the HCD trigger; the MACD has not yet triggered a signal to go long, even as the market soars to 10861. The CCI makesa zero-line cross signal, triggering to buy or at least confirming that yourlong position is valid, but also late.What is important is studying how the indicators work and understanding that if most traders follow lagging indicators, by the time they see
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FIGURE 8.6Used with permission of esignal.com.
FIGURE 8.7Used with permission of esignal.com.
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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. That mightbe not much money; but on a day trade margin of $500, that is a 15 percentreturn and gives you a leading edge over the competition.Besides the mini-Dow, Standard & Poor’s (S&P), and the Nasdaq, thereis the Russell 2000 contract, which had a tremendous run in 2005 and early2006. This stock index contract responds well with the high close doji triggers combined with the COMAS method. Remember that we do not see abona fide doji appear all the time; for example, when the close is not at theexact same price as the open. A doji can assume the shape of a spinning toppattern as well, which is why I use my judgment to determine if the close isless than 8 percent or so of the overall range. I do consider the psychological aspect of the creation of the doji candle pattern. After all, even a spinning top after a downtrend indicates indecision; so a higher assigned valueor a higher closing high takes on the same meaning as a high close doji.Also confirming a trigger to go long, as the example in Figure 8.8 shows, isseeing the HCD form at or come near to the pivot point support level andthen look for a close above both moving average components. In addition,the shorter-term moving average crosses above the pivot point average,
FIGURE 8.8Used with permission of esignal.com.
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confirming a conditional bullish change in the market. A trigger to enter along was established on the close above the spinning top pattern or theopen of the next period, which was at 658.00; and as you can see, higherhighs, higher lows, and higher closing highs developed. Examine the market’s behavior at the R-1 target resistance level: The market simply paused,but yet still closed above the R-1 price resistance level. After it penetratedthe R-1 level, the market consolidated but still maintained a bullish bias because the market did not confirm an exit signal by simultaneously establishing three criteria:1. A close below a prior low.2. The moving averages that did not cross and close below each other.3. A price that did not close below both moving average values.
Fractal RelationshipsIn Figure 8.9, I want to dissect a daily chart to see what the intraday patternlooked like, as the daily chart formed a textbook high close doji trigger. Thetrigger to go long was at 208.25, on the close of business on January 24 oron the open on January 25. This example really highlights a fractal relationship as one time period interacts with another.
FIGURE 8.9Used with permission of esignal.com.
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My favorite time period for intraday trading is the 15-minute time period because it is divisible by 3, a relatively important number in the fieldof technical analysis. More important, it is an extremely relevant time period to the grain complex: Since the market opens at 9:30 A.M. (CT) andcloses at 1:15 P.M. (CT) there are 15 complete 15-minute time periods totrade.Coincidentally, the day the doji formed on an end-of-day chart asshown in Figure 8.9, we see that a high close doji pattern formed on the intraday chart on a 15-minute time period as well. Therefore, we sometimessee this pattern develop on smaller time periods, such as the 15-minute period for end-of-day patterns for added confirmation. Figure 8.10 shows the15-minute chart for corn on January 24, the day the doji formed. This is agreat example of what a fractal relationship is with trading signals.As you look at the 15-minute chart, we see a nice bullish run, completewith the sequence of events we like when in a long position: higher highs,higher lows, and higher closing highs. Quite a sweet setup—no pressure—no hassle—the way trading should be all the time!
FIGURE 8.10Used with permission of esignal.com.
