MOVING AVERAGE

How to trade with Moving Averages ?

Moving Averages are particulary useful in identifying the direction of an uptrend or downtrend of stocks and markets in general. They are based on the previous data and hence are generally referred to as lagging indicators which help us in locating the trend and following on in the trend . Since they do not allow you to predict the trend, you have to use other technical indicators in conjunction with them during trading.

Generally, the most common way to trade with the Moving averages is this – If the price crosses above the moving average, it means that a buying interest has set in – and thus indicates a buy signal. Similarly when the price crosses down the moving average, it means that a selling pressure has set in – thus indicates a sell signal.

Although it helps in indicating the current trend, it does not indicate for how long this trend would continue or when does the reverse trend begin. So traders should be cautious about this when using the moving averages for planning trades. It is also important to consider the volume for the security in question before trading. Sporadic movements with low volumes can generate erratic signals.

Example :

Look at this chart of Reliance capital shown below. The bold yellow line indicates the price and the thin blue line indicates the 9-day Simple Moving Average of the Close price of this stock.

As you can see from the above chart, when the price has crossed above the SMA, then it indicates that buying interest has set in. From then on, the stock price is on a rise with minor dips. The downtrend is indicated at the point after the price crosses down the MA line. This indicates a down trend and becomes a candidate for sell signal. As can be seen the prices come down in the downtrend.

Longer and shorter Moving Averages

Moving averages can be configured any period of your choice. The most common ones are 9 Day, 30 Days, 50 days and the 200 Day Moving averages. The longer the period, smoothing will be more. Thus in stocks which display a great deal of sharp glitches and breaks, longer moving averages would make sense, as smoothing would be better. Choosing short period moving averages in such cases would result in erratic signals.

Short trends are identified by short period MAs – like the 9 day and 15 day MAs. A medium term trend is given by the 30 – 50 day moving averages. 100 and 200 day moving averages can indicate the intermediate long term trends.

Trading with Moving average Crossovers

Plotting both long term and short term Moving averages for the same security can lead to crossovers. This can also indicate some trading signals in some cases. A buy signal is generally assumed if the short term moving average crosses over the long term moving average. Similarly a sell signal can be indicated when the short moving average falls down the long term moving average.

Example: Look at this chart of the stock ABB in the NSE. The bold yellow line signifies the price movement of the stock. The blue line is the 30 day EMA and the brown line is the 200 day EMA.

As can be seen from the chart, when the short term MA i.e the 30 day EMA (blue line) crosses over the long term MA ( 200 day EMA – brown line), then an uptrend is identified and thus a buy signal is generated.

As indicated earlier, MA can help in identifying trends and can give late trading signals. When used with other technical indicators, they can be very helpful in determining trading strategies.

How to Day Trade

Here’s one of the best day trading tips you’ll ever hear: When you make a serious decision to learn day trading, commit yourself to getting an excellent trading education.

Day trading is a profession, and as such, if you’re honestly going to learn to day trade stocks, Forex, futures, commodities or options, you’re going to need the best trading education you can find.

If you’re completely new to trading, I recommend a good, inexpensive book like Day Trading for Dummies. It won’t make you a successful day trader overnight (nothing will do that), but it will give you the basic concepts and vocabulary you need when you pursue a more in-depth education.

If you want to be one of the few who can successful do day trading for a living, then you’ll also need the proper tools: at least one fast computer with multiple monitors, a fast Internet connection, and an excellent broker.

You’ll also need day trading software (a Forex platform, stock trading software, or futures trading charts), to help provide you with trading signals through the use of technical analysis (chart reading).

As you journey through your trading education, you’ll have to decide what type of trading you want to do: Trend trading, swing trading, momentum trading, etc. This takes time as you won’t really know what style fits your personality until you try each of them.

In addition you’ll have to decide which market(s) you’ll want to trade. Do you want to do emini trading, Forex trading or online stock trading.

After getting the basics, you need to learn how to day trade by taking advantage of the study, research, and experience of successful traders who have come before you. You’ll also need to go beyond that to learn a specific trading methodology that has clear, objective rules and money management techniques.

Finally, before you begin trading with real money, you should test your methodology and get used to it by paper trading. Actually that’s an old term. Now there are many software programs available in which you can trade electronically using fake money. They are called “simulators” or your broker may provide a “demo account” that will do this for you.

