0 Trend Indicators

Moving Average

Moving average is the average of prices over a specified number of periods. It is a smoothed correlation between currency rates and time periods. The time period of any moving average defines how much it will be smoothed. For example, when a Moving Average is calculated by adding the closing prices for the last 5 bars, then it is defined as a 5-period MA.

Simple Moving Average — SMA:
SMA = (P1+P2+P3+….+Pn) / n
P= Price — price of i-bar. Usually closing prices are used.
n — MA period. This is a number of bars on which the indicator is calculated.
The main disadvantage of SMA is that it counts the price twice, when it is received and when it leaves the area of calculation. That is why improved variants of the indicator should be better used.

Weighted Moving Average (WMA):
WMA = (w1*P1+w2*P2+w3*P3+….+wn*Pn) / (w1+w2+w3+…+wn) wi — the so called weight or coefficient which is assigned to every price. The closer the price to today the larger coefficient is assigned.

Exponential Moving Average (EMA):
EMA(t) = EMA(t — 1) + (K x [Price(t) — EMA(t — 1)],
where t — current time period (current bar),
t — 1 — previous time period (previous bar),
K = 2 / (n + 1),
n — EMA period.

The main advantage of the Exponential Moving Average (EMA) is that it discounts both prices of the previous and current periods. Every subsequent value becomes more significant. MA length is better to choose for every specific instrument on which you trade and for every specific chart scale.
Some traders believe that it is better to use Fibonacci figures. For example, the following ones.

How to analyze Moving Averages:
If the price line crosses the Moving Average line from below, then this is a signal to buy. If it crosses from above, then it is time to sell.

The first method gives many false alarms as markets become faster each year.
That is why cross-points of two Moving Average indicators of different periods
are used (n1 and n2);

Moving Average indicators of a greater period may specify the trend themselves. When the value of the indicator is more than 40 it becomes less sensitive to price movements and indicates only the general direction of the movement (Trend);

The points of the most significant divergence of MA and the price chart indicate that the market is overheated greatly and correction is possible.Moving Average signals are more effective on a trend market and less effective when the market is flat. As MA is a lagging indicator, it gives many false alarms.


Source: Forex Killer

0 The NickB's 4H Scalping Trading Method

The setup for the trades is simple...

Pair: GBP/JPY
Timeframe: 4 hour
Indicators: NONE!!

What we want to do first is to find recent swing highs and swing lows where the price has hit and made a significant reversal. Here are some examples.

At each of the orange lines price changed direction and moved, over many 4 hour candles, hundreds of pips away. These orange lines are called scalp lines.
So what do we do with these scalp lines?? You trade them! When the price returns to a scalp line you simply place a trade on the break of the line using a 50 pip stoploss and a 50 pip takeprofit. That's all there is to it!
Here is an example of a scalp line break:

Not only are these trades easy to find, they can be taken with pending orders! So if you work full-time this is a great method to use!
If anyone has any questions or comments feel free to post them. And, just to be clear, this is not my system. It was developed by Nick Bencino, aka NickB.

Here's a copy of Nick's ebook that describes his entire system.



Download


How to download : Click here

0 The Pin Bar : Some Final Thoughts

Remember that it is fine to trade less frequently than everyone else. If 90% of forex traders will fail it is because many of these traders have ‘an itch’ to trade and feel that they need to be making many trades to make good money. Do not be like them. Select the best pins and aim for longer time frames if you want to gain money. When Jim is providing trading examples he explains that good traders should be hunting with a rifle from the bushes – they wait for the best setup (using pin bars in this case) then nail the trade. Over a one month period you may only find one good pin bar setup for each currency pair.
 If you look at six currency pairs this would be six good pin bars in a month. This might be all you trade for the month but traders can still make good money by exercising patience this way. Jim recommends that traders who are new to using pin bars use the 4-hour time period as the minimum time period and only try trading on time frames smaller than this when more experienced. Daily and weekly pins are better and are more reliable.
Also note that if you trade with longer time periods you will have much larger stops; the range of price movement in a 1 week period is considerably greater than the range of price movement in a 4 hour period. It may be necessary to carefully select a broker that allows you to have micro-lots ($1000 lots) so you can put on a position size that suits your risk. (Some brokers such as roboforex.com which allows you to take a position of any dollar size! This is not a recommendation as to which broker you use but to point out that a trader with a small account size can efficiently manage risk even with large stop losses.)

Playing daily or weekly pins also means that you are not glued to your computer. You can check in a couple of times a day to monitor your trades and shift your stop losses as appropriate. Demo trade pin bars first. When you can trade them profitably for 3 months then open a small account (with a broker like Oanda.com that provides a lot of flexibility in position sizes, or another broker that allows micro-lots to be traded). Trade with the money in this account until you can trade profitably for three months. Make sure you are using small position sizes when you start to trade using real money. Then begin to trade with your full size account or with larger position sizes.

FijiTrader has recommended to some new traders that they start trading risking a small amount of their trading capital with every trade. An appropriate level to start at may be 0.5% (yes, half a percent) of the trading capital. This allows new traders to become used to the emotional and psychological aspects of trading real money. Each week the amount risked may be increase by 0.1% until the trader reaches a position size that they are finally comfortable risking on each trade (probably 2-3%).


Hope be usefull..

0 Finding the Pin Bars

The purpose of this section is to give several examples of what a pin bar looks like. Take a look at Figure 5 and the bars that have been numbered (either below or above the bar in question). The chart shows the daily charts for the GBPUSD pair for a period from the 20th January 2006 to the 23rd February 2006. Look at the image and decide whether the numbered bars are good pin bars to trade, based on how they look and where they are. Decide which of these bars, if any, you would trade. See if your comments match those made below.

1. This bar has good form. The open and close are nearly equal and they are very close to one side of the bar (in this case, the bottom) and are lower than the previous eye. But the nose is not very long and it doesn’t protrude much from the prices of the previous eye and the bar before it. 
2.  The open and close are nearly equal and are quite close to one side of the bar (in this case, the high) and are also higher than the previous eye. The nose is not very long and it does not protrude much from the previous eye.
3. The open and close for this bar are nearly the same but they are getting quite close to the middle of the bar – it is almost a neutral bar. It is good that the open and close are above the previous eye. The nose is not very long because of this. (Note that if you played this pin on a break of the pin bar (taking a long position) there would have been no trade as prices went down on the next bar.) 
4. The open and close are nearly the same but they are also right in the middle of the bar. It is also an inside bar (or very close to it) where the bar makes a lower high and a higher low than the previous bar – so prices are not protruding.
5.  The open and close are near the same price and are right near one end of the bar and are lower than the previous eye. The nose is nice and long, which is good, and protrudes nicely from previous prices. This would have been a good pin to play on the break and we can see that for the next two bars if we had taken a short position there would have been good opportunity to profit from the setup.
6. For this bar the open and close are near one end of the bar and are higher than the eye. Note that the nose doesn’t stick out much beyond the low of the bar that has been numbered 4, so prices have not protruded much. If we look at the next bar we see that prices only go 5 pips above the high of bar number 6, so we would have not entered a long trade anyway. 
7. The open and close are not at nearly the same level and the close is nearly half way down the bar and is not higher than the low of the previous eye! The nose does protrude from the prices, but because of the position of the close this is not a pin bar! 
8.  In contrast, the close of this bar IS within the previous eye, but it is still half way up the bar! The nose also doesn’t protrude much beyond the previous prices. Overall, this would not be a good pin bar to play. 
9. Open and close are near one end and are enclosed by the previous eye. The nose is nice and long but fails to protrude from the surrounding prices much, so it would not be a good pin bar. 
10. The open and close are near one end of the bar. However, the nose does not stick out. Not a pin bar. 
11. This looks promising with open and close near one end of the bar. They are well placed compared to the first eye on the left. The nose sticks out a bit. This bar isn’t at a swing high or swing low or at confluence, though. 

