Monthly Archives: July 2010

Better than Candlestick Patterns – Part Two

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In Part 1 of this series, we learnt how to read the Close Position, and define each candle as either a High Close, Mid Close or Low Close candle depending on where the candle closed within its own range.

If you missed part 1, you’ll find it at the following webpage: https://yourtradingcoach.com/trading-process-and-strategy/better-than-candlestick-patterns-part-one/)

We discovered a simple way to identify the sentiment of the individual candle, as follows:

  • High Close = bullish sentiment
  • Mid Close = neutral sentiment
  • Low Close = bearish sentiment

And we saw how the path taken by price within the candle creates slight variations in the degree of bullish/bearish sentiment.

We now build on our assessment of current price action sentiment, by considering the current close in the context of the previous candle – allowing us to determine the sentiment of the 2-candle pattern.

We define a candle as a Bull Candle, Range Candle or Bear Candle, depending on where price closes with respect to the previous candle’s range.

I call this the Close Comparison.

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Reader Trade Review – 22 July 2010

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I received an email recently from a reader, asking for a GBP/USD trade review and advice on how to follow the trend. His analysis concluded that the higher timeframe 4 hour chart was in a downtrend (based upon EMAs) so he then looked for a resistance area at which he would sell, expecting a resumption of the downtrend.

The email Q&A which followed offered some great learning points, so I’d like to share these points with all readers via this article.

The following chart shows the 4-hour chart at the close of the candle prior to entry. Please note, I’m not sure of the EMA’s he uses, but it’s largely irrelevant. This chart shows a standard EMA(20). I’ve also used the 6B instead of the GBP/USD (cause that’s what I trade), but it should be the same give or take 1-2 pips.

The next chart (below) shows his entry area. He identified resistance at 1.5213-23, based upon prior price action. He entered approximately at point E with a stop a little above the swing high.

So, the premise was for his resistance area to reverse the 5 min uptrend, and commence a continuation of the 4 hr downtrend. Subsequent price action shows the trade stopping out.

Here’s an excerpt from my email reply…

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Better than Candlestick Patterns – Part One

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The key learning point from candlestick patterns is that (assuming you’ve been taught correctly) it teaches you to read the sentiment within the pattern; how the battle between the bulls and the bears is playing out and which is the dominant force.

This concept is then applied to a dozen or so patterns. And provided the patterns are then considered within the context of the background market action, they can provide a good indicator of potential reversal.

Here’s the problem though… you only learn to apply this concept to those dozen or so patterns. If those text-book patterns don’t display on the screen, you’re lost.

A better approach is learning to read the sentiment of EVERY candle or group of candles.

We are not reliant then on fixed text-book patterns.

Let’s look at how I read the short-term sentiment of the current candle, or group of candles.

Let’s learn how to read candles in a way that I consider vastly superior to standard candlestick analysis.

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Trader Performance Drills

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Here’s another great email question from a reader…

Question:

Hello Mr. Beggs,

I am serious about trading, but I am still a newbie. What are three things that I can practice to improve my performance that can be repeated a lot and will continuously provide me feed back on my results? You currently being a successful trader and instructor/mentor, so I figure you must know a few things that are highly mentally demanding and maybe not fun but would improve a traders performance if practiced.

Thank you in advance for your help, I truly appreciate it!

W

Response:

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Where to Trigger Entry into a Pullback

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Some more great email Q&A…

Question:

Hi Lance,

Had a question on breakouts. I know you subscribe to the breakout, then wait for a pullback to get in. I was monitoring GBP/USD last night. I set an alarm for if price got up to resistance at 1.5080. It then broke thru. Sticking to my rules I chose not to enter but to instead wait for a pull back. Which it did after first shooting up 30 pips or so. What I wanted to know is specifically how you play breakouts. That is, after the pull back…what triggers you in? Do you wait for another breakout,….perhaps on a smaller timeframe? Or do you maybe look for a pullback to a minor support area and then enter and NOT wait for momentum to kick back in in the direction of the breakout (that is, not to take out another additional high), etc.? Things like that. Because what I am doing now will involve more and more of entering after price breaks thru. And I want to make sure I play these right without getting burnt too often on false breaks.

Very much appreciate your thoughts on this.

A.

Response:

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Support and Resistance on Composite Indices

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Every now and then I get a question I just can’t answer, which is great because it gives us both an opportunity to learn. If anyone can help with this, I’d love to hear your thoughts. Please email me.

Here’s the email Q&A…

Hi again Lance,

I have a real question to ask as I really don’t know the answer and have been pondering it as one of my obsessions with trying to understand the market/s.

The question surrounds the basis for support and resistance prices but as I think about it, it can also apply to trend lines as well. And specifically, I am thinking about indices. I understand the notion of support and resistance with individual stock, futures and currency trading. They are unitary in that they are not comprised of any other combination of securities. However, thinking about an index like the S&P 500 or the Dow is a bit of a conundrum.

Consider: An index like the Dow or the S&P are merely a number of individual components mathematically weighted and summed to create a resulting value. In the case of the S&P there are ~ 2700 issues in this mathematical total called the S&P 500. Yet, one looks at these indexes as if they were a singular entity when in fact they are only a summation of the many individual elements. How is it possible and what is the mathematical basis for 2700 issues converging exactly in such a manner as to create a specific resistance or support level in the index given that each is only a component of the index and not all traders/investors, trade all of the issues in exactly the same proportion at the same time? Support and resistance levels may well apply to an individual issue but somehow, it doesn’t make sense that they all conspire to create specific and repeating support and resistance levels in the index to which they are only a part.

I hope what I expressed makes sense. It just is one of those fundamental understandings that have been bothering me and that I believe can apply to a better understanding as to why the support and resistance levels seem to appear consistently on the indexes. Of course, you can trade the DIA which is just a 100th of the DOW but it’s only a divided value of the DOW and thus inherits the same index properties. The same question applies here.

I have never heard this issue discussed or illuminated and I can find no discussion on the internet. Any thoughts?

Thanks,
L

RESPONSE:

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Market Analysis Example – Narrow Range Sideways

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I received an email this week thanking me for the Advanced Candlestick Analysis articles and requesting some more analysis of this type.

If you haven’t seen these articles, check out part 1 and part 2 here:

I’d love to do more of these articles, but they take quite a while to put together. Probably video would be an easier format for me to present this type of material, but then you can’t print it out and study it.

Anyway, Ill be sure to do some more once the ebook is complete later this year. Actually, the ebook should present quite a few examples.

In the meantime, I went through my email archives to find a sequence of emails I recalled from earlier this year, which could be of interest to anyone who is into discretionary trading. It deals with whether or not it’s possible to trade a very narrow range sideways market, as occurred in the emini-futures on Jan 6th, 2010.

Please recognise that any hindsight based analysis should be treated with skepticism. As you’ll see in my response, it’s easy to trade with perfect hindsight. In reality (as I state in the email), standing aside was probably an excellent option.

Oh, and don’t get any thoughts that this is the usual amount of response I’ll provide to your email questions. This was a one-off.  🙂

Anyway, I hope you get something out of it…

First Email:

Hi, Lance,

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