As you can see, despite a lot of the marketing, learning how to day trade is not something you will do overnight. It is a career that requires a serious education and the commitment of a good amount of time and effort.

Trading is always risky, and there are never any guarantees, but for those who commit to it, learning how to day trade can provide a great income and lifestyle not found in many other professions.

Fibonacci

Fibonacci

The life and numbers of Fibonacci

thanks to... R.Knott, D.A.Quinney and PASS Maths

If XN appears as XN then your browser does not support subscripts or superscripts. Please use this alternative version.

Have you ever wondered where we got our decimal numbering system from? The Roman Empire left Europe with the Roman numeral system which we still see, amongst other places, in the copyright notices after TV programmes (1997 is MCMXCVII).

The Roman numerals were not displaced until the 13th Century AD when Fibonacci published his Liber abaci which means “The Book of Calculations”.

Fibonacci, or more correctly Leonardo da Pisa, was born in Pisa in 1175AD. He was the son of a Pisan merchant who also served as a customs officer in North Africa. He travelled widely in Barbary (Algeria) and was later sent on business trips to Egypt, Syria, Greece, Sicily and Provence.

In 1200 he returned to Pisa and used the knowledge he had gained on his travels to write Liber abaci in which he introduced the Latin-speaking world to the decimal number system. The first chapter of Part 1 begins:

These are the nine figures of the Indians: 9 8 7 6 5 4 3 2 1. With these nine figures, and with this sign 0 which in Arabic is called zephirum, any number can be written, as will be demonstrated.

Root finding

Fibonacci was capable of quite remarkable calculating feats. He was able to find the positive solution of the following cubic equation:
x^3+2*x^2+10*x = 20

What is even more remarkable is that he carried out all his working using the Babylonian system of mathematics which uses base 60. He gave the result as 1;22,7,42,33,4,40 which is equivalent to:
1 + 22/60 + 7/60^2 + 42/60^3 + 33/60^4 + 4/60^5 + 40/60^6

It is not known how he obtained this, but it was 300 years before anybody else could find such accurate results. It is quite interesting that Fibonacci gave the result in this way at the same time as telling everybody else to use the decimal number system!

Fibonacci sequence

Fibonacci is perhaps best known for a simple series of numbers, introduced in Liber abaci and later named the Fibonacci numbers in his honour.

The series begins with 0 and 1. After that, use the simple rule:

Add the last two numbers to get the next.

1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987,…

You might ask where this came from? In Fibonacci’s day, mathematical competitions and challenges were common. For example, in 1225 Fibonacci took part in a tournament at Pisa ordered by the emperor himself, Frederick II.

It was in just this type of competition that the following problem arose:

Beginning with a single pair of rabbits, if every month each productive pair bears a new pair, which becomes productive when they are 1 month old, how many rabbits will there be after n months?

Answer to rabbit problem

Imagine that there are xn pairs of rabbits after n months. The number of pairs in month n+1 will be xn (in this problem, rabbits never die) plus the number of new pairs born. But new pairs are only born to pairs at least 1 month old, so there will be xn-1 new pairs.

xn+1 = xn + xn-1

Which is simply the rule for generating the Fibonacci numbers.

The Golden Section

A special value, closely related to the Fibonacci series, is called the golden section. This value is obtained by taking the ratio of successive terms in the Fibonacci series:

If you plot a graph of these values you’ll see that they seem to be tending to a limit. This limit is actually the positive root of a quadratic equation (see box) and is called the golden section, golden ratio or sometimes the golden mean.

The golden section is normally denoted by the Greek letter phi. In fact, the Greek mathematicians of Plato’s time (400BC) recognized it as a significant value and Greek architects used the ratio 1:phi as an integral part of their designs, the most famous of which is the Parthenon in Athens.
The Parthenon in Athens.

Phi and geometry

Phi also occurs surprisingly often in geometry. For example, it is the ratio of the side of a regular pentagon to its diagonal. If we draw in all the diagonals then they each cut each other with the golden ratio too (see picture). The resulting pentagram describes a star which forms part of many of the flags of the world.

