ick patterns.
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14 05
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Candlestick Patterns
Doji
Inverted Hammer
7 4
Hanging Man
Spinning Top
o1 I] 4 +o
Dark Cloud
Piercing Lines
Bearish Engulfing
Bullish Engulfing
O+I 1+ tii $1
Evening Star
Morning Star
Three Black Crows
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Bearish Harami
Bullish Harami
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I
Three WhiteSoldiers
Ladder Bottom
Trading Candlestick Charts
Candlestick Patterns
Tradine Candlestick PatternsThe chart above illustrates various Candlestick patterns from the S&P 500 Futures 610 tickchart. Various Candlestick patterns have been marked in the chart above and explained asfollows: 1). A Doji pattern to suggest indecision in the prior direction. 2). A Dark Cloud tosignal a potential end of trend. (Also see Hammer pattern prior to the Dark Cloud). 3).Another Doji to signal indecision. 4). A Piercing line followed by a strong trend reversal bar.5). A Bullish Engulfing pattern to confirm a strong trend ahead. 6). A Gravestone Doji. 7). ADoji bar to suggest an imminent trend reversal in the next few bars. 8). An inverted Hammerat the top to signal the end of uptrend and strong downtrend to follow.
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1.3. Three Line Price BreakCharts(3LPB)
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3LPB ChartsThree Line Price Break (3LPB) charts define the underlying trend and are considered as anadjunct to the candlestick charts. 3LPB charts display a series of vertical boxes or candles thatare based on price changes. The 3LPB method entirely dispenses with the recording of thevolume sales and time data on the X-Axis. The other major charting techniques like Point &Figure, Kagi and Renko charts also ignore the passage of time and volume.The 3LPB are always constructed based on closing prices. A basic understanding of 3LPB iswhen there are three white successive candles, the major trend is up, and when there are threesuccessive black candles, the major trend is down. The major reversal signals (based on the3LPB technique) are given when the shift lines, white to black or black to white are formed.After forming a confirmed trend of 3 white candles or 3 black candles, the reversal is onlytriggered if the current price is traded below the lowest of all prior three candles in case of abullish trend reversal, or if the current price is traded above the highest of all prior threecandles in case of the bearish reversal.Trading with 3LPBThe 3LPB charts below show major trend changes. A trend change confirmation is made whena reversal bar is formed. However, a trend confirmation bar could be late and a significantmove to the upside or downside may have already happened. A solution for this problem couldbe an intra-day trading signal for confirmation of the trend. The 3LPB charts also use otherindicators and pattern formations to indicate price trends. The best trade signals are generatedwhen the market reverses near the key support and resistance levels.
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Trading 3LPB Pattern
rThree Bar Price Break
Trading 3LPB ChartsThe chart above shows an example of a 3LPB pattern from the Russell 2000 E-Mini oneminute chart. Candle A shows a Three Line Price Break reversal to the upside from theprevious trend as the price closed above the high of the three candles. A "long" entry is placedat 83 1 level. A stop order is placed at the low of this breakout candle at 830. Targets are eithertaken with a reversal candle or at a pre-set target limit. One of the best techniques to place atarget is to take the length of the reversal bar and use 2 times the length of the bar as thetarget. At candle B, a 3-Bar reversal candle is formed to enter a "short" position below thelow of candle B. A "stop" order is placed above the high of Candle B. A target of twice thelength of the candle is placed below the entry level.
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Trading 3LPB Pattern
.
Trading 3LPB with Triangle FormationThe chart above shows a Three Line Price Break chart from the Russell Emini one-minutechart. The chart shows an ascending triangle pattern formation as the upper trend line wastested three times. The price closing outside the upper trend line signals a potential long trade.1. Enter a "long" trade above the high of the breakout bar.2. Place a "stop" order below the low of the breakout candle.3. In an "Ascending triangle" pattern trade setup, the depth of the triangle is added tothe breakout level for a target.
