Candlestick and pivot point trading triggers setups for stock forex and futures markets 2007 phần 7 doc

208 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 7.41 Yen Lows and Highs Used with permission of GenesisFT.com. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FIGURE 7.42 Euro Lows and Highs Used with permission of GenesisFT.com. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% c07.qxd 9/25/06 8:30 AM Page 208 Candle Charts and Top Reversal Patterns 209 FIGURE 7.43 British Pound Lows and Highs Used with permission of GenesisFT.com. FIGURE 7.44 Canadian Dollar Lows and Highs Used with permission of GenesisFT.com. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 47% c07.qxd 9/25/06 8:30 AM Page 209 210 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS We can dig a bit deeper in the results and say that certain markets re- spond better than others with the psychological elements that dojis, ham- mers, and stars represent. Each market has its own character. The Canadian dollar, for example, is a currency that highly correlates to com- modities, which would be a good reason why it has a strong percentage of occurrences versus the British pound. The Canadian dollar tracks closer to the moves in gold. In addition, the volume of trading is lower as compared to the British pound, the euro, or the yen, according to the Triennial Cen- tral Bank Survey 2004. While most currencies are tradable, the five curren- cies, including the U.S. dollar (four currency pairs), that represent the majority of foreign exchange trading volume are the euro (EUR/USD), with the majority of volume of 28 percent; the yen (USD/JPY), with estimated 17 percent of market share; the British pound (GBP/USD), with 14 percent; and the Swiss franc (USD/CHF), with an estimated 5 percent share of over- all volume activity. The Canadian dollar volume trades comparatively speaking about less than 4 percent. There are those who will take these statistics and show that there is no evidence that it is reliable information or that there was not enough back- test studies completed. In fact, statisticians and those who understand Bayesian calculations will most likely dispute these findings. Well that’s al- right, as I see these patterns form over and over and over; and the computer findings substantiate that. In case you wanted to know what Bayesian the- ory is, it is from the famous mathematician Thomas Bayes. He was born in London in 1702 and died in 1761. One of the few works Bayes published during his lifetime was a defense of Issac Newton against a bishop who had attacked the logic of his calculus, according to the Encyclopedia Britan- nica. Bayes was successful enough as a mathematician to win election to the Royal Society of London. He would have been long forgotten had it not been for his friend Richard Price, who inherited Bayes’s papers. Price, him- self famous for devising one of the first actuarial tables, came across the “Essay towards Solving a Problem in the Doctrine of Chances” and helped develop the Bayes rule. Statisticians have long recognized the rule’s im- portance, and some high school classes use it to solve straightforward probability problems. But once both data and beliefs enter the picture, the math can become unbelievably complex. Over the past 10 or 15 years, how- ever, computers have become powerful enough to handle Bayesian calcu- lations with relative ease; and the method has won a following. Bayes’s formula allows scientists to combine new data with their prior beliefs about how the world works. It is an idea that amounts to heresy in much of the statistical world. After all, the method requires individuals to make sub- jective decisions about how strongly to weigh prior beliefs. The essence of the Bayesian approach is to provide a mathematical rule explaining how c07.qxd 9/25/06 8:30 AM Page 210 Candle Charts and Top Reversal Patterns 211 you should change your existing beliefs in the light of new evidence. In other words, it allows scientists to combine new data with their existing knowledge or expertise. This rule applies to the statistics provided on hammers and dojis forming bottoms, as in the case of the Canadian dollar, saying “40 percent of bottoms are hammers” is not equivalent to saying “40 percent of ham- mers are bottoms.” The Bayes rule can be used to connect these two state- ments. Therefore, you must be aware that what happened in the past might not repeat with the same frequency or that this data is even reliable. How- ever, the facts are the facts. During this time period, the results speak for themselves. Now that you are armed with enough information to be dangerous in your trading, let’s go over how to find certain setups and explain what trig- gers a call to initiate a trade based on these findings combined with what we have learned so far with pivot point analysis. In the following chapters, we will also cover the type of risk parameters to use and when and where to exit positions. c07.qxd 9/25/06 8:30 AM Page 211 c07.qxd 9/25/06 8:30 AM Page 212 213 CHAPTER 8 Setups and Triggers Combining Candles and