Fibonacci in nature

The rabbit breeding problem that caused Fibonacci to write about the sequence in Liber abaci may be unrealistic but the Fibonacci numbers really do appear in nature. For example, some plants branch in such a way that they always have a Fibonacci number of growing points. Flowers often have a Fibonacci number of petals, daisies can have 34, 55 or even as many as 89 petals!

Finally, next time you look at a sunflower, take the trouble to look at the arrangement of the seeds. They appear to be spiralling outwards both to the left and the right. There are a Fibonacci number of spirals! It seems that this arrangement keeps the seeds uniformly packed no matter how large the seed head.

Fibonacci in Maths

The Fibonacci numbers are studied as part of number theory and have applications in the counting of mathematical objects such as sets, permutations and sequences and to computer science.

CANDLE STICKS

Candle Stick

Introduction to Candlesticks

History

The Japanese began using technical analysis to trade rice in the 17th century. While this early version of technical analysis was different from the US version initiated by Charles Dow around 1900, many of the guiding principles were very similar:

* The “what” (price action) is more important than the “why” (news, earnings, and so on).
* All known information is reflected in the price.
* Buyers and sellers move markets based on expectations and emotions (fear and greed).
* Markets fluctuate.
* The actual price may not reflect the underlying value.

According to Steve Nison, candlestick charting first appeared sometime after 1850. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata. It is likely that his original ideas were modified and refined over many years of trading eventually resulting in the system of candlestick charting that we use today.

Formation

In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called “the body” (also referred to as “the real body”). The long thin lines above and below the body represent the high/low range and are called “shadows” (also referred to as “wicks” and “tails”). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.

Compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price action. Immediately a trader can see compare the relationship between the open and close as well as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.

Long Versus Short Bodies

Generally speaking, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.

Long white candlesticks show strong buying pressure. The longer the white candlestick is, the further the close is above the open. This indicates that prices advanced significantly from open to close and buyers were aggressive. While long white candlesticks are generally bullish, much depends on their position within the broader technical picture. After extended declines, long white candlesticks can mark a potential turning point or support level. If buying gets too aggressive after a long advance, it can lead to excessive bullishness.

Long black candlesticks show strong selling pressure. The longer the black candlestick is, the further the close is below the open. This indicates that prices declined significantly from the open and sellers were aggressive. After a long advance, a long black candlestick can foreshadow a turning point or mark a future resistance level. After a long decline a long black candlestick can indicate panic or capitulation.

Even more potent long candlesticks are the Marubozu brothers, Black and White. Marubozu do not have upper or lower shadows and the high and low are represented by the open or close. A White Marubozu forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. Black Marubozu form when the open equals the high and the close equals the low. This indicates that sellers controlled the price action from the first trade to the last trade.

Long Versus Short Shadows

The upper and lower shadows on candlesticks can provide valuable information about the trading session. Upper shadows represent the session high and lower shadows the session low. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlestick with long shadows show that traded extended well past the open and close.

Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session, and bid prices higher. However, sellers later forced prices down from their highs, and the weak close created a long upper shadow. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.

Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning tops. One long shadow represents a reversal of sorts; spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand and the result was a standoff. After a long advance or long white candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.

Doji

Doji are important candlesticks that provide information on their own and as components of in a number of important patterns. Doji form when a security’s open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word “Doji” refers to both the singular and plural form.

Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing.

Different securities have different criteria for determining the robustness of a doji. A $20 stock could form a doji with a 1/8 point difference between open and close, while a $200 stock might form one with a 1 1/4 point difference. Determining the robustness of the doji will depend on the price, recent volatility, and previous candlesticks. Relative to previous candlesticks, the doji should have a very small body that appears as a thin line. Steven Nison notes that a doji that forms among other candlesticks with small real bodies would not be considered important. However, a doji that forms among candlesticks with long real bodies would be deemed significant.

Doji and Trend

The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.

After an advance or long white candlestick, a doji signals that buying pressure may be diminishing and the uptrend could be nearing an end. Whereas a security can decline simply from a lack of buyers, continued buying pressure is required to sustain an uptrend. Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick’s open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star.

After a decline or long black candlestick, a doji indicates that selling pressure may be diminishing and the downtrend could be nearing an end. Even though the bears are starting to lose control of the decline, further strength is required to confirm any reversal. Bullish confirmation could come from a gap up, long white candlestick or advance above the long black candlestick’s open. After a long black candlestick and doji, traders should be on the alert for a potential morning doji star.