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Chapter 2: Bar Groups2.1. Market Structures
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Market StructuresI first read about the Market Structures concept from Dr. Ron Lockhart. Then I read moredetailed Market Structures work from Michael Jardine's book, Fibonacci Trading. The MarketStructure concept is simple, yet a very powerful structuring concept. Markets have structuresand traders miss most cues as they are constantly hunting some pattern, momentum, oscillatoror some Zen-type signals. Market Structure formation is a price phenomenon occurring atmajor turns. Prices start with a wave (lets say Up) and it ends at some point and then there is adown-wave, and it ends some time and then begins another up-wave. These wave formationsstart with the Market Structures. Market Structure Low (MSL) and Market Structure High(MSH) formation is continuous and is repetitive at every wave begin and at every wave end.Market Structures form in all markets, in all time-frames and in all instruments. They fail andre-fail, form and re-form. Market Structure is a concept pattern. It needs other indicators,support/resistance levels, triggers to confirm the theory and its works.Market Structures are well explained with Candlestick charts. Market Structure Low (MSL) isexplained with three candle pattern. A new low, lower low, higher low of CLOSE. Please seethe word in BOLD, MSL is based on close values not lows or highs. A MSL based long istriggered when prices close above the highest close value. A stop is being placed below thelow of the MSL to protect the trade.
3/17/078:29 AM
Market Structure LOIF(MSL)
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many theories of using MSHs in trading. One theory of MSH, is to find a critical resistancearea and trade a short position. The other way is to find a series of past MSHs and build a trendline for resistance. The third way is to use MSH in a fractal wave form and build a larger wavestructure using the distances between them.The Market Structure High (MSH) definition is when markets make a new high followed byhigher high followed by lower high. This pattern is shown with a three candle pattern. Butmany cases it may not be. It can form in 5-6 candles in a time-frame, but the internal candlesshould be mostly inside-bars suggesting indecision.
A MSH short trigger (after 3-bar MSH formation) is signaled when price closes below the lowof the third candle.
There are two ways to target MSH shorts. One is to trade until another MSL forms near a key
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........... ....... stop"
The example above illustrates a Market Structure High (MSH) formation from the EM 610tick chart. On March 14,2007, at around 9.35am7EM formed a Market Structure High tosignal a potential top at 780 level. A short trading opportunity is presented when prices closedbelow the low of the third candle.1. Enter a "short" trade below the low of the third candle at 778.2. Place a "stop" order above the MSH high at 780.2.3. Target is dynamically changed and traded until the prices form either anotherMSL, or if the price closes above the previous bar's high after an initial profit.
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Trading MSL
rMarket Structure Lo\+,'
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Source: IradeStation
-
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Trading Market Structure Low (MSL)The example above shows a MSL formation from the Dow EMini futures (YM). In October,2005, YM made a MSL formation after a long downtrend around 10700 level. This MSL isconfirmed when the price closed above the high of the third candle.
1. Enter a "long" trade above the high of MSL at 10850.2. Place a "stop" order one-tick below the low of the MSL at 10650.3. Target a reversal MSH formation or when price closes below the low of previous bar.
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Trading Market Structures
Market Structures
The example above illustrates a Market Structure trading formation on Russell Emini futures(ER2) weekly chart. In April 2002, ER2 formed a Market Structure high at 560 level. A shorttrading signal was triggered the following week at 540 level. A stop is placed above the highof MSH at 565. A profit level for MSH trading is set either at a previous swing low or MSLlevel, or until another MSL is formed to reverse its trend direction. A similar tradingopportunity for MSH is presented again in December 2002. A MSL trading opportunity isshown in April 2003 around 420 levels. A stop loss is set at MSL low (at 390).