Which of these pin bars should a beginner play? The bars numbered 1 and 5 seem to have the best form and have the best long noses that stick out from the surrounding prices. If you are patient over this one month period two pin bars would have been played. They both would have worked well with lots of potential for profit. YES it is easy to say this in hindsight but LOOK for the good pin bar formations while you are trading and try it out. (While trading GBPUSD over this period I personally only took the pin bar labelled 5 and this was the only daily pin bar I traded on the GBPUSD for that period.)

 By : Lincoln (a.k.a. lwoo034 at Forexfactory.com forums)  





Next....Some final thoughts

0 Trading the Pin and Managing Risk

This section discusses what to do once the trade has been entered and how to manage the risk during the trade.

 So, you’re in the trade - congratulations! Unfortunately entering the trade is simpler than exiting it correctly. Very often several traders in a forum will enter a trade based on pin bars yet one trader will make twice as much profit as another trader because of the differences in the way they exited the trade. The recommendations in this section are based on the following four premises:

1. Very few good pin bars (swing high/low or bouncing off confluence) will move directly to hit the initial conservative stops that trader has placed, without first giving the trader the chance to take some profits (this may happen roughly 10% of the time or less), 
2. Traders should take the profits as they are offered by the market,
3. Traders should NOT let a winner turn into a looser (this point has been reiterated by several experienced traders at the forexfactory.com forums). Hell, you’ve earned this profit; do not let the market take it back, and, 
4. There are PLENTY of opportunities to trade pin bars, be patient and take only the best pin bar setups! 

In essence is it important to close out part of the position early and learn to shift the stop loss to the break even point quite quickly. The first thing that a trader should try to do when playing a pin bar is close out the trade incrementally. This means that the trader closes part of their position early, at small profit. The benefits of doing this stem from the fact that it banks some profit (consistent winners are those that bank profit); the corollary of this is it reduces the number of lots that can then hit the stop loss (so it has reduced the remaining risk for the trade).

The trader can achieve this objective by splitting the total position into several distinct trades or lots. (Remember that no matter how it is split the total value at risk should not exceed your threshold.) The preferences of how the trade is split up and where the targeted profits are depend on the individual trader. It is best to take some profit initially at 20-30 pips profit (depending on the expected range of prices on the currency pair you’re trading and the time-frame you’re trading), then take more profit a little further on.

It is always uncertain how far a trade will run. Trades resulting from pin bars might run from one bar before the prices turns back, or they may run for many bars. Lock some profit in and leave a portion (1/2, 1/3 or 1/4) of your trade to run until completion. When you lock in your profit by closing out a portion of your trade early you have banked profit (realised profit as opposed to unrealised profit through having the position un-closed) and your total open position size has decreased, meaning that if there is a sharp reversal to your initial stops then the loss has been reduced by a reduced position size and already having banked some profit.
(If you do not understand this concept then please take a pen and paper and fiddle with some numbers and prove it to yourself.) After a trader has initially banked some of their profit they will want to consider shifting the position of the stop loss. Exactly how this is performed is up to the trader and will depend upon their own trading style. It is an important part of playing the pins, however, as successful traders do not want their winning trades to turn into losers!

“So when I get up [into a reasonably profitable position] on a trade the "golden rule" comes into play: never ever let a winner become a loser, for any reason, no matter the scenario …” -Vegas.

Once a trader has taken some profit and shifted the stop loss to the break even point they are in a “free trade”. All pressure is now off the trader, no matter what happens they have banked some profit on this trade and made some money. The trade can now run for large profits without the trader worrying about making a loss on the trade.

“Trading is about "free trades". Those of you who don't understand this concept need to stop trading until you do. It doesn't matter what method you use.” -Vegas.

Because we cannot know what will happen to the price in the future it is necessary that some profit be taken early. Selecting the BEST pin bars and exercising patience will mean that a trader can cherry-pick the pin bars with the highest chance of success. Around 70% of these will be quite profitable. If 10% just reverse to hit the initial stops, then these losses are more than made up for by the profits taken early on many other trades. Around 20% of good pin bar trades will good winners where the price runs and the final portion of the trade will be chasing big pips and bigger profits.

Can a trader prevent losses that may occur while you trade the pins? No. This is why it is wise to use the initial stops at the start of the trade. This means that the trader has defined the circumstances under which they know their trade setup has failed and they do not want to lose more money. Doing this indicates that the trader has accepted that there is some risk of the trade failing. These losses are the cost of doing business in the forex market – traders need to accept them.

By : Lincoln (a.k.a. lwoo034 at Forexfactory.com forums)  


Next....Finding the pin bars

0 Playing the Pin Bar

 This section details how the pin bar can be played. The advanced tutorial provides more details of how a more experienced trader might approach the pin bar. Traders that are new to pin bars may put a limit/stop order under the bottom of the pin bar. It is placed 10 pips under to account for a false break-out (unlikely to be 10 pips). When this order has been triggered then the trend will probably be heading in the opposite direction of the nose. This approach also means that the trade does not need to be monitored so closely.

One question that traders may want to ask themselves as they contemplate entering a trade is this: “When will I know if the trade has gone against me and this setup is not working?”
When you know how to tell whether or not your trade setup has failed and is not going to work you can begin to calculate how much risk you can take. These calculations are performed before placing orders so that the appropriate level of risk (on the basis of account size) may be determined so that an appropriate position size may be taken.

The conservative approach to placing stops is to place stops 10 pips from the end of the pin-bar/nose (the point where the prices are not going, far from the eyes). This level is acting as resistance now. The stop loss and entry orders are placed 10 pips away from highs and lows because sometimes prices will creep a little big past these highs or lows which can have a negative impact on the trade setup.
Traders need to discover their own preference for stops and risks based on the pin bar. The Advanced Tutorial gives some more ideas of how to enter and set the stop losses.


By : Lincoln (a.k.a. lwoo034 at Forexfactory.com forums)



Next .... Trading the Pin and Managing Risk

0 Introduction to Pin Bars

This section explains what the pin bar is. Following sections explain how it may be traded. Generally examples are only given for pin bars pointing one way. The same concepts can be applied to pin bars pointing the other way (just reverse the concepts!).