Long-Legged Doji

Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market. Long-legged doji indicate that prices traded well above and below the session’s opening level, but closed virtually even with the open. After a whole lot of yelling and screaming, the end result showed little change from the initial open.

Dragon Fly and Gravestone Doji

Dragon Fly Doji

Dragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a “T” with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

The reversal implications of a dragon fly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragon fly doji could signal a potential bullish reversal or bottom. After a long uptrend, long white candlestick or at resistance, the long lower shadow could foreshadow a potential bearish reversal or top. Bearish or bullish confirmation is required for both situations.

Gravestone Doji

Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside down “T” with a long upper shadow and no lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.

As with the dragon fly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.

Before turning to the single and multiple candlestick patterns, there are a few general guidelines to cover.

Bulls Versus Bears

A candlestick depicts the battle between Bulls (buyers) and Bears (sellers) over a given period of time. An analogy to this battle can be made between two football teams, which we can also call the Bulls and the Bears. The bottom (intra-session low) of the candlestick represents a touchdown for the Bears and the top (intra-session high) a touchdown for the Bulls. The closer the close is to the high, the closer the Bulls are to a touchdown. The closer the close is to the low, the closer the Bears are to a touchdown. While there are many variations, I have narrowed the field to 6 types of games (or candlesticks):

1. Long white candlesticks indicate that the Bulls controlled the ball (trading) for most of the game.
2. Long black candlesticks indicate that the Bears controlled the ball (trading) for most of the game.
3. Small candlesticks indicate that neither team could move the ball and prices finished about where they started.
4. A long lower shadow indicates that the Bears controlled the ball for part of the game, but lost control by the end and the Bulls made an impressive comeback.
5. A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback.
6. A long upper and lower shadow indicates that the both the Bears and the Bulls had their moments during the game, but neither could put the other away, resulting in a standoff.

What Candlesticks Don’t Tell You

Candlesticks do not reflect the sequence of events between the open and close, only the relationship between the open and the close. The high and the low are obvious and indisputable, but candlesticks (and bar charts) cannot tell us which came first.

With a long white candlestick, the assumption is that prices advanced most of the session. However, based on the high/low sequence, the session could have been more volatile. The example above depicts two possible high/low sequences that would form the same candlestick. The first sequence shows two small moves and one large move: a small decline off the open to form the low, a sharp advance to form the high, and a small decline to form the close. The second sequence shows three rather sharp moves: a sharp advance off the open to form the high, a sharp decline to form the low, and a sharp advance to form the close. The first sequence portrays strong, sustained buying pressure, and would be considered more bullish. The second sequence reflects more volatility and some selling pressure. These are just two examples, and there are hundreds of potential combinations that could result in the same candlestick. Candlesticks still offer valuable information on the relative positions of the open, high, low and close. However, the trading activity that forms a particular candlestick can vary.

Prior Trend

In his book, Candlestick Charting Explained, Greg Morris notes that for a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend. The direction of the trend can be determined using trend lines, moving averages, peak/trough analysis or other aspects of technical analysis. A downtrend might exist as long as the security was trading below its down trend line, below its previous reaction high or below a specific moving average. The length and duration will depend on individual preferences. However, because candlesticks are short-term in nature, it is usually best to consider the last 1-4 weeks of price action.

Candlestick Positioning

Star Position

A candlestick that gaps away from the previous candlestick is said to be in star position. The first candlestick usually has a large real body, but not always, and the second candlestick in star position has a small real body. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from previous price action. The two candlesticks can be any combination of white and black. Doji, hammers, shooting stars and spinning tops have small real bodies, and can form in the star position. Later we will examine 2- and 3-candlestick patterns that utilize the star position.

Harami Position

A candlestick that forms within the real body of the previous candlestick is in Harami position. Harami means pregnant in Japanese and the second candlestick is nestled inside the first. The first candlestick usually has a large real body and the second a smaller real body than the first. The shadows (high/low) of the second candlestick do not have to be contained within the first, though it’s preferable if they are. Doji and spinning tops have small real bodies, and can form in the harami position as well. Later we will examine candlestick patterns that utilize the harami position.