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Intraday Triggers on StocksLet’s look at a 15-minute chart on IBM, a fairly popular stock, and see howthis method applies for day traders. Figure 8.11 shows a double bottomformed with the primary low formed by a doji followed by a hammer. Thehigher close occurs at 81.24, with immediate results following. Prices peakat 12 noon around 81.50, only to fade back after the crowd decides to takeprofits before lunchtime. The initial risk target has not been challengedduring that time frame. Then, as volume picks up as traders return in the afternoon, another doji forms, followed by a second HCD signal. See how themarket hugs the daily S-1 pivot support as well. The market enjoys a nicegain with the very sequence we like when we are in a long position: higherhighs, higher lows, and higher closing highs, right up to the daily pivot pointR-1 target high.Let’s look at another stock example. For those stock traders not looking to trade commodities but wanting to participate in the action, here is anovel opportunity. One consideration should be to buy stock in the ChicagoBoard of Trade. That way you will own a piece of the exchange! Figure 8.12shows a 15-minute chart on CBOT holdings. Notice that the HCD trigger ismade by a higher close than open hammer candle pattern; and as you can
FIGURE 8.11RealTick graphics used with permission of Townsend Analytics, LTD.
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FIGURE 8.12RealTick graphics used with permission of Townsend Analytics, LTD.
see, the market reacted strongly as the trend sequence developed onceagain with higher highs, higher lows, and higher closing highs. This stockgenerated a buy at 91.70, closed at 93.00, and kept following the money trailinto the next day’s trading session. In fact, the market kept trading higherup to 119 as of February 24, 2006, when I was editing this book. I wouldimagine that as volume increases, this stock can trade higher for years tocome. It has a pretty good track record staying in business; it has beenaround for over 155 years.Let’s look at another commodity-related stock; this one is Exxon. Bynow, everyone knows that this company generated the highest profit in agiven quarter of any company in the world. As energy prices bouncedaround, so did this stock. In Figure 8.13, we have a 60-minute chart for aswing trade, showing the weekly and monthly pivot points that are helpingto illustrate and uncover the hidden support value. As the market declines,the doji formations develop at these confluence levels of supports. Then, asthe moving average crosses and as prices close above the doji highs, wehave a confirmed buy signal.There was never any pressure of loss on the trade; but even if you werebored with the trade, a secondary trigger was generated three days later at57.00. Notice the trending market condition and the sequence of events that
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FIGURE 8.13RealTick graphics used with permission of Townsend Analytics, LTD.
we are looking for when in a long position; higher highs, higher lows, andhigher closing highs. Also note that the white candles signify that the market is closing above the open on each time period, demonstrating that buyers are dominating the market. This chart pattern resembles a “W” bottompattern, which is quite similar in formation to the IBM chart in Figure 8.11.It is interesting that these two stocks showed this formation on differentdates as well.I have illustrated how the setup and signal work for intraday time periods. Let’s take a look at how we can apply the methods combining all thetechniques, including the pivot point moving average crossovers, pivotpoint support targets, stochastics, and the high close doji. In Figure 8.14 weare looking at Alcoa; the stock went into a nasty tailspin, as most marketsdid in October 2005. However, after long price declines, you do not want toget too bearish in the hole, so to speak, especially on high-quality companies implementing the longer-term monthly pivot point methods. We uncovered that there was support at 22.15 and a potential bottom or end ofthe decline. Granted, the low was 22.28, so we were off by a small margin.But notice how when using my methods, the signal to go long was triggeredonce the market closed above the moving averages; a high close doji trigger prompted a long position; and the stochastics confirmed the long trigger, as %K and %D both crossed and closed above the 20 percent line. If you
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FIGURE 8.14RealTick graphics used with permission of Townsend Analytics, LTD.
follow the flow of the market, you will see that the sequence of events thattranspire is higher highs, higher lows, and the most important feature:higher closing highs! Now, that was a gem of a move! The best part aboutthis method is that it keeps you focused on specific targets and keeps yourrisk to a minimum, allowing you to be a more relaxed and a more confidenttrader, letting the trade mature and generating bigger profits.So far we have demonstrated that dojis form more times than not atpivot point support and resistance targets. In most of the examples, wehave not seen a classic morning doji star pattern develop at bottoms; however, high close doji setups have developed. As you have identified the “hidden” support target by calculating the pivot point target levels, you had amuch clearer view of timing the market reversal. Stacking the odds in yourfavor by including analysis from other time frames, in addition to the aid ofknowing the right way to read the confirming indicators, will continue tohelp you with your entries. Combining that with the knowledge of what tolook for in identifying trending conditions and what signals a trend to runout of momentum will help you with your exits. That is what will increaseyour profits.
