Archives of “reversal patterns” tag

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Rules for Bear Market

  
  Education
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1. Good news in a bear market is like smoke in the breeze (i.e., soon dispersed). Don’t buy into upgrades or analyst recommendations. Analyst “upgrades” or recommendations can kill you.Every person reading this has access to some kind of trading platform, trading tools or systems that afford instant access to the financial markets. Good news like upgrades in bear markets typically has about five minutes of fame.

 

2. Bear markets are not a time to learn how to “day trade” in an effort to recoup losses (no matter how many times you hear that “this is a traders’ market”).

 

3. Accumulation days (there may be three or more in a row) are shorting opportunities, but resist being aggressive until the S&P 500 shows a 3- and 5-day moving average bearish cross. (Remember that it’s 50% market, 25% sector and 25% stock as far as direction, but some could argue in markets it’s 75% index, 15% sector and 10% stock.)

 

4. Chart patterns (unlike ice cream) come in just two flavors: continuations and reversals. Reversal patterns mostly form in weak trends. If the trend that the market or stock you are watching has been strong, then chances are that any pause is just a consolidation before the next leg down.

 

5. There is no such thing as “safe sectors.” Sure, each bear market brings sector rotation. But make sure if you are playing this game that you don’t have the flexibility of wood. And when the music stops, quickly find a chair!

That is, you must keep a flexible mindset so that you are able to change with the markets. The best traders are those who are nimble and approach the markets without bias.

 

6. Your stop-losses are YOUR stop-losses. The pain of being down 8% in a bull market is no different than being 8% wrong in a bear. If your risk tolerance requires you stopping out at 8%, then be consistent in any market you trade, but trade “with the primary trend.”

It takes greater emotional balance to trade a bear than a bull. So, always manage your risk — just remember that, in the markets, your money is always at risk.

Great traders manage emotions and risk. This makes them great. YOU know your risk tolerance and YOU control what happens between the “keyboard and chair.”

 

7. Bear markets are generally slow-moving affairs. However, stocks in bear markets can move much faster than you think (hence the reason that volatility rises drastically). But the “time” we spend in a bear is what everyone needs to keep in perspective. Bear markets last much longer than most are willing to wait. (more…)

Highly-reliable reversal signals

  
  Education
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highly-reliable reversal signals

For now, ignore the red candles and focus only on the white and black candles that form the left sides of each drawing.

You may have noticed that a lot of “spikers” have gone up too far too fast. These are the stocks that become perfect short candidates for a 1-3 day hold. You may have noticed some of the patterns (above) before, but I’ll give you some examples and what to look out for.

Evening Stars are one of the most reliable reversal patterns available. The failure rate is extremely low and I can’t remember the last time I had a major problem with them. What’s happening is that as each day passes during the rally, the open-close range gets smaller meaning that the buying is starting to slow down. The “cross”, called the doji, at the top signals that the rally has entirely stalled and there is some confusing among both bulls and bears as to which direction the stock should go. This doji day is critical because what happens the next day will most likely continue in the direction of the winner.

Because the rally stalled, it means that the bears have taken some control away from the bulls and there is a very high chance that the stock could drop the very next day. If that does occur, that’s called the evening star and that consists of a long white candle, the doji in the middle, and a down day. Just because a stock dropped to confirm this pattern does not mean that it’s too late to short. Most of the times, this is only the beginning.

Shooting Stars are one of my favorite patterns. They remind me of a comet (or shooting star) falling down to Earth and that’s exactly how the Japanese rice futures traders named this pattern. It’s an ominous sign that a stock (or rice) will drop very, very soon. (more…)

Brooks, Trading Price Action Reversals

  
  Education
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The third and final volume of Al Brooks’s series is Trading Price Action Reversals: Technical Analysis of Price Charts Bar by Bar for the Serious Trader (Wiley, 2012). A trader does indeed have to be serious to read all three volumes because, according to the author himself, the task is daunting: some 570,000 words.
Only half of the final volume is about trend reversals. The rest deals with day trading, the first hour (the opening range), and putting it all together, including 78 trading guidelines, some of which you may not have encountered elsewhere.
This volume is the most accessible of the three, but then my very tired eyes did a lot of work before getting here. It would be difficult to skip the first two volumes and expect to understand the third.
Brooks himself is not primarily a reversal trader. As he writes, “I prefer high-percentage trades, and my most common trades are pullback entries and trading range fades. I especially like breakouts because when they are strong the probability of follow-through is often more than 70 percent. I look less often for reversal trades, because most reversal attempts fail, but I will take a strong reversal setup.” (p. 463) (more…)

7 Major Candlestick Reversal Pattern Pairs

  
  Education
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Candlestick reversal patterns can be a boon to any trader’s repertoire. Combining them with support/resistance lines and other indicators can increase a trader’s edge substantially. Each set below contains both the bearish and bullish counterparts. These are ideal setups that require directional movement (i.e. nothing range bound). The more volume at the given point, the more strength each of these patterns portend.

Realize that a candlestick pattern is simply a means of reading data on the chart. Whether you trade forex, stocks, options or futures it is a superior tool for technical analysis.
Once you become familliar with the basic candlestick patterns you will quickly assimilate their meaning and easily interpret them.
The patterns are basically intuitive and the learning curve is small.
There comes a point where you will recognize market sentiment without even identifying a specific candlestick pattern.
No matter what system style or technique you may implement the fact is you will be that much more effective by making candlestick charts your tool of choice.
The alternatives or archaic to say the least, and downright ugly once you get used to using Japanese candlesticks.
Candlestick charts are the most widely used for of charting for good reason. With a little practice and help, it is actually the most intuitive process for understanding current and future price action.
 harami7

 

 Bearish and Bullish Harami –
Identified by a long bar followed by a very short one. Harami signal a loss of momentum and a possible reversal.

darkpiercing6
Dark Cloud Cover and Bullish Piercing Pattern – The dark cloud cover and bullish piercing patterns reveal weakness in the current trend and emerging strength in the opposition. (more…)

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