Long Shadow Reversals

There are two pairs of single candlestick reversal patterns made up of a small real body, one long shadow and one short or non-existent shadow. Generally, the long shadow should be at least twice the length of the real body, which can be either black or white. The location of the long shadow and preceding price action determine the classification.

The first pair, Hammer and Hanging Man, consists of identical candlesticks with small bodies and long lower shadows. The second pair, Shooting Star and Inverted Hammer, also contains identical candlesticks, except, in this case, they have small bodies and long upper shadows. Only preceding price action and further confirmation determine the bullish or bearish nature of these candlesticks. The Hammer and Inverted Hammer form after a decline and are bullish reversal patterns, while the Shooting Star and Hanging Man form after an advance and are bearish reversal patterns.

Hammer and Hanging Man

The Hammer and Hanging Man look exactly alike, but have different implications based on the preceding price action. Both have small real bodies (black or white), long lower shadows and short or non-existent upper shadows. As with most single and double candlestick formations, the Hammer and Hanging Man require confirmation before action.

The Hammer is a bullish reversal pattern that forms after a decline. In addition to a potential trend reversal, hammers can mark bottoms or support levels. After a decline, hammers signal a bullish revival. The low of the long lower shadow implies that sellers drove prices lower during the session. However, the strong finish indicates that buyers regained their footing to end the session on a strong note. While this may seem enough to act on, hammers require further bullish confirmation. The low of the hammer shows that plenty of sellers remain. Further buying pressure, and preferably on expanding volume, is needed before acting. Such confirmation could come from a gap up or long white candlestick. Hammers are similar to selling climaxes, and heavy volume can serve to reinforce the validity of the reversal.

The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. The low of the long lower shadow confirms that sellers pushed prices lower during the session. Even though the bulls regained their footing and drove prices higher by the finish, the appearance of selling pressure raises the yellow flag. As with the Hammer, a Hanging Man requires bearish confirmation before action. Such confirmation can come as a gap down or long black candlestick on heavy volume.

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star look exactly alike, but have different implications based on previous price action. Both candlesticks have small real bodies (black or white), long upper shadows and small or nonexistent lower shadows. These candlesticks mark potential trend reversals, but require confirmation before action.

The Shooting Star is a bearish reversal pattern that forms after an advance and in the star position, hence its name. A Shooting Star can mark a potential trend reversal or resistance level. The candlestick forms when prices gap higher on the open, advance during the session and close well off their highs. The resulting candlestick has a long upper shadow and small black or white body. After a large advance (the upper shadow), the ability of the bears to force prices down raises the yellow flag. To indicate a substantial reversal, the upper shadow should relatively long and at least 2 times the length of the body. Bearish confirmation is required after the Shooting Star and can take the form of a gap down or long black candlestick on heavy volume.

The Inverted Hammer looks exactly like a Shooting Star, but forms after a decline or downtrend. Inverted Hammers represent a potential trend reversal or support levels. After a decline, the long upper shadow indicates buying pressure during the session. However, the bulls were not able to sustain this buying pressure and prices closed well off of their highs to create the long upper shadow. Because of this failure, bullish confirmation is required before action. An Inverted Hammer followed by a gap up or long white candlestick with heavy volume could act as bullish confirmation.

Blending Candlesticks

Candlestick patterns are made up of one or more candlesticks and these can be blended together to form one candlestick. This blended candlestick captures the essence of the pattern and can be formed using the following:

* The open of first candlestick
* The close of the last candlestick
* The high and low of the pattern

By using the open of the first candlestick, close of the second candlestick, and high/low of the pattern, a Bullish Engulfing Pattern or Piercing Pattern blends into a Hammer. The long lower shadow of the Hammer signals a potential bullish reversal. As with the Hammer, both the Bullish Engulfing Pattern and the Piercing Pattern require bullish confirmation.

Blending the candlesticks of a Bearish Engulfing Pattern or Dark Cloud Cover Pattern creates a Shooting Star. The long, upper shadow of the Shooting Star indicates a potential bearish reversal. As with the Shooting Star, Bearish Engulfing, and Dark Cloud Cover Patterns require bearish confirmation.