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Three Bar Groups
,
Chart formations in Technical analysis require a group of bars to derive a pattern. Sometimes asingle bar or two bars can show great patterns, but as a group, 3-bar series groups providereliable patterns or confirmations for other major developing patterns. These groups of barsare called "key reversal" bars. This 3-bar group may also consist of well known two-barreversals or a single bar patterns within inside this group. Most of these 3-bar groups are partof a "fractal" formations or part of "market structures" where a prevailing trend showing signsof pausing or reversal of current trends. Bars with exhaustion price-action, "narrow range(with inside-days)" or "spike with ledges" are some of the 3-bar group pattern examples. 3-bargroup pattern formations near key support and resistance levels or near key moving averagesI (50 EMA, 200 SMA) offer great potential trade setups.1 Within the 3-Bar Groups, intra-bar relations like close and open values relative to other bar
, close and open values and how they are formed could give signals of continuation or reversalof trends. Gaps within the 3-bar patterns also have significance.Three Bar Pattern groups as the name suggests, will have three continuous bars. It can be inany time-frame or in any market instrument. A 3-bar group pattern is defined using the threebar's inter-bar Open, High, Low, Close relationships with each other. In my view, Three Barpatterns are relatively short trade setups and should be traded using other indicators. They aremore effective as reversals near the end of prolonged trends than in the middle of the trends.When markets making new highs and showing a series of signs of pausing or reversals, 3-barpatterns are more reliable than 3-bars formed in the middle of the trend. Two out of three 3Bar Groups may be successful but the concept also applies to bigger structures with threecontinuous major "swing highs" and three continuous major "swing lows". When tradingthree-bar groups, look for the third bars' range. When the range of the third bar is greater thanprior two bars, it tends to produce more reliable results.I
One of the 3-Bar Groups (Market Structures) is discussed in detail in this book and here Ipresent few of my favorite patterns that 1 trade.
1 Trading 3-Bar GroupsAll the 3-Bar group patterns listed below have trade-setups. Most of these patterns are shortterm based and targets are usually at a major "swing h i g h or major "swing low" based on thepattern setup. Stop orders should be placed to protect the trade within the 3-bar groups. Threebar group patterns fail when significant support or resistance is traded against the trade setup.When trading an upside 3-bar group, place a stop order below the lowest low of the three bars.When trading a downside 3-bar group, place a stop order above the highest high of the threebars.
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Trading Three Bar Groups.HI31 > HI21C[21 < C[ 1IL [ I l > L[21H[ 1I > HI21Trade above H[3]
3
1
Trade above H[1]
HI31 > H[21HI21 > HI1 IL[31 < L[21L[21 < L[ 1ITrade above H[3]or Trade below L[3]
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HI31 * H[21C[21 < C[31ot11 * C[21HI11 * H[31Trade above H [ l ]
L[21 < L[31L[ 1I < L[21H[31 * H[21HC21 HI11Series o f Small barsTrade below L[1]
H[41 < HI31C[31 * C[21c[21 < C[31WI < C[21C[11 * C[21Trade above H[3]
I
Trade above H[2]
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I
2.3. Matching HighsILows
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Matching HighsILows PatternMatching Highs and Matching Lows patterns occur at market bottoms and tops. Prices formkey support and resistance areas at certain price ranges, and attempt to break these levels for atleast 3 bars in a row. When the prices fail to break these levels, they form "matching lows" andmatching high patterns for a minimum of 3 bars, and these "matching highs" or "matchinglows" may signal a potential trend reversals. These patterns are more effective in daily andweekly charts. Intra-day tick charts with higher tick counts or time-frames are used whenfinding reliable matching highllow patterns.Trade:Trades are taken in the opposite direction prior to the matching highsllows pattern. After a"matching lows" pattern, a "long" trade may be entered above the high of the breakout bar.For a matching highs pattern, a "short" trade is entered below the low of the breakdown bar.I
1 Stop:
,
Place a "stop" order below the low of the pattern for a "matching lows" pattern. For amatching highs pattern, place a "stop" order above the high of the pattern.Target:Targets are placed from the trade entry in multiples of length of the breakout bar. For a longentry, place the first target at the length of the breakout bar above the entry, and the secondtarget is set at twice the length of the breakout bar above the entry. For short entry, place thefirst target at length of the breakout bar below the entry level, and the second target is set attwice the length of breakout bar below the entry.
bf atching Highs
IJ
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Trading Matching Highs PatternThe example above illustrates a "Matching Highs" pattern from the Russell Emini fitures(ER2) 6 10 tick chart. On March 26, 2007, ER2 rallied most of the day to form a top at the815.5 area. Late in the afternoon, Russell formed a Matching Highs pattern for a series of barsto suggest a potential short trade.1. Enter a "short" trade below the low of the breakdown bar at 813.6.2. The length of the breakdown bar is measured at 1.6 points.3. Set a profit target at 812 (length of the breakdown bar) and 810.4.4. Place a "stop" order above the high of the pattern at 815.5.
