beneath the 80 percent line, a sell trigger is generated. That signal warns of an impending, prolonged downtrend of substantial proportion. Therefore, it is important to monitor for divergence patterns. Rules to Trade By The bearish divergence pattern signals that there is an impending price re- 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 should not 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 to guide you to trading a stochastics divergence pattern: How to Read Oscillators to Spot Overbought or Oversold Conditions 101 FIGURE 3.5 RealTick graphics used with permission of Townsend Analytics, LTD. c03.qxd 9/25/06 8:22 AM Page 101 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 secondary price high point. 3. If the secondary stochastics peak is less than or under the 80 percent level, 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 the next 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 de- 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 high above the 80 percent line, and the secondary high in price corresponds with %K and %D below the 80 percent level. Once the long dark candle closes below the prior low (in fact, it closes below five prior candles lows), a sell signal 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. c03.qxd 9/25/06 8:22 AM Page 102 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 you exited 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 indi- cator remains below the 20 percent line as the %K and %D cross multiple times but never back above the 20 percent level to trigger a buy signal until after the electronic day session close, which is 4 P . M . (CT). MACD In simplest terms, moving average convergence/divergence is an indicator that shows when a short-term moving average crosses over a longer-term moving average. Gerald Appel developed this indicator as we know it today, and he developed it for the purpose of stock trading. It is now widely used for short-term trading signals in stocks, futures, and forex markets, as well 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 to calculate a value, which is the difference between the two exponential mov- ing averages, which then compares that to the 9-period exponential moving average. What we get is a moving average crossover feature and a zero-line oscillator, and that helps us to identify overbought and oversold market conditions. I might add that because traders are now more computer savvy than ever 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 to generate fewer trade signals and can shorten the time periods to generate more trade signals. Just as is the case for most indicators, the higher the time periods used, the less sensitive the indicator will be to changes in price 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 relative strength between where current prices are as compared to past time frames from a short-term perspective to a longer-term perspective. The MACD indicator is constructed with two lines: One is the 9-period exponential average (slow line), and the other is the difference between the 12- and 26-period exponential moving averages (fast line). In general, when the fast line crosses above the slow line, a buy signal is generated; the op- posite is true for sell signals. How to Read Oscillators to Spot Overbought or Oversold Conditions 103 c03.qxd 9/25/06 8:22 AM Page 103 The MACD also has a zero baseline component, called the histogram, that is created by subtracting the slower signal line from the MACD line. If the MACD line is above the zero line, prices are usually trending higher. The opposite 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 look for the zero-line crossovers to identify market changes and to help confirm trade 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 cross back above the zero line, indicating a confirmed shift in momentum. That zero-line cross helped filter out the bottoming process. A long position would 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, carrying prices up over 1270. Clues that identify shifts in momentum as the market moves from one extreme 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. c03.qxd 9/25/06 8:22 AM Page 104 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 the keys 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 HCD trigger as the histogram bar crosses above the zero line, initiating a long at 1234.75. Notice that the histogram bars continue to expand higher, con- firming that the bullish momentum is accelerating. Identifying a zero-line cross 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 ex- actly the same as Figure 3.9 demonstrates. The histogram was not under the zero line; therefore, a zero-line cross did not trigger. However, observ- ing that the histogram bars move higher as prices start to advance would certainly help confirm the strength of the uptrend. How to Read Oscillators to Spot Overbought or Oversold Conditions 105 FIGURE 3.8 RealTick graphics used with permission of Townsend Analytics, LTD. c03.qxd 9/25/06 8:22 AM Page 105 RELY ON THE PATTERNS Another method useful with the MACD indicator, and one that is more reli- 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 low from a previous low, but the underlying MACD pattern makes a higher low, 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 moving averages, 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 and stochastics 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, the market 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 position with 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. c03.qxd 9/25/06 8:22 AM Page 106 [...]... 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 all three 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 sig111 112 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS nal Just... respect that price point the next time the market trades back at that level So the high and the low are important reference points of interest With that said, pivot point analysis incorporates the three most important elements—the high, the low, and the close—of a given trading session 1 24 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS THE LEADING INDICATOR The definition of the pivot point is the average... methodology applies to all markets, including stocks, futures, and especially spot foreign currency markets, or forex This method can work for a short-term application for identifying a potential range for a day, a week, or a month By having a good idea, well in advance, of what the high or the low for a given time period might be, you are able to use this information to apply the right trading vehicle or... a trading system on some powerful setups and on what triggers a trade As I disclosed, professional stock, forex, and futures traders have had significant success in utilizing these “hidden lines”; and I think that with a more thorough understanding of the concept, so will you As a quick review, one of the main benefits for using pivot point calculations is that they help determine when to enter and. .. calculations and the rationale behind the psychological impact that drives traders to make decisions around these predicted support (S) and resistance (R) levels I will break this chapter into separate sections to explain how pivot points can be used for short- and longer-term stock trading; how it applies to futures trading, especially when day trading stock index futures; and finally how it applies to the spot... period That information will help a trader with setups and triggers on entering a position and, most important, exiting a position This is where pivot point analysis will help you Think for a moment: If most technical tools are lagging indicators and if most traders follow and use these trading indicators to make trading decisions, then it would make sense that most traders get trading signals and execute... information I am not saying that at times it may help having the midpoints or R-3 or S-3 target levels in front of you; I just believe in keeping things simple, and less is better FILTER OUT INFORMATION OVERLOAD I have developed a method to filter out the pivot numbers; this is just one facet that I explain to attendees of my trading seminars and to students 132 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS. .. unbelievable aspect of pivot point analysis is who uses it In fact, many traders feel compelled not to learn about it because it seems complicated I will dispel that myth Other traders who had read my previous book T 121 122 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS felt that since I had mentioned futures, rather than equities or forex, pivot analysis did not apply to those specific markets The truth... usually does You need discipline and patience to stay with a trade These situations will likely happen; but by utilizing pivot points and by watching the market’s behavior at or near these levels, you will be better prepared to make better trading decisions, especially on exits 128 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS POSSIBLE OUTCOMES WHEN PRICES ARE NEAR PIVOT AREA You need to stay in the... are the most common formulas: • Pivot Point the pivot point (P) is the sum of the high (H), the low (L), and the close (C) divided by three P = (H + L + C)/3 • Resistance Level 2—R-2 is the pivot point number plus the high and minus the low R-2 = P + H – L • Resistance Level 1—R-1 is the pivot point number times two minus the low R-1 = (P × 2) – L • Support Level 1—S-1 is the pivot point number times . know it today, and he developed it for the purpose of stock trading. It is now widely used for short-term trading signals in stocks, futures, and forex markets, as well as for swing and position. wonder rally that failed, and a price reversal was to be expected. 1 14 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c 04. qxd 9/25/06 8:23 AM Page 1 14 INTEGRATE VOLUME AND INDICATORS Volume helps. 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. c 04. qxd 9/25/06 8:23 AM Page 112 is