More than two candlesticks can be blended using the same guidelines: open from the first, close from the last and high/low of the pattern. Blending Three White Soldiers creates a long white candlestick and blending Three Black Crows creates a long black candlestick.

For a comprehensive list of chart patterns, see the StockCharts Candlestick Dictionary.

TEN COMMENDS

10 Ways To Stay Focused For Real-Time Traders

Introduction:

Take two traders. Give them the same starting capital, the same trading platform, the same market, and the same trading system with precise rules for entry and exit. Come back a month later and what will you find? One trader will be up 20%. The other will be down 40%. It’s fascinating, isn’t it, how two people can have the same opportunities in life, and yet get very different results.

We firmly believe that the answer to success lies within each of us; and that we are each completely responsible for our own results in the market. The following top 10 list was compiled from the many discussions that take place at our regular monthly “trader’s conferences” (i.e. a local bar). ) Some of it you’ll already know… some of it will be new. Hopefully you’ll find it useful.

1. Understand The Truth

Trading is a game of probabilities. Imagine we’re flipping a coin. Heads I win one dollar – tails you win one dollar. Simple. Heads and tails will each come up half the time, and we’ll both neither win nor lose. However, unknown to me, you have a loaded coin. For every 100 throws, heads comes up 49 times, and tails comes up 51 times. You now have a license to print money. Let’s call it the “Tails Trading System”. All you have to do is sit back and bet on tails forever. Eventually, you’d win all my money (and anyone else’s who took you on). All any trading system gives you is an “edge”. A favorable bias. Something that is more likely to happen than not. Whatever trading system you use…

e.g.
… pattern breakouts, trend-following, fibonacci, moving averages, channel following, oscillator signals, bollinger bands, swing trading, opening gaps…… you are relying on a positive bias. Essentially, the trading system is saying “when ‘x’ happens… ‘y’ usually follows”. Sometimes it doesn’t. Most of the time it does. And all your trading system does is help you identify high probability trades, enter then correctly, and protect yourself while allowing your profits to grow.

Now some trading systems are better than others. But don’t get caught up on the search for the perfect system… You know, the trader’s Nirvana… the elusive “Holy Grail”… the system that delivers profits on demand and never, ever gets it wrong. Find a trading system that you like. One you feel comfortable with. One you understand. Then stick with it. Be consistent. A cool, disciplined, trader will take an average system and make money with it. A nervous, arbitrary trader will take a brilliant system and wreck it. All traders have “good” days and “bad” days. Some days you’ll make small profits. Other days you’ll make small losses. And once or twice a month, on average, you’ll make big profits. That’s how you make money as a traders. It’s not 9 till 5. Problem is, you never know when the big trades are due to arrive. Like our “Tails Trading System” above, the one time you don’t take the trade is exactly the time the market takes off and never looks back.

You MUST see the big picture. Realize that the current trade is only one of many. On that basis, the current trade hardly matters. It’s like a piece of plankton in a very large ocean. Trading is all about managing risk and then surrendering yourself to the oldest law in the Universe: The ancient law of probability.

2. Plan Your Trades, Then Trade Your Plan

Your job as a trader is to follow a trading plan. And who’s going to write this trading plan? You are. Notice the word “write”. It needs to be written down, on your trading desk, in front of you. Your trading system will give you the rules to follow. All you do is translate these into your plan. A trading plan must have three parts: Setup, Entry and Exit. (Obviously it’s beyond the scope of this document to provide details on specific trading systems as there are literally hundreds of them! However we do feature some occasionally in our newsletter.) The point is that a trading plan covers every eventuality. You know what to look for in the market, when to get into a trade, and when to get out. Keep it simple. Then follow it. Religiously.

3. If You Don’t Spend Much, You Can’t Lose Much

One of the biggest mistakes you can make as a trader is have too much money riding on a trade. The more money you use, the more emotional fuel you are pouring onto the fire. Eventually, you are likely to be burned… badly. And the post-traumatic stress may be irreparable. Most beginning traders stake too much in the hope of a quick win. Experienced traders know better. In day trading, where the trades can come thick and fast, a few big losers can eat you alive very quickly. Good day traders who survive will risk only a tiny amount of their trading capital on any one trade. If you’re “under capitalized” then consider using a trading system which offers a tight stop loss. Alternatively, trade a shorter time-frame, like the 1-minute chart, where losses can be minimized. Overconfidence is the other cause of excessive risk. “Hey… heads has come up 10 times in a row… let’s put half the trading capital on tails (which is sure to come up next) and clean up.” The problem with sure-thing trades is that:

a) The market hardly ever obliges;
b) Everyone else sees them as sure-things as well and jumps aboard. So when they go wrong, they go wrong big-time.

