Candlestick Examples

This is the chart for RIG on July 5th, 2007. I'm sure the first thing that you are noticing is the triple tails and the small morning star pattern before the stock made it's move. This would have been a trade that I would have taken an excessive amount of risk on a few weeks ago. The triple tails are a buy signal. I would have bought .75 or so and expected that to be the bottom of the move and would have gotten stopped out at the bottom of the tails for a .25 hit. If you look closer at this trade (credit to Terence for doing much of the research on this), the triple tails aren't telling you to buy the next bar. They are simply telling you that this stock has buyers at the half. When the market isn't showing a clear direction, there is no sense is being aggressive and taking an expensive offer. Set the price yourself and bid to buy where you think the trade would make sense to be long. In this example, the RIG showed buyers at the half so that would have been a good entry. Many times, you'll place your bids or offers out there and no one will want your stock. It's better to miss the trade altogether than to be aggressive and enter a trade with a 1 to 1 risk /reward or less only to watch yourself get stopped out and the trade continue in your direction without you. On days where you feel like nothing is moving and all you are seeing are small ranges, try putting bids and offers out there at "out of the money" prices. With these wacky markets orders these days, you may just get filled.





These are the 5 and 15 minute charts for MCO on June 27th, 2007. The red line shows the that focus time on both charts is 10:00 am. Here on 5 minute you'll notice an inverted hammer entry signal. One of the strategies that I've been using more of is to look at two separate time frames. In this case, the 5 minute chart (shorter time frame) gives me the short term entry signal. Then you can look to the 15 minute chart (longer time frame) for a more broad view in order to catch the longer term trend. Some of you are even using the 60 minute chart. By looking at two time frames, you can avoid getting identify the real move. Focusing on just the 5 minute, may have made you a bit impatient with all of the dojis at the different support levels.









However the moves on the 15 minute chart, gave you no exit until 3pm or so. I'm not saying that holding these trades for hours is an easy task. Most of us (including me) have itchy trigger fingers after the first twenty cents or so. Old habits are hard to break, but the charts don't lie. Many of us have been covering our positions without defined exit signals on the first downtick it seems (again myself included) without seeing the trade through to the end. Remember, if you entered a trade with the thought of taking 15 cents of risk and you get scared out taking a 10 cent profit, it wasn't a successful trade. Risk / Reward ratios should be at 3 to 1 or greater and no less than 2 to 1.

-MM