Pivots T here are many methods you can employ to actively trade, including various mechanical trading systems and manual trading tactics. The constant changing of market conditions can require system traders to adapt and update the parameters for their trading decisions. I often pre- fer the hands-on visual approach, which is more of a manual method, while employing a mechanical trigger to both enter and exit a position with a specific risk management technique. The visual approach is aided by the use of candle charts. The triggers discussed in this chapter are based on the methodology de- veloped from my 26 years as a trader. I have continually strived to find clearer signals and triggers for short- and even longer-term trade opportu- nities. I have been doing extensive research regarding the combination of candlestick formations and pivot points; some of the proprietary signals that I have taught traders at seminars and in my course, I am sharing in this book. This chapter details the triggers designed by me, based on my re- search joining both specific candle patterns and pivot point analysis. I am going to cover three setups: (1) the high close doji (HCD), (2) the low close doji (LCD), and (3) the jackhammer. Each one has a special set of rules by which to initiate a trade and to exit a trade. These strategies have done well in periods of both bullishness and bearishness, as well as in times of heightened volatility and periods of low volatility. This is just a small sample of what is taught in my three-month inten- sive trading school. I have been asked why I would share such high- probability trading signals with the public. Well, I have taught these methods to many people, including my own father and son. Just as they have differ- c08.qxd 9/25/06 8:38 AM Page 213 ent results with the same signals, you will, too, due to the very nature of trading. Once my trading concepts are taught by the masses, I do not be- lieve the signals will be diluted or absorbed in the marketplace. I believe not every trader will implement my methods in exactly the same way as I do. For example, Larry Williams has his OOPS method, Mark Fishers has his method, and Tom Demark had his method let out to the pub- lic. And all these systems, to my knowledge, are still highly effective strate- gies. So I do not believe letting you into my “black box” will hurt or dilute the signals. There are various markets and various time periods in which to enter a trade, such as a 60-minute, a 15-minute, and a 5-minute time period for swing and day traders. These signals work for futures and stocks, and they work amazingly well in the foreign exchange (forex) markets, as you will see in the coming examples. The premise is to help keep the trader focused on the now, to watch and study the current price action. The candle pat- terns give a visual confirmation of price momentum, and the pivot points forewarn you of what the potential turning points are. When you combine the two methods, you have a solid trading program. This setup may help you improve your trading performance and allow you to develop a consis- tently winning trading strategy. This could be your personal trading system that is based off proven and powerful techniques. For a moment, I want you to envision the concept of epoxy glue: It requires two compounds. Sepa- rately, they are not very reliable or, in fact, a very strong bonding substance. However, when combined, a chemical reaction occurs and forms an amaz- ingly strong and powerful bond. Using the methods of candlesticks with pivot points can give you that same result if you know what to look for. The implementation of longer-term analysis using pivot points will give a trader a fantastic means by which to anticipate a point where a trend change could occur, thus helping a trader not only to prepare but also to act on a trade opportunity. One can implement this setup using different time frames besides daily analysis. You can include weekly and even monthly pivot point calculations. This method of analysis will alert you well in ad- vance of a potential support and/or resistance level. In the setup process, you will heighten your awareness to enter in a long or a short position against predefined levels and will wait for the trigger or market signal at those levels. It can not only help you define or identify the target area to enter but also establish your risk objective. Another event that occurs with this setup process is that you now can set up your orders to buy on your trading platform with the selected contract amounts—in other words, pre- arrange the commands on the electronic order ticket. Now all you need is confirmation so you can pull the trigger or click the mouse to establish an entry in the market and establish a position. In Chapter 7, we covered the importance of dojis and the statistical rel- 214 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c08.qxd 9/25/06 8:38 AM Page 214 evance of why I look for them at pivot point support targets. The primary importance in the study of the doji at a pivot is to understand that the doji indicates