Trading is a probabilities game. There is always risk of loss and the trade going ‘the wrong way’ after the pin bar has formed. All we can expect to do is to tip the odds in our favour. When good pin bars are traded then a trader can tip the odds in their favour. Some trades will result in losses; such losses will occur with any trader from time to time. (Even a good pin bar setup may result in a loss!)

Looking at Figure 1 we can see what a completed pin bar looks like. See that this Pinocchio bar (which is abbreviated to ‘pin bar’) is poking his long nose outwards and is telling you a lie (an untruth) about where the price is going. The name is based on the old European story about the wooden boy, Pinocchio, whose nose grew longer every time he told a lie.
The bigger the lie the bigger the nose! For us this means that we want a nice long nose when we see a pin bar. We trade in the opposite direction to where the nose is pointing (so the pin bar in Figure 1 indicates that traders should be taking short positions while trading EURUSD). The high of the bars on either side of the pin are the ‘eyes’ for the pin bar. Note that the open and close of the pin must be within the left eye. For a nose pointing up, this means that if the high of the eye is roughly at the 1.2175 level (as shown in Figure 1), then the open and close of the pin bar must be below this level of 1.2175 (as is the case here). If the open/close is outside of this level then it is not a real pin bar (see the Advanced Tutorial for some ideas on how a trader might deal with a bar that looks like a pin bar but fails to meet this requirement).

The pin bar means that the price is going to move in the opposite direction to where the nose is pointing. In Figure 1 the nose is pointing up so the trader should expect prices to move down.
A pin bar must:
• have open/close within the first eye,
• protrude from surrounding prices (‘stick out’ from surrounding prices); it cannot be an inside bar.
A good pin bar has:
• a long nose (and a long nose relative to the open/close/low),
• a nose protruding a long way from the prices around it (it ‘sticks out’),
• the open / close both near one end of the bar.

The pin-bars can be played by themselves as they occur on the charts. One forexfactory.com member did some automated back testing and found that merely playing a pin bar does not provide spectacular results. You need to carefully select the pin bars you want to play. The best pin bars are played as they bounce off either:
1) Fibonacci levels (retracements of the previous move)
2) Important pivot levels
3) Moving averages
4) Confluence (several MA or Fib levels in the same general region)
5) Swing high / swing low
6) Retracement of the current move (must retrace a minimum of 23% fib retracement of the current move), which is a lower probability play.

For the BEST results a trader may play a pin-bar on the swing high (or swing low) or a pin-bar that is bouncing off confluence (of MA and Fib levels). The pin bar is a very reliable setup under these circumstances, indicating that there is a high probability that prices will change direction – which is very tradeable setup!
Shown is a cluster of Fibonacci retracement levels from the big moves down during 2005. Note that the pin bar is bouncing right off these. This means that the pin bar has bounced off an area of confluence!

Shown in Figure 2 is a close-up of the pin bar that formed on the EURUSD pair weekly chart. Notice that there is confluence of fib retracement levels from the more recent previous movements down. This pin bar has punched through these, after three previous bars were bouncing off this area. This would have been a good pin bar to catch. The three previous bars failed to move through this area, showing it has significant resistance. The pin bar has moved a long way through it before moving right back down again. The high made by the pin bar is probably the highest price that will reached for weeks (or months).

Is this a good pin bar formation? The nose of the pin bar pokes out a long way above previous prices. It has made it through some resistance at the confluence of fib levels and bounced off the longer-term fib levels (in Figure 2). The open and close are below the high of the previous bar (the eye). Yes – this is a good pin bar.



By : Lincoln (a.k.a. lwoo034 at Forexfactory.com forums)


Next.....Playing the pin bar

0 Top 7 Trading Entry Tips

These are the Top 7 Trading Entry Tips

1. Think contrarian to other market participants, and act on your signals without emotion.  
2. Uses a simple naked price chart (no magical indicators).  
3. Uses timeframes 1 hour or above  
4. Use Patterns that are easily identified.  
5. Look for patterns that repeat themselves often on the time frame we trade.  
6. Use price action as confirmation , don’t get in before!  
7. Trades with the path of least resistance (short term daily chart trend pressure) when starting to learn.

Written By: Nial Fuller ; Price Action Trading Course,

0 Trading Education, Volume – The Key to the Truth by Tom Williams

Volume is the major indicator for the professional trader.

You have to ask yourself why the members of the self-regulated Exchanges around the world like to keep
true volume information away from you as far as possible. The reason is because they know how important
it is in analysing a market!
The significance and importance of volume appears little understood by most non-professional traders. Perhaps this is because there is very little information and limited teaching available on this vital part of
technical analysis. To use a chart without volume data is similar to buying an automobile without a gasoline tank.Where volume is dealt with in other forms of technical analysis, it is often viewed in isolation, or averaged in some way across an extended timeframe. Analysing volume, or price for that matter, is something that cannot be broken down into simple mathematical formulae.
This is one of the reasons why there are so many technical indicators – some formulas work best for cyclic markets, some formulas are better for volatile situations, whilst others are better when prices are trending. Some technical indicators attempt to combine volume and price movements together. This is a better way,but rest assured that this approach has its limitations too, because at times the market will go up on high volume, but can do exactly the same thing on low volume. Prices can suddenly go sideways, or even fall off, on exactly the same volume! So, there are obviously other factors at work. Price and volume are intimately linked, and the interrelationship is a complex one, which is the reason
TradeGuider was developed in the first place. The system is capable of analysing the markets in real-time
(or at the end of the day), and displaying any one of 400 indicators on the screen to show imbalances of
supply and demand.

Urban Myths You Should Ignore
There are frequent quotes on supply and demand seen in magazines and newspapers, many of which are
unintentionally misleading. Two common ones run along these lines.
• "For every buyer there has to be a seller"
• "All that is needed to make a market is two traders willing to trade at the correct price"
These statements sound so logical and straightforward that you might read them and accept them immediately at face value, without ever thinking about the logical implications! You are left with the impression that the market is a very straightforward affair, like a genuine open auction at Sotheby's perhaps.
However, these are in fact very misleading statements.
Yes, you may be buying today and somebody may be willing to sell to you. However, you might be buying
only a small part of large blocks of sell orders that may have been on the market-makers' books, sitting
there, well before you arrived on the scene. These sell orders are stock waiting to be distributed at certain
price levels and not lower.

The market will be supported until these sell orders are exercised, which once sold will weaken the market,
or even turn it into a bear market.
So, at important points in the market the truth may be that for every share you buy, there may be ten thousand shares to sell at or near the current price level, waiting to be distributed. The market does not work like a balanced weighing scale, where adding a little to one scale tips the other side up and taking some away lets the other side fall. It is not nearly so simple and straightforward.