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The chart above illustrates an example of a Matching Lows pattern from the Russell Eminifutures (ER2) 610 tick chart. On April 5,2007, during the morning trading, ER2 formed amatching lows pattern at 815 area to suggest a potential long trade. Wait for a breakout bar toconfirm higher highs before placing a trade.1. Enter a "long" trade one-tick above the breakout bar's high at 8 16.3.2. The length of the breakout bar is 0.8 points.3. Set targets at 817.1 (length of the bar) and 8 18.4. Place a "stop" order below the low of the matching low pattern at 815.1.
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Stocks making new Highs and new Lows with high volume attract momentum players.Momentum players continue to push these stocks until the supply or demand diminishes. Butas in any rally or decline, these trends stop and reverse. The prices become oversold andoverbought creating a condition for exhaustion of the supply and demand. Hence, if theseprices reverse (could be brief), an opportunity is presented. Traders who wait and takeadvantage of these counter-trades are daring and risky, but they do present a healthyrisklreward profit ratio. The popular trading strategy is to wait for the trend to stop and reverseThe n-Bar RallyIDecline setup presents a technique of trading these counter-trend setups.Trade: The n-Bar RalliesIDeclines build up on based on new-highs and new-lows setups.Prices must make at least a 21-bar new high and new-low, and at least 3 new highs or 3 newlows successively-the higher the number, the better the pattern result. After an exhaustionmove, enter a long one tick or 5 cents above the last falling bar's high, or enter a short one tickbelow the last rising bar's low.Stop: Place a "stop" order one tick below the low of the falling bar in a long setup, or place a"stop" order one tick above the high of the rising bar in a short setup.
Target: Place a target 62% to 100% of the entire range of n-bar RallyIDeclines for long orshort setups. The other targets could be a major "swing high" or major "swing low" prior tothe n-Bar setup.
n11-Ear- Declines
Lows
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Trading 11-Bar Rallies/DeclinesI@ER~ 6: 0 Tick Bars L= 823.80 -0.30-
5/10/076 2 3 PM
1829.00
Tradin~n-Bar DeclinesThe example above illustrates an n-Bar Decline pattern from the Russell 2000 Emini chart.On May 10, 2007, ER2 sold off in the pre-afternoon session and started to make new lowsaround 12pm. Six new lows bars were traded before a reversal bar triggered a trad above theprevious bar's high. This scenario presented a trade long in the downtrend.1. Enter a "long" trade one tick above the previous bar's high at 822.7.2. Place a "stop" order below the low of the n-Bar decline at 821.6.3. Target between 62% and 100% of the n-Bar decline range from 824.8 to 826.
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Trading n-Bar Rallies/Declines5/10/076:06 PM
CVX - Weekly L=78.19 -1.56
-
4
........ ....Stop
tl OC1'\ kt.lhl
t
65.00
Trading n-Bar RallyThe example above illustrates an n-Bar Rally setup from the Chevron weekly chart. FromJanuary to March of 2005, Chevron's stock rose from $52 to $63. Chevron made a series ofhigher-high prices to complete n-Bar High pattern. At the beginning of April, 2005, Chevronstopped making new highs and presented a potential short setup.1. Enter a "short" trade below the low of the last higher-high bar at $59.70.2. Place a "stop" order above the high of the last n-Bar setup at $63.25.3. Place the target from 62% to 100% of range of the n-Bar setup from $55 to $53.