indecision and is a significant sign that changes are coming. In candle patterns, the morning doji star is one of the most reliable reversal formations that a trader can identify. The problem is that there are about 12 variations, making it hard to write code to program in a trading software package. However, the main component about the doji is the trigger indi- cating when the next time period’s close is higher than the doji’s high. This can be a subtle change by just two PIPs in forex or ticks in futures. It can- not be at the exact high of the doji; rather, it needs to close above the doji high. This is a very important point, so make sure you are crystal clear on it. Figure 8.1 demonstrates the definition of a close above the doji high. HIGH CLOSE DOJI The most reliable and most common method used to determine support and resistance levels is the mathematical-based calculations from pivot point analysis. Through the years, I have noticed that doji formations form more often than not at these predefined levels. In Chapter 7, we have sta- tistical information that backs up that observation. That is the focus on which we want to concentrate—the market’s behavior at support and re- sistance levels, especially when dojis appear. The key is to watch for con- firmation for a transition to take place and to act when there is a shift in momentum. We are looking for a specific conditional change to take place in the market, namely a higher closing high above a doji’s high at the pivot point support level. This is the pattern I call the high close doji (HCD) Setups and Triggers 215 FIGURE 8.1 c08.qxd 9/25/06 8:38 AM Page 215 method. It has dimensions of specific criteria that need to fall in place, helping to eliminate and to filter out false signals. It is a simple and basic approach to candlestick chart patterns that is a high-probability winning strategy. Characteristics When the market is in an extended trend to the downside and the market condition is oversold, a doji appears, indicating indecision and weakness of sellers to maintain the downward trend. In addition, prices are near a pro- jected pivot point support target level (Figure 8.1). When a doji appears, you should: • Buy on the close or on the next open after a new closing high is made from the previous doji candle high, especially when the market is against a key pivot point support target number. • Place stops below the lowest low point of the doji. Stops should be ini- tially placed as a stop-close-only, meaning you do not exit the trade un- less the market closes back below the doji’s low. • Sell or exit the trade on the close or on the next open of a candle that makes a lower closing low near a key pivot point resistance number. You can use a “filter” or backup process to confirm the buy signal, such as a bullish convergence stochastic pattern or a bullish convergence on moving average convergence/divergence (MACD). Spot Forex Triggers Now let’s put these rules into practice by examining active trading markets, such as in foreign currency markets. Figure 8.2 shows a 15-minute time pe- riod candle chart on the spot British pound. Taking the data from Septem- ber 29 and using the close from the 5 P . M . (ET) New York Bank settlement, we have a high of 177.04, a low of 175.92, and a close of 176.13. Once we cal- culate the pivot points, we have the first support (S-1) figured as 175.68. The first resistance (R-1) is 176.80. As you can see, the market trades for almost two hours at the pivot sup- port; but at 4:30, a doji forms. Three time periods later, a close above the doji’s high occurs. Note that the market closes above both moving average values. In addition, the COMAS (Conditional Optimized Moving Average System™) method shows the shorter-term moving average cross above the longer-term average, confirming a trigger to go long. The trigger to enter a long position would be on the time period’s close or the very next session’s 216 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c08.qxd 9/25/06 8:38 AM Page 216 open; the entry price would be 175.95. As the market blasts off into trend mode, the money-making sequence of events transpires—higher highs, higher lows, and higher closing highs. As the trade matures, watch the reaction at the pivot resistance R-1 of 176.80. Observe the bullish momentum dry up; for the first time, there is a lower closing low, and prices close below both moving average values. The moving averages also form a negative cross, confirming a trigger to exit the long position. As a day trader, you have completed your mission to cap- ture money from the market. This example would have had you exit the position at 176.57. For each full-lot-size contract, that would be a 62-PIP profit or $620 gain. Granted, you did not buy the low or sell the high; but you certainly did what you always want to do—capture a nice chunk of the middle of a price move. If you understand that markets move from trend mode to consolidation (or congestion) phase, then you will realize that at this time it is best to walk away and wait for the next setup because you are now vulnerable to getting whipsawed in the market during the consol- idation phase. That is why most successful traders make their money and walk away. Other less fortunate traders tend to make money early in the day and lose it by trading it away late in the trading session during the con- solidation period. Setups and Triggers 217 FIGURE 8.2 Used with permission of esignal.com. c08.qxd 9/25/06 8:38 AM Page 217 [...]