You frequently hear of large blocks of stock being traded between professionals, bypassing what appears to
be the usual routes. My broker, who is supposedly "in the know", once told me to ignore the very high volume seen in the market that day, because most of the volume was only market-makers trading amongst
themselves. These professionals trade to make money and while there may be many reasons for these
transactions, whatever is going on, you can be assured one thing: It is not designed for your benefit. You
should certainly never ignore any abnormal volume in the market.

In fact, you should also watch closely for volume surges in other markets that are related to that which you are trading. For example, there may be sudden high volume in the options market, or the futures market.
Volume is activity! You have to ask yourself, why is the ‘smart money’ active right now?

.........................................
Author: Tom Williams,
Master the Markets
Taking a Professional Approach to Trading & Investing by
Using Volume Spread Analysis
Published by TradeGuider Systems

0 Trading Education What is the Market? by Tom Williams

Every stock market is comprised of individual company shares that are listed on an exchange. These markets are composed of hundreds or thousands of these instruments, traded daily on a vast scale, and in all but the most thinly traded markets, millions of shares will change hands every day. Many thousands of individual deals will be done between buyers and sellers. All this activity has to be monitored in some way. Some way also has to be found to try and gauge the overall performance of a market. This has led to the introduction of market indices, like the Dow Jones Industrial Average(DJIA) and the Financial Times Stock Exchange 100 Share Index (FTSE100). In some cases the Index represents the performance of the entire market, but in most cases the Index is made up from the "high rollers" in the market where trading activity is usually greatest.

In the case of the FTSE100, you are looking at one hundred of the strongest leading companies' shares, weighted by company size, then periodically averaged out to create an Index. These shares represent an equity holding in the companies concerned and they are worth something in their own right. They therefore have an intrinsic value as part-ownership of a company which is trading.The first secret to learn in trading successfully (as opposed to investing), is to forget about the intrinsic value of a stock, or any other instrument. What you need to be concerned with is its perceived value -its value to professional traders, not the value it represents as an interest in a company. The intrinsic value is only a component of perceived value.
This is a contradiction that undoubtedly mystifies the directors of strong companies with a weak stock! From now on, remember that it is the perceived value which is reflected in the price of a stock, and not, as you might expect, its intrinsic value. We shall return to this later, when looking at the subject of stock selection.
Have you ever wondered why the FTSE100 Index (or any other index) has generally shown a more or less continuous rise since it was first instigated? There are many contributory factors: inflation,constant expansion of the larger corporations and long-term investment by large players; but the most important single cause is the simplest and most often overlooked – the creators of the Index want it to show the strongest possible performance and the greatest growth. To this end, every so often they will weed out the poor performers and replace them with up-and-coming strong performers.

.............................................

Author: Tom Williams,
Master the Markets
Taking a Professional Approach to Trading & Investing by
Using Volume Spread Analysis
Published by TradeGuider Systems

0 Trading The Largest Business in the World

Every working day, billions of dollars exchange hands in the world's stock markets, financial futures and currency markets. Trading these markets is by far the largest business on the planet. And yet, if you were to ask the average businessman or woman why we have bull markets or why we have bear markets, you will receive many opinions.
The average person has absolutely no idea what drives the financial markets. Even more surprising is the fact that the average trader doesn’t understand what drives the markets either! Many traders are quite happy to blindly follow mechanical systems, based on mathematical formulas that have been back-tested over 25 years of data to ‘prove’ the system’s predictive capacity. However, most of these traders have absolutely no idea whatsoever as to the underlying cause of the move. These are intelligent people. Many of them will have been trading the financial markets, in one way or another, for many years. A large number of these traders will have invested substantial amounts of capital in the stock market.
So, despite financial trading being the largest business in the world, it is also the least understood business in the world. Sudden moves are a mystery, arriving when least expected and appearing to have little logic attached to them. Frequently, the market does the exact opposite of a trader's intuitive judgement. Even those who make their living from trading, particularly the brokers and the pundits, whom you would expect to have a detailed knowledge of the causes and effects in their chosen field, very often know little about how the markets really work.
It is said that up to 90% of traders are on the losing side of the stock market. So perhaps many of these traders already have the perfect system to become very successful – all they need to do is trade in the opposite direction to what their gut feeling tells them! More sensibly, this book will be able to help you trade intuitively, but in a way a professional does.
Below is a brief series of questions – as an experiment, see if you can answer any of them:
• Why do we have bull markets?
• Why do we have bear markets?
• Why do markets sometimes trend strongly?
• Why do the markets sometimes run sideways?
• How can I profit from all of these movements?
If you can answer these questions with confidence you do not need to read this book. If on the other hand you cannot, do not worry because you are not alone, and you will have the answers by the time you have reached the end of the book.
It is interesting to note that the army puts a great of effort into training their soldiers. This training is not only designed to keep the men fit and to maintain discipline, but is designed around drills and procedures learned by rote. Drills are practised repeatedly until the correct response becomes automatic. In times of extreme stress which is encountered in the haze of battle (trading in your case),the soldier is equipped to quickly execute a plan of evasive action, suppressing fear and excitement,ensuring a correct response to minimise or eradicate whatever threat the soldier is exposed to.Cultivating this automatic and emotionless response to danger should be your mission too.Good traders develop a disciplined trading system for themselves. It can be very sophisticated or very simple, as long as you think it will give you the edge you will certainly need. A system that is strictly followed avoids the need for emotion, because like the trained soldier, you have already done all the'thinking' before the problems arrive. This should then force you to act correctly while under trading duress. Of course, this is easy to say, but very difficult to put into practice.

Remember, trading is like any other profession, insofar as the accumulation of knowledge is concerned, but this is where the similarity stops. Trading is a rite of passage – the road will be long,the terrain will be tough, you will suffer pain. Trading is not glamorous! At this juncture, you do not need to worry about any of these things. This book will act as your ‘brief’, ‘intelligence report’, and‘operations manual’. Read through the whole of this book – it will serve you well. You may not agree with all of the content, but that is not important – if you have absorbed the principles, the purpose of this book will have been fulfilled.
As you gain more experience, you will see that the markets do in fact move to the dictates of supply and demand (and little else). Imbalances of supply and demand can be detected and read in your charts, giving you a significant advantage over your peers. If you own the TradeGuider software, you will see that it does an excellent job of detecting these key imbalances for you, taking the hard work out of reading the markets, and enabling you to fully concentrate on your trading.

.........................................
The review: Master the Markets by Tom Williams
Published by TradeGuider Systems

0 Forex Strategy Bad News Gaps

The ultimate poop trade! You just recently bought a position because of a very good bullish signal. All confirmation is positive, it moves up nicely the first day. THEN, the dreaded news! The company issues an earnings warning, the SEC announces a surprise audit, a contract gets cancelled. Whatever the news, the price drops 20%, 30% or greater.