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Figure 8.15 is a chart on Dell. As the market was plummeting, an exhaustion gap developed. For some traders, buying sharply lower gap openings, such as those that occurred at the end of October, is their bread andbutter. Most traders buy the lower opens and look for the gap to be “filled”on the charts. In other words, they buy the market looking for prices tomove back up to test the prior day’s settlement. In this situation, that wouldhave been a bad strategy because the market remained on the defensive foranother week and a half. In fact, the market made a lower low. However, instead of playing the “catch the falling knife” guessing game, if you were patient and practiced discipline by waiting to see what the market’s behaviorwas at the confluence of weekly and monthly supports levels, you wouldhave seen a high close doji setup develop. Even the stochastics indicatorconfirmed the trigger to buy. As you can see, the %K and %D crossed andclosed back above the 20 percent line at the same time as the high close dojitrigger occurred.The high close doji helps add simplicity to your trading. Aided by theuse of pivot points analysis, stochastics, and MACD indicators and the moving average method, you have a beautiful system that should help generatereliable buy signals for forex, futures, and stock traders, whether they areshort-term or long-term in nature.
FIGURE 8.15RealTick graphics used with permission of Townsend Analytics, LTD.
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LOW CLOSE DOJIThe 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 ahigh, when a doji forms, it is indicating there is indecision; and once we establish a lower closing low below the doji’s low, as shown in Figure 8.16,which establishes that there is a loss in bullish momentum, we can initiatea short position.
FIGURE 8.16
CharacteristicsWhen the market is in an extended trend to the upside and the market isoverbought, a doji appears, indicating indecision and weakness of buyers tomaintain the upward trend. Pay particular attention if the candle precedingthe doji is a tall white candle, which would be a two-candle pattern calleda bearish harami doji cross. Watch for increased volume, as this also confirms a blow-off-top formation.
Trading RulesWhen a doji appears, you should:• Sell on the close or the next time period’s open once a new closing lowis made from the previous time period’s doji’s low, especially when themarket is against a key pivot point resistance target number.• Place stops above the highest high point of the initial doji candle. Stopsshould be initially placed as a stop-close-only, meaning you do not exitthe trade unless the market closes back above the doji’s high.• Buy or exit on the open of the first candle after the previous candlemakes a higher closing high than the previous candle.
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You can use a filter confirming the signal, such as a bearish divergencestochastic or MACD pattern.Here is a secondary guideline for the exit and risk management strategy. Get out of half of your positions on the first shift in momentum, whichin a low close doji (LCD) trade would be after the initial trigger. The market moves in your favor; and at times we see a consolidation period, similar to a bear flag formation. Covering your shorts and booking profits onhalf of your positions will keep you in a profitable position for the remainder of the trade. You initially placed a stop-close-only; but for an intradaytime period, this would have been a mental stop-close-only because mostorder platforms do not have that feature for day trading. As the market hasmoved in your favor, you can place a hard stop above the doji high. Therewill be times when you have to make a judgment on whether the risk is tooexcessive by the distance of the proposed entry and the stop-close-only.Therefore, you may want to scale out of two-thirds of a position at the firstsign you see the trend lose momentum.
Spot Forex TriggersLet’s examine market price action and how to execute this signal. Youhave your predetermined pivot point resistance levels already mapped outfor you. RealTick has the feature that automatically sets the daily pivotpoint levels on the charts. Genesis Software has the Person Pivot withthe COMAS triggers programmed in a library feature that highlightsthe buy and sell signals with the red and green arrows. Some chartingpackages have pivot points available as well. If you do not have either ofthese two software packages, you can do an Excel program; or at the veryleast, you can use my pivot point calculator included on the CD or on myweb site www.nationalfutures.com to program any market for any timeframe you want. The key is that once you have the predetermined supportand resistance numbers, it is the second variable that is more important,which is looking for a signal that triggers a call to action. That would bethe LCD signal.The chart in Figure 8.17 is a spot forex euro currency that shows onceagain why it is important to wait for sell signals at resistance rather thanbuying breakouts. The euro currency chart shows the market breaking outabove the R-1 level. As a standard rule, I do not like to take buy signals atresistance (we have covered that in the pivot point section). I would ratherwait for a sell signal to develop and go with the declining momentum. I believe that one reason why this signal works so well is that many traders aretrying to trade breakouts of pivot point resistance and, therefore, go longonce they see the breakout above the R-1 level. Once there is little followthrough and prices start to retreat, then they are trapped and scramble to
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Don’t take buy signals at resistance.
