Candles And Pivots

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 of the market.

Blending the strengths of characteristics of Candlestick Chart pattern recognition with a specialized Pivot Point filtering system I designed call “CandlesandPivots”, 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 re-occurs frequently and has a favorable high probability outcome. It works across multiple time frames and asset classes.

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 encountered. It 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 is a high probability winning strategy.

 

I have introduced the term Pivot Points so far with out proper introduction. Many professional traders use Pivot Point Analysis and perhaps you are familiar with them. The Pivot Point method I use I one I created and it is based off of a math calculated model that gives predicted targeted levels of resistance and predicted levels of support. It uses the previous day, week or moth’s 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
Figure 1, we have Nvidia Corporation (NVDA), which had a predicted monthly support (green line) at 11.87 for the month of August. Notice that the market formed a bullish HCD pattern right on the predicted monthly pivot support level. This form of confirmation is what gives traders a heads up to a potential bullish reversal. Using the Person’s monthly pivot method, gave us an idea of the following:

  1. What the market condition was.
  2. What the potential low of the month might be.

This allows traders to prepare for a trade especially when a setup like the HCD pattern appears. This way the trader is armed with a game plan that has the entry level indentified with a defined risk level rather than trading on hunches or gut feelings.

Figure 1

 

Once the price closes above the high of the Doji (with three bars) look to enter a long position on the close or the next periods open. Initially place stops below the low of the Doji. You should see immediate results within 5 bars, that is the trade should be profitable within 5 bars after your entry.

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 candles and pivot analysis can certainly aid traders reduce what ails all humans, fear and greed.

This is an effective strategy for stock traders that can be used for all time frames and this set-up works for various asset classes especially for day trading Forex or Emini S&P’s. It can also be applied to any chart system or trading platform.

About the Author: 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 www.Personsplanet.com.