The question is, “What to do now?” Do you sell the stock, take a loss and move on? Do you trade it at the new levels? Do you hold and/or buy more at these levels? What is the best course of action?
Traders and long-term investors will have completely different outlooks. The trader bought the stock a few days back, due to specific parameters for making that trade. He should consider liquidating the trade immediately and move his money to better probabilities. The reason for putting on the trade, for a short-term trade, has completely disappeared after the massive down move. The longer-term investor has a few more analytical options. They may want to hold the position because the candlestick formations indicate that the price will move back up or liquidate because the Candlestick signal shows further decline. Reading the signals becomes an important element in knowing what to do in a “bad news” situation.
A “bad news” gap down has a multitude of possibilities after the move. The prior trend gives you valuable information on how to react to the move. Of course, the news is going to be a surprise or there wouldn’t be the gap down. Analyzing the trend prior to the move gives you a good idea of how much of a surprise the announcement or news bulletin is.

For example, IBM, Figure 30, recently reported lower earning expectations. The price gapped down. However, you have to analyze whether this news was a complete surprise or whether the gradual decline in the stock price was anticipating the coming news. As can be seen in the IBM chart, the price had been declining for three months before the actual news was announced. The smart money was selling from the very top, months ahead of time. It was the diehards who held on until the bad news was reported. As the chart shows, the final gap down produced a long legged Doji, indicating massive indecision. From that point the buyers and the sellers held the price relatively stable for the next few weeks. This now becomes one of the few times that a technical analysis has to revert back to fundamental input. Unless you believe that the markets in general are ready for a severe downtrend, consider what the chart is telling you. The price of IBM stock was reduced from $125.00 per share down to $87.00 per share. The last down move produced a Doji. The price has not moved from that level for two weeks.

Figure 30 - IBM

Now let’s look at the fundamental input. IBM, a major U.S. company, well respected, known to have excellent management. And like any other quality company, it has made marketing or production mistakes from time to time through the years. The announcement made that knocked the price down, whether it was a earnings warning, shutting down a product line or whatever, the factors that were announced as the result of the problem did not surprise company management. They knew that there were problems well before the news announcement. Being intelligent business people, the management of IBM was aware of the problems and had been working on the solutions months before they had to announce. When the announcement was made, probably many strides had been already taken to correct whatever problems caused the price to drop. For the long term investor, it would not be unusual to see the price of IBM move back up to at least the level where it last gapped down, approximately $100. This still provides a 15% return.

You can chart your own course through common sense analysis. Watching for a Candlestick “buy” signal gives you the edge. IBM is not going out of business. Who was buying at these levels when everybody was selling? The smart money! Are the professional analysts of Wall Street recommending to buy at these levels? Probably not! But watch the price move from $85.00 back up to $95.00, then you will see the brave million dollar analysts say it is time to buy. Practical hands-on analysis, being able to see the “buy” signals for yourself, will keep you ahead of the crowd.

BKS, Barnes and Noble, Figure 31, has a completely different scenario. Notice it was in an uptrend, just about ready to break out to new highs when it had bad news reported. With the trend being up prior to the announcement, it appears that the announcement came as a complete surprise. This should imply that if you are in the position, get out immediately. There will be no telling what the reaction will be. In this case, the sellers continued to sell on the big down day after the announcement.

Being out of the position now gives you a better perspective as to what the news will do to the longer-term trend. It took only the next day to see a Doji to be prepared to get back into the stock. For the longer-term investor, this becomes a good place to start building another position. The buyers start becoming evident on the next day after the Doji. A purchase at this level creates a relatively safe trade. A stop at the lows is a logical point for getting out. The rationale being that if those levels did not support, the sellers were still in control.

Figure 31, BKS Barnes & Noble

On major gap down days, major being a 20% down move or more, there is always the initial 30 minutes of churning. The traders who were short start buying to cover, while the sellers are unloading. After that period, the buyers or the sellers will start to overwhelm the other side. This is where an immense amount of information will be revealed. If the price starts acting weaker, the news still had sellers participating. If the price starts up, that would indicate that the news scared out the weak holders and did so at the level where the buyers felt it was oversold, and they stepped in immediately to buy the bargain. This should reveal to the

Candlestick investor that the white candle forming represents a buying level. Hold on to the position for awhile. It is not unusual after a major gap down to see the price move back up to the area from where it gapped down. This would occur over a six to twelve week period. Still not a bad return, 20% to 30%, over that time frame.

 -o0o-

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Thanks to Stephen W. Bigalow as the author of the articles : “Big Profit Patterns Using Candlestick Signals And Gaps”. Hope that Yours will help all investors to make better decision to trade.

0 Forex Strategy Island Reversals

An easy-to-see, obvious reversal is the Island Reversal. It provides a dramatic reversal in that the enthusiasm that sent a price in a particular direction is countered with the same enthusiasm going the other way. In the example of Orbital Sciences Corp. ORB,

Figure 29, the up-trend can be easily seen. At the top, after the buying enthusiasm created a long bullish candle, the price gaps up away from the previous trading. This really demonstrates that the enthusiasm had reached an apex.

But upon inspecting the formation that it made, a long-legged Doji, the Candlestick investor should have been alerted to the indecision that was illustrated during this gap up. The following day did not show any evidence that the buyers were still present. This would have been further warning that the blow off top was in place. Finally the gap back down illustrates the great enthusiasm to get back out of the stock. This is an Island Reversal, usually very accurate and powerful.

 Figure 29 - Orbital Sciences Corp.

An Island Reversal doesn’t have to be a quick move. Note in the Circuit City chart, Figure 30, how the gap down was countered with a gap up over six weeks afterwards. This formation indicates to the long-term investor that a new long-term trend has started.
The gaps on both sides of the bottom trading area make the Island Reversal an easy-to-see situation.

Figure 30 – Circuit City

As long as the gaps remain unfilled, the trend should remain up.




Next.....................Forex Strategy Bad News Gaps

0 Forex Strategy The J-Hook Pattern

The J-Hook Pattern is another example of being alerted when a gap up could occur. The J-Hook Pattern occurs after a trend has had a fairly strong run up. It backs off for a period, most likely profit taking. The stochastics do not get back down to oversold, they start leveling out and curl back up near the 50 area. As the price stabilizes and starts back up, the previous high becomes the logical target. This is the prime time to look for a gap up. The buyers, who saw the price have a strong move, then see it pull back, are now seeing it stabilize and try to move higher again. Once they become convinced that the sellers have been exhausted, the buyers will come back into the stock with confidence. This new confidence, the appearance of a gap, could be strong enough to breach the recent high and take prices up to new levels.

Figure 28 - D.R. Horton Inc.

D.R. Horton Inc. is an example of gaps playing an important part in recognizing when the next run-up will occur. Once the initial run up had run its course, the consolidation period or the hook area didn’t allow the stochastics to get down to the oversold area before turning back up.
The J-Hook Pattern is also a function of what the markets are doing in general. It is not unusual for the price of a stock to rise with the markets, pull back with the markets, then resume its uptrend when the market starts heading up again. But these stocks usually act with greater volatility than the market in general.