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Seven-Day Narrow Range &Inside Bar &
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NR7ID with ORBToby Crabel popularized a trading pattern called NR7ID with ORB in his book, Day Tradingwith Short Term Price Patterns and Opening Range Breakout.7-Day Narrow Range (NR7): NR7 is defined as the daily range which is narrower than theprior 6-Day range.Inside Day (ID): Inside Day is defined as a trading day that has range which is completelyencompassed by the previous days' range. The prior day's high is higher than the current days'high and the prior day's low is lower than current days low.Opening Range Breakout (ORB): Is a trade executed when prices trade a predeterminedamount above or below the opening range. The predetermined range is calculated as the 10-baraverage distance between open to high and open to low.Trade: Enter a trade after the NR7ID in the direction of the breakout. Enter a long trade onbreakout at the ORB value above the high. For a short trade, enter a short trade on breakdownat the ORB value below the Low.Stop: For breakout trades, place a stop order at (low-ORB). For breakdown trades, place a stoporder at (high + ORB).Target: "NR7ID with ORB" is primarily a trade entry technique and the targets are set at prior"swing highs" and prior "swing lows" or at key resistance and support areas.
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Trading NR7ID with ORB,NR7ID Pattern
Trading NR7ID with ORB PatternThe chart above illustrates a series of NR7ID patterns (shown in circles) from the Russell2000 (ER2) 610 tick chart. An ORB is computed for a trade entry on the charts. Trades areonly initiated in the direction of the breakdown or breakout above the high by ORB (at high +ORB), or below the low by ORB at (low - ORB). A stop order is placed in the oppositedirection of the trade. As an example, for a breakout from NR7ID, a stop is placed at (lowORB) and for a short trade, a stop is placed at (high + ORB).
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Trading NR7IDGOOG - Daily L=465.75 -1.06
5 / 9 / 0 7 7:45 AM-490.00
Previous Bar High/Low
+-
-485.00
II
480.00
-370.00
-465.00
-160.00
-155.00
-350.00
-445.00
-110.00Source. TradeStatiou
5
12
19
26
I
AprU7
9
16
23
I
MayU7
7
Day Trading NR7ID with Previous bar HighILowsThe chart above illustrates an example of a NR7ID pattern with previous bar highsllowtrading from the GOOG daily chart. An efficient way to trade NR7ID bars is to use theprevious bar high, or the previous bar low as the trigger points. Trade stops are placed on theother end of NR7ID against the trade. Usually these trades are very short-term and should beclosed within 1-3 bars (days). In the chart above, on March 12th, GOOG formed a NR7IDpattern at A. A trade setup is to enter a long trade on the next day if the price trades 10 centsabove the previous days high or enter a short if the price trades 10 cents below the previousdays' low. Trades at B and D are long trades. Trades at C and E are short trades.
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Seven Day Wide-Range andOutside Day Pattern(WR70D)
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WR70D PatternA 7-day Wide Range bar is formed when a current bar has the widest range in the last 7 bars.An outside bar develops when the low of the current bar is lower than the previous bar and thecurrent high is higher than the previous bar. Trades are only entered in the direction of thecurrent trend.Wide Range bars forming at the start of a trend or at key reversal levels could signal strongbullish and bearish trends. If Wide-Range bars are forming out of a consolidation range, theysignal price continuation in the direction of breakouts. And Wide-Range bars forming at theend of the rallies and sell-offs, the bars may be signaling exhaustion and potential trendreversals.
Trade: Wait for WR70D to form in the current up or down trend. In an uptrend, trade only"long" one tick above the high of the WR70D bar. In down trends, trade only "short" one tickbelow the low of the WR70D bar.
Stop: Place a "stop" order one-tick below the low of the WR70D bar (for breakouts). Place a"stop" order one-tick above the high of the WR70D bar (for breakdowns).Target:Set targets of 50% to 100% of the WR70D range from the breakout or breakdowns levels.