FIGURE 8.17RealTick graphics used with permission of Townsend Analytics, LTD.
sell to get out of their losing trade. In this example, notice where we have amoving average crossover—not only do prices close below the doji, butalso below both moving average values.The trigger to sell short was executed at 118.67, and we saw an immediate reaction as prices plunged. The sequence of events that we want tosee once we are in a short position, as in this example, is lower highs, lowerlows, and the most important lower closing lows. Finally, the marketpauses at 118.30, where we would look to cover half to two-thirds of our position, banking a quick 37-point (or PIP) gain per position. Now we canmake a decision instead of placing a hard stop above the initial doji high.We could decide, since the move was a decent distance away from our initial entry, to place a stop at breakeven on the balance of our position. As themarket enters a consolidation phase, we see that prices never close abovethe high of the first reactionary low’s high. That keeps prices contained ina sideways channel, which is similar to a bear flag formation. As we followthe flow of the market, notice how the market declines by the end of theday to the S-2 of 117.80. As a day trader, there is no question on where youneed to exit the position. It is the end of the day, and you have managed atrade all day and rode a very nice trending market condition.Using a half-position scale-out method, you obviously need to trade atleast a minimum of two contracts. In this example, when you cover half of
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your positions at 118.30, you pick up $370 per 100,000 full-size contract. Youcan now afford to ride the balance. That generates the bulk of your profits,as you would be covering the other half of the trade at the 118.00 level fora 67-PIP gain, or $670. Combined, you have a profit of $1,040 on just a twolot position.In Figure 8.18, I want to look at a textbook setup in the Japanese yen.This is a 5-minute chart without the pivot point moving averages overlaid tohelp you see the progression of the trade and the sequence of theopen/close relationship that candlestick charts display.As the market advances toward the projected pivot point daily R-2,traders may assume the market conditions are in a bullish mode. When youget in that mindset, you tend to forget about looking at the current marketconditions. The top pattern is not a traditional or classic morning doji starformation because the third candle does not close below the midpoint ofthe tall white candle. However, it does close below the doji’s low; that is theconditional change that takes place giving us the clue that the bullish momentum has dried up and that a reversal is imminent. First, there is a lowerclosing low; then, the market closes below the open; and finally, prices reversed direction—all after the market tapped the pivot point resistancelevel. Therefore, we want to sell on the close or on the very next time pe-
FIGURE 8.18Used with permission of esignal.com.