Identifying the J-Hook Pattern requires a minor amount of previous visualization. After seeing a major run-up in a stock price, then witnessing “sell” signals, makes for a good profit taking period. However, if an uptrend has been reasonably strong, without many zigs and zags, it is definitely profitable to keep monitoring that stock after the pullback has started. Depending on market conditions, considering that the stock is selling off but that the markets in general are still holding their own, it is worthwhile to check the progress of that stock for the next week or so.

After the “sell” signal and seeing that the stochastics have turned back down, the potential for a J-Hook Pattern to form is always there. About the third or fourth day, investigate to see if the stochastics are showing signs of leveling out. This may be occurring when the stochastics are in the 50 area. If so, watch for Candlestick buy signals forming. The signals will usually be smaller in size compared to a full-fledged bottoming signal. For instance, a series of small Hammers may form for a few days at the same price area.

This starts to flatten the trajectory of the stochastics. After this stabilization period, a small Bullish Engulfing pattern may appear. Buying in at this time produces two possible profit potentials. First, it is likely that the price is now going up to test the recent highs. This may be a 4%, 8%, or 10% move in itself. The second potential profit is breaking through the recent high and having a strong run up. A gap up at or near the previous highs indicates that the buyers are not concerned about the recent high acting as a resistance level.

Review the Tiffany & Co. chart, Figure 28a. After an extended uptrend, the stock ran into selling (profit taking) at the $30.00 area. It pulled back to about $27.50 when buying seemed to start supporting the price. It became evident that the selling had waned. As the pullback flattens out, it appears as if the buyers are starting to step backing at around $28.00. Buying at these levels gives the investor the potential to make $2.00, or about 7% profit over a three or four day period. As can be seen in this example, once the price got back to the highs, the stochastics had some juice left in them. At this point, watching the market direction in general should have been built into the decision of whether to liquidate or hold. If the market movement was stable to upward, then holding at the resistance level of the previous high would be warranted.

The gap up to a new trading range was evidence that the sellers were not going to stand in the way. Unless something severe is taking place when the gap up occurs, such as a severe drop in the market or a surprise announcement about the company or the industry, anticipate seeing the buyers continue to move the price higher.

Figure 28a - Tiffany & Co.

The J-Hook does not have to be a complete retracement to the recent highs to have a gap effect the break out. Note in the Monaco Coach Corp. chart, Figure 28b, how the gap up occurred prior to actually getting to the previous high.

 Figure 28b - Monaco Coach Corp.

Hopefully the Candlestick investor would have been in the position after the Hammer signal. The gap up to new highs simply indicates that the high was not going to act as a lid on the price, giving buyers new impetus to take prices even higher

Figure 28c - Jones Apparel Group

Jones Apparel Group, Figure 28c, provides an obvious visual depiction of the prices gapping up at the previous high. The alert investor would have been in near the $26.75 level, upon seeing the Inverted Hammers slowing down the pullback.

Participating in the J-Hook Pattern usually requires being familiar with the price movement of a stock. It is difficult to write a search program that would encompass all the parameters describing a J-Hook Pattern. The easiest method for locating this pattern is to watch for an extended uptrend that is now in a pullback. The aggressive trader will want to get in as the pullback levels out. The more conservative investor will want to get in upon seeing a gap up as the trend is heading back up, especially if the previous high is within a reasonable range.

Being educated in Candlestick signals produces the extra advantage that other trading methods do not provide. This additional knowledge rewards you by illuminating profitable trade set-ups. You gain the benefits of always having profit potential that other investors cannot see. You can be racking up profits when the majority of investors are just getting what the market will give them. Even in difficult markets, you will be able to generate profits.



Next.....................Forex Strategy Island Reversals 

0 Forex Strategy Breakouts

As revealing as the gaps are for alerting when a major run-up is about to occur, it is even more beneficial to know when the gap is about ready to occur. There are particular patterns that forewarn when a gap is likely to occur. And when they do, it means that a whole new trading area is going to be reached. Having this forewarning permits the investor to be ready to get into the trade at the optimal time and have the funds available to take advantage of the profitable move that it initiates.
Note how the gap up at a level that had not been breached for a couple of months now indicates the buyers not being apprehensive about buying above the past highs. This easily reveals that the price is going to new levels.
Notice the breakout in Figure 25 - DCN, Dana Corp. DCN starts its major run once it broke out of a trading range over the past two months. The gap is the alert. The gap up at this important level is a profitable transaction. In this example, volume had a great increase once the new trading levels were reached. Stochastics stayed up near the overbought range but they do indicate that they are pointing up when this new move starts. The protective stops, placed on a gap up day near the highs, would not have been affected with the price continuing higher.

Figure 25 - Dana Corp.

The Prepaid Legal chart, Figure 26, is a chart that one could anticipate a gap occurring. The best entry level was the confirmed Inverted Hammer pattern with volume dramatically increasing over the next few days. As the price came back up towards the trading area of $22.00, it was feasible that if the price broke that level, it could head much higher. The appearance of the gap should have been an immediate indication that buying was coming into the stock. The long bullish candle would have revealed that the old trading levels were now being disregarded, new buying dynamics were in the stock price.

 Figure 26 - Prepaid Legal PPD.

 

Figure 27 - Cooper Tire Company
 
Despite the very small gap in the price rise of Cooper Tire’s stock move, it still indicated strong buying even after a strong up day. The fact that the buying after the gap up took
prices to new highs would have alerted the Candlestick investor that a new level should be reached.
All of the above examples had chart set-ups that would leave room for anticipating that a gap up could occur. All illustrate that when a gap up is noticed, new buying strength is involved, moving prices up to much higher prices.


Next..............Forex Strategy The J-Hook Pattern  

0 Forex Strategy San-Ku - Three Gaps Up

As mentioned in Japanese candlestick analysis, the number three plays a very relevant part of the investment doctrine. Many of the signals and formations consist of a group of three individual signals. It has become a deeply rooted number for the Japanese investment community whether applied to Candlestick analysis or not.
This creates a highly profitable investment strategy when applied to Gaps or Windows. San-ku provides the best opportunities for buying and selling at the optimal points in time. After observing the bottoming signals, the first gap (ku) indicates that the buyers have entered the position with force. The second gap indicates further enthusiasm for getting into a stock position. This should have a mixture of short covering involved.

The third gap is the result of the bears finally realizing that this is too forceful for them to keep holding short positions, they cover along with the later buyers. Upon seeing the third gap up, the Japanese recommend that the position be closed out, take the profits. This is due to the price having probably reached the overbought area well before it should. The presence of three gaps up probably has resulted in very good profits over a very short period. The same parameters will occur in the opposite direction, in a declining price move.

Note in Figure 22 - URI, United Rental Inc., how the first gap demonstrated that the reversal picked up a lot of strength, buyers gapped up the price and it closed at a high for many months. A few more days of buyers showed that the price was not going to back off. This led to another gap up, probably the shorts deciding that the trend is now firmly against them. After a couple of more days of no real weakness, the price gapped up again. Panic short covering? Also the Japanese rule suggests, sell after the third gap up. In this case, selling on the close of the third gap up day would have gotten you most of the gains possible from this trade.

