Most traders live by the adage, “Buy Low & Sell high”; really great traders buy high and sell even higher. They also take advantage of selling short but simply stated, successful traders just want to trade on the right side of the market.
Blending the strengths and characteristics of Candlestick chart pattern recognition with a specialized Pivot Point filtering system I designed has helped me to stay on the right side of the market. This is what I have been teaching around the globe to private and institutional investors, professional traders, brokerage firms and various Exchanges.
This article is designed to introduce you to one of my propriety set-ups that reoccurs frequently and has a favorable high probability outcome. It works across multiple time frames and asset classes.
My intentions are to leave you with a specific set of rules with knowledge on how to Identify a trade setup, when to enter a position, how to effectively place a stop and where set a profit objective and an exit strategy. It is a simple style that may help you change the way you trade.
Many methods have been introduced to traders but the one constant that has not changed is human emotional behavior. In order to master trading, people need to control their emotions. The good Lord knows that is a difficult task for many of us. The markets are simply a reflection of these emotions. Fear of losing money causes market prices to head lower as people sell, and greed from missing an opportunity causes market prices to move up as people buy trying to catch a free ride. Therefore, it is imperative that we understand how and when a market moves and what signals or patterns give us a clue for a directional price change. There are patterns that recur consistently and this is one that is easily identifiable with the criteria’s to help traders overcome the conflicts of fear and greed based on the entry, the risk management, the trade management and the profit objective.
HIGH CLOSE DOJI (HCD)
Out of all the candlestick reversal patterns, this is the best and most reliable bullish set-up that I have encountered. This was first published in my second book titled “Candlestick and Pivot Point Trading Triggers”. The pattern is based off of a simplified Morning Doji Star formation. Instead of looking for the traditional three candle pattern; this set-up merely focuses on the Doji and the event that follows the formation of the Doji. The key is watching for confirmation for a transition to take place and to act when there is a shift in momentum. We are looking for a specific conditional change to take place in the market, namely a higher closing high above a Doji’s high, especially when it occurs near a Pivot Point support level. This is the pattern I call the High Close Doji or the HCD method. It has dimensions of specific criteria that need to fall in place, which will help to eliminate and filter out false signals. It is a simple and basic approach that parallels a high probability winning strategy.
I have introduced the term Pivot Points so far with out proper introduction, my bad, I am sorry. Many professional traders use Pivot Point analysis and perhaps you are familiar with them. Persons Pivots are a method I created that is based off of the same math calculations its just that my indicator uses a moving average component which identifies the trend, bullish, bearish o neutral and then filters out the respective levels of resistance and support. Once again It uses the previous day, week or months’ High, Low, Close data to first give a projected market condition, whether it is bullish, bearish or neutral, then under that criteria, my method filters out what the targeted range might be for that next session. My work is only interested in the filtered method that gives a bullish or bearish bias based on a moving average calculation and then with that condition targets what the next time periods range might be. So if we have a bullish bias I am looking for a bullish pattern or trade set-up. That is where my HCD pattern comes in play.
This style of trading helps remove some element of fear of loss as the risk is defined and helps quash holding on to winners too long by setting a profit objective. In the chart below in Figure 1 we have Lean Hogs from the December contract. At the time this setup occurred that was the leading front contract month. The actual low was formed on November 9th, which that day a Doji formation was created. For those not familiar with candle charts, a Doji is created when the close is right at the spot where the opening price was established. For the patterned to work we need to see with in a prescribed period of time the preceding times frames to close above the high of the actual Doji. This action was done the very next day as the highlighted section shows. What is more interesting is that the Doji was created at the Monthly Persons Pivot Support level. The call to action is to go long on the close or the next time frames open, placing the initial stop loss under the low of the Doji. The entry top go long would have been the open on 11/ 11/ 2011 at a price of 85.95, your stops would be at 84.70, a risk of 125 points or at $4.00 per point a $500.00 risk.
This pattern works well for all markets including stocks. Take for example the graph in figure 2 on American Vanguard Corp. (AVD). See the Doji formation that was formed on 11/25/2011, it was the next sessions close at 11.81 that triggered the trade. The set-up once again is after a Doji is formed look for the market to close and the key here is it needs to close above the Doji’s high within three (3) bars, or time periods. Clearly as you can see from the highlighted area, the market closed above the Doji’s high the very next session. The entry would have been on the open on 11/29/2011 at a price of 11.83, the stop would have been placed under the Doji’s low of 11.94. Notice in this trade the Doji was also the low for this particular month and again it was also at the monthly Persons Pivot (Green line).
This form of confirmation is what gives traders a heads up to a potential bullish reversal. Using the Persons Monthly Pivot method gave us an idea of A.) What the market condition was and B.) What the potential range might be. This allows traders to set up a game plan with defined risk and reward parameters, based on a trading system, not hunches or “gut feelings”.
This is an effective strategy that as I stated earlier can be used for all time frames and various asset classes besides day trading Forex or Emini S&P’s. It can also be applied to any chart system or trading platform.
In situations when I start to see a sudden loss of momentum or reversing price action, I certainly consider that I have sufficient cause to begin taking profits. If I see evidence that the move is getting drained by smaller ranges or subsequent closes, closer to each low, or if I see a climax with a larger than normal size real body or other evidence that supply is returning to the market, thus turning back price, I start to take several forms of action. I reduce my position by at least half to two thirds and tighten stops. After all I know all too well if I don’t take money off the table the market is way too eager to accommodate and take the money back. As discussed here, the proper use of combining certain candle patterns in conjunction with pivot analysis can certainly aid traders reduce what ails all humans, fear and greed.
Let’s explore the High Close Doji a bit more. In the next example in figure 3 we have a chart on Copper. On November 22nd the chart completed a Doji formation as marked as “A” on the graph. The dashed line denotes the high of the Doji, and then the very next session we see the price closed below the Doji’s low. This negates the High Close Doji formation buy signal. However, three sessions later Copper formed another Doji on 11/25/2011 as marked “B” on the graph. The next day after the Doji formed see where the market closed above the Doji’s high as shown by the dashed line. This is a confirmed trigger to go long. As you can see prices posted a sharp move higher almost immediately. And that is another key point to remember. When this set-up occurs you need not wait for a move to occur. It should show almost immediate positive results, usually within less than five bars.
One can always use other tools for confirmation but keep in mind indicators and oscillators like a Stochastics, MACD, RSI and even CCI can lag price action, but the value in using those tools in conjunction with spotting a High Close Doji pattern is you will be in the trade ahead of the crowd, once those indicators do turn into buy signals that is when you have others possibly jump in on the trade as well helping to push market prices further in your direction.
The next graph in figure 4 is the same copper chart only with the fast Stochastics, MACD and CCI indicators in separate panes under the candle chart. As the vertical line shows all three indicators in this case have triggered a buy signal almost at the very end of the move. The High Close Doji formation not only got you in early to increase you profit potential, more importantly it reduced the risk factor allowing one not to potentially talk themselves out of the trade due to a high risk set-up.
Combining Candle Stick chart patterns and Pivot analysis is a major asset for all traders. If you know how to spot these trades, or better yet scan for set-ups like these will give traders a much better and more frequent quality trades.
I wish you all well in the New Year. Here’s to your health and wealth for 2012 and beyond.
John Person has been actively trading stocks, futures and foreign currency markets for 31 years. He has published three books through John Wiley and Sons, and publishes a monthly and weekly newsletter. He is the founder of an the investment advisory service at Nationalfutures.com. Reach him at firstname.lastname@example.org