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riod’s open, placing our stop (initially) as a mental stop-close-only abovethe high of the doji, which is 118.18. That is just three PIPs above the dailypivot point resistance level, too.Again, what we want to see is almost instant follow-through for theprice to decline. As you can see with this trade, there was immediate follow-through. Notice the progression of the market as it declines from theentry price at 118.07 straight down to 117.87, for a quick 20-PIP gain. Themarket then trades back and forth, creating small-range candles, whichform a sideways channel. If you look carefully at each candle’s close, youwill see that it does not close back above the high of candle that establishedthe first reactionary low. As a trader, you may want to hold all positions atthis time or at least cover half of your positions for small gain. One reasonto do that is because, as powerful and reliable as these triggers are, we stilldo not know how far prices can or will actually move. Remember that thepatterns recur; the outcome is what is different each time.The markets could easily reverse back and challenge the highs. By taking money out of the market immediately on half of your positions, youhave profits; and more important, you reduce your risk exposure inthe market.Always remember that every time you are in the market, you face risk.So by establishing a profit and following the flow of the market, you canmanage the balance of your trade with less stress, knowing you have mademoney. See how the candles in Figure 8.18 show the true direction of themarket: The dark candles reflect closes below the open. For the most part,there are more of the dark, or negative assigned, candles, which are establishing lower closing lows, than there are white, or positive assigned, candles. Not only do they have smaller ranges, but they do not make higherclosing highs. This shows that every time the market rallies just a little bit,sellers are present. Long real-body, or negative assigned, candles representsellers, who dominate this market. Therefore, staying short on the balanceof the position is warranted. Now, as the market price disintegrates,demonstrating the conviction of sellers, we can place a hard stop atbreakeven on the balance of the position and start to adjust the stop to protect profits accordingly. This is what managing the trade is about and whatwe will go over in Chapter 9.As a short-term trader, it is imperative to trade with the current flow ormomentum of the market. Because there are so many variables that can influence your trading decisions, using the methods described here will helpyou keep focused and will alleviate the problem of trading on emotionalimpulses.When you are armed with what the potential resistance levels are, thenonce you identify a low close doji signal and then apply trade managementtechniques, you can certainly increase your chances to consistently capture
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profits. It is literally up to you to pull the money out of the markets. In Figure 8.19, we have a 10-minute chart, just to illustrate that dojis form on various time frames as well. As you can see, the market starts to rally andcloses above the pivot point resistance. By not allowing emotions to interfere with your better judgment, just by applying one mechanical rule—donot take buy signals at resistance—you will have eliminated the greed factor that often causes a trader to chase after a market. Therefore, just wait,and practice patience to look for a sell signal to develop. As you can see inFigure 8.19, after the long white candle forms, a doji forms. Then, as themethod dictates, you do not enter a short position until you see confirmation of a breakdown in the bullish momentum by a lower closing low belowthe doji’s low. Once that occurs, you enter a short position on the close ofthat period or on the next open. Remember that this does not tell you howmuch money you will make on each trade. Every outcome is different.There is a strong possibility that, based on historic reference, you shouldsee a decline in prices; the question is by how much.In this chart, you see an immediate reaction, as you would have entered a short from 122.94; and the bears take over almost immediately.There is a sequence of lower highs, lower lows, and lower closing lows. In
Stop-close
,
FIGURE 8.19Used with permission of esignal.com.
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fact, using the moving averages, notice the confirmation of a negativecrossover and prices closing below the moving averages. This short-termdowntrend ends when you see a change in conditions once the moving averages cross back up and prices start to close above both moving averagevalues. This is a sign that the negative momentum, or selling pressure, isfading and that it is time to exit your position. Also, notice that a doji formsat the bottom of this downturn; it is the candle that closes above the doji’shigh that makes you commit to exiting all positions. This trade results onlyin an 11-PIP gain; but not all outcomes will be grand-slam home runs. Thekey is in being able to identify true conditional changes that will make youact on facts, triggering a call to action by a set of rules rather than by emotional impulses. If you have the discipline to trade by a set of rules and tofollow those rules, you will reap some juicy trading profits consistentlyover a long period of time.
Triggers on Futures MarketsLet’s look at implementing a confluence of pivot points and see how themarket behaves at these longer-term resistance projections. In Figure 8.20,we have the daily, weekly, and monthly numbers all concentrating near 115in the bonds. This chart is a 5-minute time period that illustrates again whyit is important to look for sell signals at resistance and for buy signals atsupport.Many traders fail to see the bigger picture and get caught up in the excitement of a trending market condition. As prices trade above the daily R2 pivot point, some traders look at their R-3 numbers and think they are ona “cash cow” train ride that will never stop climbing higher. By examiningthe higher-degree time periods, such as the weekly and monthly numbers,you can get a better idea that the market may soon run out of steam as thereis hidden resistance from longer-term pivot analysis. Practicing disciplineby not following the herd mentality and demonstrating patience to wait fora sell signal will lead to a more fruitful opportunity.As you can see, once the market closes below the double doji formations triggering a short position, the moving averages cross and the marketcloses below both values. Once again, here is the market reaction as bullsscramble to sell out their longs. The trigger to sell short was 11428⁄32, and themarket plunged to 11415⁄32, for a quick 13⁄32-point decline (each point is $31.25),or a gain of nearly $400 per position. Notice how the market pauses or consolidates forming a bear flag. Here is where tightening your stops and covering half or two-thirds of your positions would again come into action andbe a wise and profitable decisison.The LCD signal works on most active markets, as long as there isvolatility and price movement. In late 2005, as commodity markets came
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FIGURE 8.20RealTick graphics used with permission of Townsend Analytics, LTD.