There was a day or two that you could have gotten a few percentage gains more, but why risk it? The Japanese have watched these moves for hundreds of years. Why try to squeak out a few more percentage points profit? 28% in the couple of weeks should be plush enough. Go on and find another trade that is starting at the bottom.

 Figure 22 - United Rental Inc.

The same dynamics can be seen in the Ingersoll-Rand Ltd. Chart. In Figure 23, the first gap broke out prices above the recent high, the second gap still shows strong buying and the close of the third gap up day is as good a spot to take profits as any.

Figure 23 - Ingersoll-Rand Ltd.

One more illustration shows the factors at work in a San-ku formation. Note in the Maytag Corp. stock price in Figure 24, the initial gap up should have prepared the Candlestick investor for the possibility of the exhaustion gap. However, this stock price opened and steadily moved higher, not affecting any stops. As it closed near its high for the day, a white Maruboza, a bullish continuation pattern, should have now alerted the Candlestick investor that the buyers were still around in force.

The second gap up now makes the investor aware that a San-ku may be in the making. As evidenced in the last two examples, selling after the third gap up, although more lengthy a period than the previous examples, would have captured a great majority of the potential of this move.

Figure 24 - Maytag Corp.

Having the knowledge of what should occur after gaps provides that extra advantage.
Most investors are leery of gaps because they don’t understand all the ramifications gaps introduce. This allows the Candlestick investor to exploit market moves because the majority of the investment community does not understand how to use them. The San-ku formation can get investors in when many investors would be afraid to chase a gap up or gap down. It also gets the Candlestick investor out at the appropriate time where other investors would hold too long and not get the best return on investment.



Next..........Forex Strategy Breakouts

0 Forex Strategy Dumpling Tops and Fry Pan Bottoms

Sometimes a gap or window is required to demonstrate that the price move is picking up steam. Otherwise, the move may not create any signs that a move is forming. The best illustration is the Dumpling Top. The slow curvature of the top would not attract any attention. However, being prepared for a gap down allows the investor to make profits that otherwise would just blend into the trend with no great expediency needed. Figure 18 illustrates the Dumpling Top. The Gap is the crucial sign in this pattern. Once the gap occurs, the downtrend should prevail for a number of days. Prior to the gap, there is so little price volatility, nobody would be interested in what was occurring in this stock. The Candlestick investor gets a forewarning of a profitable trade.

 

Figure 18 - Dumpling Top.

Note in Figure 19 - CMH, Clayton Homes, Inc., that the trading became listless until the gap down instigated a sell off.

Figure 19 - Clayton Homes, Inc.

Just as the gap down is the main initiative for expecting the downtrend after the Dumpling Top, the same is true for expecting an up-move after a Fry Pan Bottom. The Fry Pan Bottom gets its name from the slow gradual curve made at the bottom of a trend. This provides a lot of time for the sentiment to change from bearish back to bullish.

Figure 20 - Fry Pan Bottom.

As the change becomes more bullish, the bulls feel more confident that all the selling is gone. This leads to some exuberance into getting back into the position. Upon witnessing this gap up, the Candlestick investor should be willing to commit funds as fast as possible. It usually signifies the beginning of a new trend.
Note in the New Focus Inc. chart, Figure 21, how the bottom slowly curved back up as the selling diminished and the buyers began to build confidence. The small gap up on the ascending side of the Fry Pan alerts the investor that the buying is now getting more enthusiastic. This is the spot that a Candlestick investor wants to commit funds to grab some of the 100% gain over the next few weeks.
Having the foresight that the slow curving moves are not just dull market conditions creates an opportunity for the Candlestick investor to be ready for that telltale gap. Once the gap appears, putting money into that trade maximizes the returns by being in the trade as it is now moving.


Next..............San-Ku - Three Gaps Up

0 Forex Strategy,Gapping Plays

As always, there are exceptions to all rules. The Gapping Plays are those exceptions. As previously discussed, the gap at the top of a trend is the exhaustion gap. The same is said for the gap at the bottom of a trend. The appearance of those gaps is either the last gasp exhilaration (at the top) or the last gasp panic (at the bottom). However, the Gapping Plays represent a different set of circumstances at the top or bottom.
After a strong run up, it is not unusual to see a price back off and consolidate before the next leg up in a rally. This could be in the form of a back off in price or a backing off from further advance. The latter is a period of the price trading flat at the high end of the previous uptrend. After the flat trading period, a new burst of buying, causing a gap up, illustrates that the buyers have not been discouraged. This new buying is evident by the gap up. As a gap expresses enthusiasm, this is usually the reinstatement of the previous move, taking prices up to a new level.

As seen in Figure 16 - ITG, Investment Technology, the gap up after prices had stayed flat and at the top end of the last large white candle, for about a month and a half, finally convinced buyers that the sellers were not around. The gap up should have alerted the Candlestick investor that prices should be moving up to a new level. This becomes a High Level Gapping Play.

Figure 16 - Investment Technology

The same is true for a declining trend. After a significant downtrend, prices level out. Once the sellers are convinced that there are no buyers around to move the price up, they can sell again with confidence. This confidence is seen in the gapping down of price. At that point, much lower prices can be expected.
As seen in Figure 17 - PCSA, Airgate PCS, after the price dropped dramatically, the buyers and sellers have a few days of indecision. The prices remain flat for three or four days. But after the sellers realize that the buyers are not strong enough to get the prices to move back up, they get out with force. This is known as a Low Price Gapping Play.

Figure 17 - Airgate PCS

Next.............Dumpling Tops and Fry Pan Bottoms

0 Forex Strategy: Selling Gaps

Now turn the tables over. The same enthusiasm demonstrated by a gap to the upside is just as pertinent for sellers on the downside. A gap down illustrates the desire for investors to get out of a stock very quickly. Identifying clear Candlestick “sell” signals prepares the investor for potential reversals. The Doji at the top, Dark Clouds, Bearish Engulfing patterns are obvious signals to be prepared for further downmoves. The Doji is the best signal to witness a trend reversal.

The Doji should stand out at the top of a trend just like a blinking billboard. Note the Doji at the top of the ISSI, Integrated Silicon Solution chart, Figure 13. The Candlestick investor would have already been prepared upon seeing that a Doji was forming that day as the close was getting near. At worst, the position should have been liquidated when the pre-market indications showed a weak open.

Figure 13 – Integrated Silicon Solutions

The existence of the gap down demonstrates an urgency to get out of this position. Being prepared for this event prevented giving back a major portion of profits.
Illustrated in the ASTSF chart, Ase Test Limited Ord Shr, Figure 14, the gap down confirms the downtrend a day later after the appearance of the Doji. A clear Evening Star signal requires the black candle after the Doji to close more than half-way down the previous large white candle. In this case, it closed right at the midpoint, still leaving some doubt as to whether the uptrend is truly over. The gap down the following day confirms that the sellers are now in control.