Risk a tiny amount on each trade. You’ll be more relaxed, and more able to execute the trade properly.

4. Don’t Think Money – Think Points

Following on from minimizing your exposure, we come to your relationship with money. Whether we like it or not, money is highly prized in our society. It’s important. And we attach a lot of feeling to it. How then will you feel when you see hundreds of dollars (perhaps thousands, depending on your account size) go up in smoke in front of you? The problem is, “expenses” are part of the game. You have to lose some to win some more. There is no holy grail, like we said before. If you can’t change your relationship with money, then just don’t think about it. Focus instead on numbers. Think “percentage of trading account”. Think “average risk-to-reward ratio”. Think “potential profit points versus maximum points risked”. Concentrate on getting the numbers right and the money will take care of itself.

5. What The Mind Can Conceive…

Is it possible you secretly want to lose? Self-destructive behavior can easily manifest itself in the markets, particularly among day traders. When the price is dancing around in front of your eyes, it can take a grip of you. You can start to feel like it’s playing with you. This is why you have to be very, very careful to avoid emotional trading. If you’re a boiling cauldron waiting to explode, then you’re heading for a seriously bad experience in the market. Don’t get emotional about trading. Remember the current trade is only one of a long series. You’re in this for the long term. Remember that and don’t, ever, get too attached to any one trade. You must see yourself as a professional trader. At the start of each trading day, before the market opens, take a few minutes for yourself. Close your eyes. Start visualizing the market. See the real-time chart on your computer screen. Watch as the price gyrates up and down. See yourself entering a trade. Notice you feel relaxed. You’re alert but calm. Completely nonemotional. Observe how the price moves after you enter. How it comes close to your stop loss. Mentally place a number of trades. Follow them through. You get a losing trade. Notice you see the big picture. You are unemotional. Completely calm. You put on another trade. Again, another small loss. You are unperturbed. Next a winning trade. Again, you are relaxed. It’s all part of the job. This takes practice. And you must do it regularly to get the maximum benefit. Try it every morning, and any time you even begin feel stressed or you lose your focus. The advantage of this technique is it’s free. And the payoff is excellent.

6. Be Your Own Boss

You’re the one in charge of your trading. You alone are responsible for your success or failure as a trader. Not the market… not the trading system… not the government or the Federal Reserve. You. That’s quite a responsibility. You handle it by being kind to yourself. Become your own mentor. Watch how you’re behaving during the trading session. Be especially careful to notice your feelings. Focusing on your feelings gives you useful feedback about your performance. Remember that having a “winning day” or a “losing day” is not the issue here. All that’s important is how you’re performing in the job. Are you being professional, remaining emotionally detached? Or are you starting to get irritable at the market… the market makers… the unfairness of life…? Negative emotions are early-warning signals that you need to cool down and relax. Get back into your state. Observe the tension in your body and release it. Just let it go. Perform the visualization exercise again. Remind yourself that it’s all percentages. This is just another trade, just another day. If you make a mistake during your trading – and who doesn’t – don’t beat yourself over the head with it. Learn from it. Make a mental note to build on it. Thank the market for the training lesson and move on. Be nice to yourself! It’s very important that you avoid spiraling down into an emotional cycle where you end up doing some serious damage to your account and to your own ego.