... indicators work and understanding that if most traders follow lagging indicators, by the time they see Setups and Triggers FIGURE 8.6 Used with permission of esignal.com FIGURE 8 .7 Used with permission of esignal.com 221 222 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS a bona fide buy signal, you are already well on your way to profits This signal gets you 15 points ahead of the crowd, or $75 per contract...218 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS Let’s examine another trading setup in a spot forex market and see how the HCD signal responds Figure 8.3 is another 15-minute chart on the euro currency with the two indicators stochastics and MACD So far in this book, you have learned how to spot triggers and how to properly read the indicators The HCD trigger... see, the %K and %D crossed and closed back above the 20 percent line at the same time as the high close doji trigger occurred The high close doji helps add simplicity to your trading Aided by the use of pivot points analysis, stochastics, and MACD indicators and the moving average method, you have a beautiful system that should help generate reliable buy signals for forex, futures, and stock traders,... permission of esignal.com 240 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS term moving average The trigger to sell short occurred at 10523, and the exit was confirmed with the high close doji signal at 10483, for a tidy gain of 40 Dow points, or $200 per contract, based on a day trading margin of $500 (Day trading margins vary; initial margin requirements to hold a futures position overnight is $2,632... the market tapped the pivot point resistance level Therefore, we want to sell on the close or on the very next time pe- FIGURE 8.18 Used with permission of esignal.com 234 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS riod’s open, placing our stop (initially) as a mental stop-close-only above the high of the doji, which is 118.18 That is just three PIPs above the daily pivot point resistance level,... momentum Spot Forex Triggers Let’s examine market price action and how to execute this signal You have your predetermined pivot point resistance levels already mapped out for you RealTick has the feature that automatically sets the daily pivot point levels on the charts Genesis Software has the Person Pivot with the COMAS triggers programmed in a library feature that highlights the buy and sell signals... in Point Combining the statistical data that we went over in Chapter 7 (which indicated the frequency with which dojis, hammers, and shooting stars form) with the correlating markets (such as the S&P, the Dow, gold, and currency) gives you high-performing patterns; and trading using these patterns should not be ignored If the markets outlined here have both a high frequency and a strong tendency to form... 120.15 Per 100,000 lot contract in the spot forex market, that would have generated a handsome profit over $1,000 per position All it takes is a few of those per month to generate a tidy income FIGURE 8.3 RealTick graphics used with permission of Townsend Analytics, LTD Setups and Triggers 219 Triggers on Futures Markets Let’s tune our focus to the futures markets Figure 8.4 shows a 15-minute chart... graphics used with permission of Townsend Analytics, LTD 230 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS LOW CLOSE DOJI The next trading signal is the opposite of the high close doji It is a setup developed on the premise that once the market has rallied and established a high, when a doji forms, it is indicating there is indecision; and once we establish a lower closing low below the doji’s low,... a trade setup I watch and wait for, day in and day out; and it works on most markets in most time periods The low close doji setup combined with pivot points and the moving average component really allows you to see the change in price momentum As a screen-based day or swing trader, you have superior advantage over floor traders or other traders when using charts, pivot points, and the progression of . 208 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS FIGURE 7. 41 Yen Lows and Highs Used with permission of GenesisFT.com. 100% 90% 80% 70 % 60% 50% 40% 30% 20% 10% 0% FIGURE 7. 42 Euro Lows and Highs Used. GenesisFT.com. FIGURE 7. 44 Canadian Dollar Lows and Highs Used with permission of GenesisFT.com. 100% 90% 80% 70 % 60% 50% 40% 30% 20% 10% 0% 47% c 07. qxd 9/25/06 8:30 AM Page 209 210 CANDLESTICK AND PIVOT POINT TRADING. establish an entry in the market and establish a position. In Chapter 7, we covered the importance of dojis and the statistical rel- 214 CANDLESTICK AND PIVOT POINT TRADING TRIGGERS c08.qxd 9/25/06 8:38