alive, the Chicago Board of Trade’s electronic gold contract allowed easyaccess to take advantage of some pretty good intraday moves. With the statistical study done in Chapter 7, it makes good sense to diversify in othermarkets that respond to certain technical patterns, such as dojis, hammers,and shooting stars. It is also rewarding to see how robust this method is, asit works in no- to low-correlation market relationships and in various timeperiods. In Figure 8.21, as bullish as gold was in 2005, there were periods ofconsolidation. No market ever goes straight up. A sector or market segmenttrading with such high interest as gold attracted many traders. In this example, a sell signal was triggered at 559.70, and we started to see a progression of price deterioration down to the pivot support of 544.00.Utilizing the stock index futures is one of the better markets for daytraders, as we have discussed. The low close doji trigger is a highly effective pattern in these markets. Figure 8.22 displays the e-mini–Standard &Poor’s (S&P) on a 15-minute candle chart illustrating an entry based on theclose below the doji low, a negative crossover from the moving averages,and confirmation that prices closed below both moving average values.Here we have a trigger to sell short at 1239.25. Prices continue to followthe same progression of a pause or consolidation, and then continuation of
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FIGURE 8.21RealTick graphics used with permission of Townsend Analytics, LTD.
FIGURE 8.22Used with permission of esignal.com.
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the downtrend resumes. During the consolidation period, notice thatprices do not close above the high of the last reactionary low point. In fact,notice the doji as the sideways channel develops; prices do not closeabove that high either.The low close doji pattern, when combined with the three elementsusing pivot point analysis, is a very effective trading system. You are notsimply relying on predicting a top, but rather waiting to see a conditionalchange occur in the market. By following the flow of the markets—lowerhighs, lower lows, and lower closing lows—you can really stay in the tradeand, more important, on the right side of the market. Examine Figure 8.23,which is a 5-minute chart on the CBOT mini-Dow contract. You will noticethat it is not the same chart as in Figures 8.19, 8.20, or 8.22 and that the signals are triggered at different points in time and in different time periods,just to prove the frequency and effectiveness of this pattern. Here we seethe market trade up just past the daily projected pivot resistance target.While the high was actually formed by a shooting star, the real trigger tosell occurred at the time period that established a close below the doji’slow. Notice the three elements that help confirm a trend reversal: priceclose below both moving average values and the two moving average components crossed, with the short-term moving average below the longer-
FIGURE 8.23Used with permission of esignal.com.
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term moving average. The trigger to sell short occurred at 10523, and theexit was confirmed with the high close doji signal at 10483, for a tidy gainof 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 as of 2/1/2006.) That is a trade setup Iwatch and wait for, day in and day out; and it works on most markets inmost time periods.The low close doji setup combined with pivot points and the movingaverage component really allows you to see the change in price momentum.As a screen-based day or swing trader, you have superior advantage overfloor traders or other traders when using charts, pivot points, and the progression of a moving average component. In Figure 8.24, we have a 60minute e-mini–S&P chart showing the price deteriorating once the triggerwas made by a close below the doji low. Notice, too, that the moving averages crossed and prices closed below the moving averages as well. This signals a trigger to sell short at 1278; and by the end of the day, the market wasat 1264. There was never a signal to exit the short position, which resultedin a 14-point gain, or $700 per contract. Now, this is over 140 percent gainon a