7. Mind Your Language

Try this experiment sometime: Tell a friend to close her eyes and stretch her arm out wide. Now get her to think of the word “weak”, then press down on her hand. You’ll notice her whole arm moves down easily. Repeat the experiment as before, only this time, tell her to focus on the word “strong”. This time you’ll notice enormous resistance in her arm, and you might struggle to move it at all. Two simple words – two very different results. If words are so incredibly powerful, just think what you do to yourself when you call yourself an “idiot” or worse! But words are more subtle than just name-calling. How about this one… ‘Loss’. Boy, think what that one conjures up. Missed opportunity? A gaping hole in your life? A theft? A bereavement, even? No wonder traders find it hard to take losses. Let’s call it something else: ‘An expense’. Ah, now it’s sounding better. Much more business like. Helps to put it into its true perspective. Similarly, on the other side of the balance sheet, let’s stop talking about: ‘Win’ … which again is steeped in emotion… and change it to: ‘Income’. Income versus expenses. Isn’t that what trading really is? A business. You’re much more likely to become profitable when you realize this. And forget about pitching your ego into imaginary battles that ensnare your sense of reason along the way. Mind your language when trading. Use neutral words at all times, both about yourself and the market.

8. Less Is Definitely More

The best times to day trade are usually the first two hours after the open. Some traders also like to trade the last half-hour before the close. Momentum is greatest at these times, with real buying and selling pressure creating the best trends. Many real-time traders also follow the “3 strikes and you’re out” rule. By limiting your trading to only three trades a day – MAX – you reduce your stress level enormously. You’ll be sharper and less likely to make mistakes. You also insure yourself against a “suicide day”, when you take serial losses, each time trying to recover from the previous loss… Reading this away from the market, you might feel you would never fall into that trap. However, it’s surprising how many traders have come unstuck in a real-time avalanche as the losses begin to snowball. The motto? Tomorrow’s another day. Take it easy. Don’t trade a 40-hour week. Accumulate your profits over time. And you’ll make more by doing less.

9. Get A Life

Do you know why you trade? Is it the fun and excitement, the sheer nerve-jangling, adrenaline rush that comes from trading the word’s financial markets? Perhaps you enjoy status of being a trader? “Hi – John Doe – Futures Trader – nice to meet you…” For some traders, it’s an escape. They hate the world around them – their job, their boss, their spouse, their whole life in fact. Trading then becomes a fantasy to slip into at will. The fact is, trading has to be about one thing. Making a profit. If you do it for any other reason, you are probably doomed to failure, because you’ll operate from emotion instead of the cold, mechanical thinking that’s the hallmark of a good trader. Look at your own motivations for trading. See if you can discover a hidden agenda. If there’s something missing in your life that trading is currently filling, then you need to address that. Live a balanced life. Don’t spend the whole day trading. Meet people. Get out! Start a new business. Find new interests. Keep your trading desk free from emotional clutter.

10. The Essential Real-Time Trading Tool

Real-time traders live from moment to moment. Such is the pull of a live data feed, it’s often a challenge to see the big picture. But this you must do if you want to survive and prosper. . Visualizing the current trade as one of a series helps to maintain your discipline and lower your emotional cholesterol. But there’s one trading tool that will really improve your performance more than anything else. A trader’s diary. Don’t be scared off by the sentimental connotations of keeping a diary. “Dear Diary… today I… ” this is not. Your own trading diary can be computer-based – via a word-processing document or a simple text file saved to your desktop. Or you may find a traditional pen and paper version more effective. (There is something about writing on paper that makes it more personal. Probably the way the hand and eye coordinate with the brain. Plus you’ve probably got enough applications running when you’re trading in real-time!) Another option is to a personal tape recorder. Good if you prefer speaking to writing. Whatever format you use… what will you actually write (or say)? Anything. Don’t worry about grammar. Make one-word notes of what’s happening. Sure, you can note down the facts and figures – stock code, time and date, position size, entry price, stop loss, exit price. But also – and more importantly – record your thoughts. If you were hesitant about getting in the trade, say so. If you’re terrified now you’re in (the dreaded “Trader’s Remorse”) then make a note of it. When you exit, say why. Stopped out? Took profits? Why? How did you feel before the exit? How do you feel now, afterwards? This only takes a few seconds to record this ongoing commentary of your own trading. But the information you get can be priceless.

Here’s why:

At the end of each week, preferably at the weekend when the markets are closed, review the week’s entries. You can guarantee that you’ll see a pattern in your behavior. There is probably something you are doing consistently that’s causing negative results. And once you’ve identified the problem, the solution usually becomes obvious. Do this exercise every week, and also every month to get a longer term perspective. Only you can do this for yourself. Nobody looks after your own affairs better than you do. You don’t need the latest million dollar trading system to be successful in this business.
Look within.

You may be amazed with the results.