Knowing the simple description of the signals gives the candlestick investor that extra head start in preparing to take profits or go short. Utilizing the statistical probabilities of what the signals convey allows the mental, as well as the actual preparedness. The ease of identifying a gap, and knowing what messages a gap conveys, instigates the investor to change the position status immediately.

 Figure 14 - Ace Test Limited Ord. Shrs.

These are examples that demonstrate the obvious benefits of what the windows /gaps portray. However, there are many more situations where they provide important investment decision-making aspects.
For example, review the Toll Brothers chart, Figure 15, April of 1999. Notice how the initial gap acted as a support level. In the weeks after the gap up the price would come back to the top of the gap but would not close lower. As long as the gap was not filled, the uptrend stayed intact. This is a good rule of thumb. If a gap cannot be filled, the predominant trend will continue. The Japanese term for filling a gap is anaume.

Knowing that a gap will act as a support or resistance level gives the Candlestick investor time to prepare when one of these levels is approached. The condition of the Stochastics and the potential set up of another reversal signal informs the investor as to whether that gap is going to act as a support or if the gap will be filled. This may be occurring at a time when no other technical indicators are present in that price area. Note how the gap acts as a support level in the Toll Brothers chart. Each time price dipped to this level, the buyers stepped in and would not let the price fill the gap. This should obviously become a support consideration.

Figure 15 - Toll Brothers Inc

Next ....Gapping Plays

0 Forex Strategy: Gaps at The Top

The gap that appears at the top of a trend is the one that provides the ominous information. Remembering the mental state of most investors, the enthusiasm builds as the trend continues over a period of time. Each day the price continues up, the more investors become convinced that the price is going to go through the roof. The “talking heads” on the financial stations start to show their prowess. They come up with a multitude of reasons why the price had already moved and will continue to move into the rosy future.

With all this enthusiasm around, the stock price gaps up. Unfortunately, this is usually the top. Fortunately, Candlestick investors recognize that. They can put on exit strategies that will capture a good portion of the price move at the top. Consider the different possibilities that can happen when witnessing the gap up at the top of a sustained uptrend. Most of the time the gap will represent the exhaustion of the trend, thus called an Exhaustion Gap. Or it could be the start of a Three Rising Windows formation. Or big news, a buyout or a huge contract is about to be announced.

What are the best ways to participate in the new potential, if there is any, at the same time knowing that the probabilities are that the top is in? A few simple stop-loss procedures can allow you to comfortably let the price move and benefit from the maximum potential.

Hopefully, in the description of the gaps occurring at the exuberance of an extended trend, you have already experienced a substantial gain in the position. Any gap up is adding to an already big gain. Probabilities dictate that this is the top. Possibilities could include more upside gains.
Upon a slight to medium gap up, the Candlestick investor should put their stop at the close of the previous day. The thinking being that if the price gapped up, indicating that the top is in, and the price came back down through the close of the previous day, the buying was not sustained. If so, the stop closed the position at the level of the highest close in that trend.

Look at Figure 10 - NXTP, Nextel Partners Inc. If you had bought the stock the day after the Harami signal, showing that the selling had stopped, the open may not have been the strength wanted to show that the buyers were stepping in. After the price opened lower the next day, not showing resumed buying, a good spot to put the “buy stop” would be at the closing price of the previous day. The thinking being that if the price, after opening lower, came up through the closing price of the previous day, then the buyers were still around. Buying price = $4.50.

After a few weeks, the price starts to accelerate and finally they gap it up. News was probably looking very rosy at this point. Now the Candlestick investor is prepared. Knowing that a gap up at the top indicates that the top is near, they can implement strategies to maximize profits. Most investors will know that their position is up almost 100% in three weeks. That is not the type of move that will be missed by most. Upon seeing the bigger price days and volume picking up, the Candlestick investor will be ready for any sell signals that appear.

When the gap open appears, a number of strategies can be put in place. First, a stop loss can be put at the closing price of the previous day. If prices start falling off immediately and come down through the previous day’s close, then the bears have taken control. You are out at the high close of the uptrend. In this case, as the price moves up, it would be safe to put a stop at the open price.

Figure 10 – Nextel Partners Inc.

A fundamental change might be in progress. The same rationale as putting a stop loss at the previous day’s open, if the price comes back down to and/or through that level, the sellers probably have taken over control. Otherwise, if the stock price continues higher, it may stay in a strong spike move for the next few days. Knowing that the stochastics are now well into the overbought area, and the price was running up after a gap, selling one half of the position would be a prudent move. Probabilities say that this is near the top. There is always the low percentage possibility that new dynamics are coming into the stock price, an announcement of a new huge contract or a possible buyout offer, something new and different from the dynamic that ran the price up to these levels in the first place. A surge of buying may create a “Three Rising Windows” pattern, moving prices to much higher levels. The probabilities of this occurring at the top of a trend are very small but feasible. Moving the stop losses up to each close or next day’s open price maximizes the potential profits from that trade.

As seen in NXTP, a Shooting Star formed, definitely a sell signal. If the price opened lower the next day, the position should be liquidated immediately. That is what the Shooting Star is telling you, that the sellers are showing up. The next day opened higher and stayed up all day. Things still look good. However a Hanging Man formation appears the next day. This is where the Candlestick investor should be thinking, “a Shooting Star, a sell signal, now a Hanging Man, another sell signal, be ready to get out.” The next day after the Hanging Man, a lower open should have instigated the liquidation of any remaining position. At worst, the average selling price should have been in the $8.10 area. The gap was the alert signal that positions should be liquidated. This trade produced an 80% return over three weeks. Now go find another bottom signal.

Figure 11 – Omnivision Technologies Inc.

Figure 11 - OMVI, Omnivision Technologies Inc. demonstrates a gap open at the top with absolutely no follow through. This is when having a stop at the previous day’s close will be the best exit. Whether the position was established at the breakout gap or the Tri-Star pattern, the profits were substantial. Being prepared for the gap up was the profit maximization technique.

If the gap up is substantial, after a long uptrend, it might be prudent to liquidate one half of the position immediately. The remaining position would have a stop placed at the previous day’s close. If the price pulled back to the previous close, again it would be apparent that the sellers had stepped in after the gap up. The method locked in a price above the highest closing price of the trend.

Illustrated in Figure 12 – MGAM, Multimedia Games Inc., the end of the up move was foretold by a large green candle forming after a run up, then a gap up follows. This should have alerted Candlestick investors to start profit taking. It produced a good 33% profit in a just over a week. Now go find a low risk bottoming trade again.

  

Figure 12 – Multimedia Games Inc.

If the gap is up substantially, and it continues higher, put the stop at the open price level. On any of the scenarios described, the price moving back to the stops would more than likely create signals that warranted liquidating the trade, forming Shooting Stars, Dark Clouds, Meeting Lines or Bearish Engulfing patterns. In any case, sellers were making themselves known. It is time to take profits in a high-risk area and find low-risk buy signals at the bottom of a trend.

Next.......Selling Gaps