In this article I want to share with you in detail this one specific trade setup and what it takes to confirm the buy signal or what’s known as a trigger to execute a trade.
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, therefore helping to eliminate and filter out false signals. It is a simple and basic approach that is a high probability winning strategy.
This setup may help you improve your trading performance and allow you to develop a consistent winning trading strategy. Consider this your own personal trading system that is based off of proven and powerful techniques. For a moment I want you to envision the concept of epoxy glue, it requires two compounds. Separately they are not very reliable or in fact a very strong bonding substance. However, when combined, a chemical reaction occurs and forms an amazingly strong and powerful bond.
Using the methods of Candlesticks with Pivot Points can give you that same result if you know what to look for. The implementation of longer term analysis using Pivot Points will give a trader a fantastic means in which to anticipate a point from where a trend change could occur, thus helping one to not only prepare but to act on a trade opportunity.
One can implement this set-up using different time frames besides daily analysis. You can include weekly and even monthly Pivot Point calculations. Take for instance the Weekly numbers. They are compiled from the previous weeks High, Low and Close. This method of analysis after calculating the numbers will alert you well in advance of a potential Support and or Resistance level. If you have your calculations figured out on the close of business on a Friday then you are prepared before the weekend starts and now have a general guide of what may be the next weeks potential High, Low or both.
In the setup process you heighten your awareness to enter in a long or short position against predefined levels and wait for the trigger or market signal at those levels.
It can not only help you define or identify the target area to enter but also what you wish to establish as your risk objective. Another event that occurs with this setup process is you now can “set up” your orders to buy on your trading platform with the selected contract amounts. In other words, prearrange the commands on the electronic order ticket. Now all we need is confirmation so you can pull the trigger or click the mouse to establish an entry in the market and establish a position.
The chart below magnifies what you are looking for, notice once the market closes above the Doji’s high we see an immediate reaction of positive momentum and a continuation of higher prices.
That is what we are focusing on especially after a decline in price and when the market approaches a predetermined support level based off of the Pivot Point Calculations.
Trading Rules for the HCD setup:
- When the market approaches a key Pivot Point, buy on the close or on the next open once a new closing high is made above the previous bullish reversal candle pattern especially a Doji formation.
- Place your initial risk management stop below the low of the lowest low point of the bullish candle pattern. This can be on a Manual Stop Close Only basis.
- Exit the trade on the close or the first open of a candle that makes a lower closing low after a prolonged uptrend.
- One can use a “Filter” or back-up process to confirm the buy signal against a major Pivot Point number such as a bullish convergence stochastic pattern.
No matter which indicator you are comfortable in using, when investors first discover Pivot Points, most often their first impression is one of pure amazement. Mainly due to its ability to predict what a specific time frames overhead resistance or support might be. Moreover, more times than not the High, Low or even both are right on target as the exact number for that given session. Make no mistake Pivot Point analysis is impressive. However, its real power and value does not end there. Pivot Point Analysis deals with pin pointing not only price but in a specific time period.
It is what I consider the “Right Side” of the chart indicator. It also gives you a method for identifying the trend and how to determine the typical price or fair value of a given time frame. After all, that is what the actual Pivot Point number is. If prices deviate too far from that point the outer calculation numbers can help you determine at what point a market is most likely to turn. One can also use this feature of the actual Pivot Point to develop a moving average system. But when traders combine these calculations with the visual aid of certain candle patterns, it can give you superior guidance as to when and where to enter and exit positions. Traders who want every edge in their approach for the highest probability of success will benefit from this simple but yet time tested method.
The amazing fact is this pattern works equally well in market declines, therefore I call it a Low Close Doji set-up. When I use pivot point analysis what I want to do is see how the market behaves at or near a pivot point target number. I also include a special moving average approach which is taught in my trading course that illustrates a conditional change in the market. Once we identify that the current market price is turning direction we can establish a trading position as prices close below a Doji low, a moving average cross over occurs and prices close below both moving average values. I use a combination of a specific moving average of the pivot point combined with a simple moving average. I stay with the initial position until those particular conditions change. In bearish conditions I look for a series of events such as lower lows, lower highs and lower closing lows to indicate a bearish trend. Once the market conditions change and we have a series of opposite events occur I stay on the short side of the market.
In the chart above we have a Low Close Doji sell signal triggered at the pivot Point, prices close below both moving average values and the moving averages cross signaling confirmation that a trend change has occurred. The profit target is the first Pivot Point support target level. If you notice that this method signals a short well before the MACD signal and even the Stochastics %K and %D 80% line cross method. As you will notice the low is formed by a doji candle. In the beginning of this article I stated the “Doji’s form more often than not at Pivot Point Support and resistance levels”. Here is another case in point. With that said, now you see why I focus on these high frequently re-occurring patterns and teach these specific patterns in my trading course.
I went and took this observation one more step in my soon to be release book which is slated for sale in October 2006. I cover more on statistical occurrences when Doji’s, Stars and Hammers form in certain markets. Here is an example of the frequency of these patterns, which was independently back tested by Genesis Software. In the example below using the e-mini S&P 500 futures contract, the test results were based on the US open out cry session using a fifteen minute time period. We ran these statistics on many markets; the best part is some markets had even better results than what I am sharing with you now. Looking at this bar chart below we see that 30% of the lows are established by a doji while 40% of the lows are made by Hammer formations. Combined that accounts for a 70% chance that the low is made by a Doji or Hammer based on a 15 minute time interval. At tops 36% of the time they are made by Doji’s and 40% are made by shooting stars, combined it accounts for a whopping 77% statistic.
The methods introduced here are used to help keep the traders focused on the now, which means to watch and study the current price action. The Candle patterns give a visual confirmation on price momentum, and the Pivot Points forewarn you what the potential turning points are. When you combine the two methods you have a solid trading program.
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