D
6:OTlck Bars L=1452 75 0 0 0
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4 / 9 / 0 7 5:38AM
Trading WR70D Pattern
Trading WR70D PatternThe example above illustrates a WR70D pattern from the Russell Emini ( E M ) 30 minutechart. Please note the Wide Range bar inset. Wide Range bars are only traded in the breakoutdirection of the trends. A 7-day Wide Range bar signals trend shift. Long trades are initiatedhigh above the Wide Range bar. In the example above, bars A, B and C are in down-trendand trades are only taken from downside. Bar D is formed in uptrend and trade is only takenin the upside direction.1. Enter a "long" trade one-tick above the high of the WR70D bar.2. Place a "stop" order one-tick below the low of the WR70D bar.3. Place targets from 50% to 100% of the WR70D range from the breakout level.
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Trading WR70D Pattern.
Trading WR7OD PatternThe example above shows a 7-day Wide-Range with outside bar formations from the S&Pfutures 610 tick chart. WR70D bars signal the exhaustion and trend reversals. TradingWR70D coupled with any confirmation indicators, or other market patterns, could beprofitable. The first WR70D bar was formed around lunch time in an uptrend. A "long" tradecan be entered above the high of the WR70D bar at (1). The second WR70D bar is formed ataround 1:30 pm in downtrend. A downside trade is triggered below the low of the Bar 2. Thethird WR70D bar is a trend reversal bar and trade is triggered above the high of the WR70Dbar. The fourth WR70D bar is a continuation bar similar to the third WR70D bar.
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Chapter 3: Pivots3.1. Floor Pivots
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Floor PivotsTraders believe the market direction can be divulged by Floor Pivot levels. They buy or sellthese pivot levels and exit at either the first or second resistance levels. They also have theoption to sell the pivot level and cover at the first or second support levels. Floor pivot tradingis an effective way to find support and resistance levels, and is widely used by many traders.Prices around pivot levels signal choppy or trend market modes. In bullish markets, whenprices consolidate around the pivot levels, prices tend to pick the prior trend direction andtrade higher. Pivot trading is very crucial and most traders utilize daily Pivots for trading.However, weekly and monthly Pivots are equally important. Some traders compute the midpoints between the Pivot and support or resistance levels and plot them on their charts.A confluence of pivots increases the chance of potential support/resistance compared to asingle pivot level. Often there will be many confluences between daily and weekly pivots on achart and these levels could be significant for traders.It is almost rare to see price reaching beyond R3, R4 or S3 and S4 levels on regular dailytrading. Also, it may be rare to see prices outside of weekly S2 and R2 levels. Some tradersuse weekly extreme levels and short weekly "R2" level and cover at the weekly Pivot or buythe weekly "S2" level and sell at weekly Pivot levels.Pivots are very efficient for both day and swing trading. Pivot trading is quite profitable usingthese supportfresistance levels in the direction of the trend along with good moneymanagement techniques.
Floor Pivot Calculations
Pivot Point (PP) = (H+L+C)/3First resistance (Rl) = 2*PP -LFirst Support (Sl) = 2*PP - HSecond Resistance (R2) = PP + (Rl-S 1)Second Support (S2) = PP - (Rl-S 1)Third Resistance (R3) = R1 + (H - L)Third Support (S3) = S 1 - (H - L)Where, H=High, L = Low, C = CloseThese equations above can be also appliedweekly, monthly Pivot calculations.
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Trading Floor Pivots
I
-
e E R 2 . D - 15 min L= 81 1.40 -8.00
I
!
---- - --
Trading Floor Trader PivotsThe example above illustrates Pivot levels from the ER2 15m chart. On February 8th, themarket traded in a narrow range around the Pivot level suggesting a contraction in thevolatility. On the following day, ER2 opened above the previous close and traded near theprevious day's high but could not hold on to this high prices. After the first hour, prices tradedbelow the Pivot level at 8 17.8 suggesting a potential volatilitylrange expansion. ER2continued to trade below the Pivot point, but above the key support level S 1 until lunch time.At around 12:30p.m., ER2 broke through the key support level S 1 at 8 14