CONNECING THE DOTS

Candlesticks & Convergence of Clues

The Art & Science of

Active Trend Trading
 Disclaimer
U.S. Government Required Disclaimer Commodity Futures Trading Commission Futures
and Options trading has large potential rewards, but also large potential risk. You must be aware
of the risks and be willing to accept them in order to invest in the futures and options markets.
Dont trade with money you cant afford to lose. This is neither a solicitation nor an offer to
Buy/Sell futures or options. No representation is being made that any account will or is likely to
achieve profits or losses similar to those discussed in this training. The past performance of any
trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN

LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE
RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN
GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF
HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY
TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

All Materials presented are for training purposes only . Traders should paper trade any new method
prior to risk of personal capital.
 Why Connect the Dots?
Establishing the Convergence of Multiple Clues provides context to
the Candlestick signal

Provides greater understanding of expectations

Helps Minimize Risk & Maximize Profit

Todays Objective: Gain a greater understanding of properly

analyzing Candlestick Patterns and the amplifying role of the
Convergence of Clues
Primary & Best Clues that Must Converge for a
Higher Probability Trade

Horizontal Support Zones

Horizontal Resistance Zones
Trend Lines
Flag Lines
Moving Averages for Trend
Moving Averages for Support
Moving Averages for Resistance

Minor Clue: Extremes on Indicators

 Connecting The Dots

Before taking a Bullish Reversal Signal during a Downtrend

o At least three clues must converge (be observable)

Before taking a Bearish Reversal Signal during a Uptrend

o At least three clues must converge (be observable)

During a Uptrend or Downtrend to trade in the direction of the

Trend
o At least one additional clue must converge with the candlestick
pattern
 A Quick Review
Candlestick History

Charting method originating In Japan between the 18th century & late
1800s
Potentially used by Japanese Rice Traders
Introduced to Western Traders by Steve Nison in the 1990s
Knowledge base and trading importance expanded by Steve Bigalow
 A Quick Review

Candles and Technical Analysis go together

Powerful Tools Only partially understood by most traders

Immediate feedback on investors sentiment

Greatly improve Reward/Risk on every trade in all time frames

Be a detective Look for the Convergence of Clues

Presentation Material by: Active Trend Traders
 Golden Rule of Candlesticks
Candlesticks and patterns require three criteria for
proper interpretation:

1. A Completed Line (Must wait for the time period to finish!)

2. Shape of the line of pattern

3. The Preceding Trend

 Whats the Difference?
Bar Chart vs Candlesticks

Bullish Bearish

High
Open
Close

Close
Open
Low
 Primary & Best Candlestick Signals
There are many, many Candlestick Patterns but these
represent the Primary & Best
Indecisive
Doji/Spinning Tops

Bullish Bearish
Hammer Hanging Man
Engulfing Patterns Engulfing Patterns
Piercing Line Dark Cloud
Harami Harami
Inverted Hammer Shooting Star
Morning Star Evening Star

Kicker Kicker
 The Dynamic Doji
- Dojis and Spinning Tops show indecision between buyers &
sellers

- Clues: When present at past support/resistance or moving

averages with indicator extended or divergent

- Price Action will tend to move in the direction of the open

after a Doji/Spinning Top
 Doji/Spinning Top Bullish

How Many Clues? 26%+ Gain from Signal to

26%+
High Gainmonth
in one from Signal to
High in one month
Would be comfortable trading this of
support at $62?

Series of Dojis
at Support

&

Clue: Divergent Stochastics

 Be a Detective: Search for Clues
How Many Clues?
1. Series of Dojis
2. Strong Support?
3. Divergent Stochastic

4. Break Above 8 day EMA

3
 Hammers & Hanging Men

- The Basics Shape

Small Body

Shadow must be 2X the Body

 Hammers & Hanging Men
Understanding what the line tell us?
- Buyers Wrestled control from sellers during the trading
periodbut where it appears is equally important!

R - Shows levels & zones of support and resistance

Whats ImportantContext & Convergence

1. Where the line formsUptrend or Downtrend?

2. Quality of the line
S 3. Magnitude/Range of the lineBigger Better!
4. Other Clues
5. Defining Expectations & Failure of the Signal
 Hammers & Hanging Men
Quality of the Signal is determined by:

1. Where the Line appearsHow long has the preceding trend

been in place? Appearing after longer trends can have
greater meaning

2. The Magnitude/Range of the Line

3. Convergence of other clues include:

Identify Support/Resistance
Proximity to Moving Averages
Indicators
 Hammer
Swing High
Only occurs after a downtrend.
Shadow must be 2X the Body

Expected move back to swing high,

trend lines or moving averages

Hammer Support
 Hammer Convergence of Clues

What Happened
AAPL 11/16/12
 Hanging Man
Only occurs after a
Uptrend. Shadow must Resistance
be 2X the Body

Expected move back to

swing low, trend lines or
moving averages

Swing Low
Hanging Man Convergence of Clues

TNA 5-3-11
What Happened
 Poor Quality Hammer or Hammer Failure

Two Hammer examples:

1. Too Close to Resistance of

Moving Averages

2. Appearing shortly after a

new downtrend

AAPL 10/2012
 Poor Quality Hanging Men or Hanging Men Failure

Two Hanging Man examples:

1. The lower wick entry signal as

never triggered

2. Pattern just coming out of

consolidationuptrend yes but
new uptrend

QIHU 4-2013
 Secrets of Trading Hammers & Hanging Men
Understand the Parts:
Resistance 1. Stays in effect until a close violates signal high or
Zone low

2. Both are self confirming signals

3. High is Top of a Resistance Zone

Support
Action
Zone 4. Low is Bottom of a Support Zone
Points
5. Hammerexpect testing of the wick

6. Hammer use low of body as a stop after a break

out or with Long legged Hammers

7. Hammer middle of wick can be early entry

8. Violating Low is max stop loss

9. Hanging Man violating high is max stop loss

10. Both May Appear with other candlestick reversal

patterns in series (Pay attention to this!)
 Secrets of Trading Hammers
Opens above yesterdays candle
Opens in Wick Entry 3
Entry 2

Stop From Entry 2 or 3

Opens in Wick
Entry 1 Next Day Entries &
Stops Hammer
1. Self confirming signals
can be entered day of
Max Stop Any Entry signal
 Secrets of Trading Hanging Men
Max Stop Any Entry
Opens in Top Wick

Opens in Wick
Entry 1 Next Day Entries &
Stops Hammer
1. Self confirming signals
Opens in Lower Wick can be entered day of
signal

Opens in Lower Wick

Entry 2
Opens Below yesterdays candle
Entry 3
 Clue: Dissect Each Candlestick Signal
- Every Candlestick Signal can be broken down just like the
Hammer & Hanging Man

- Use the small bodies to your benefit to plan trade Action

Points for Entry & Exit

- Count the Clues

Break Be Back in 15 Minutes
 Shooting Star
Only occurs after a Uptrend. Body
Resistance inside previous days candle

Wick must be 2X Body

Color of candle doesnt matter

Expected move back to swing low,

trend lines or moving averages

Swing Low
 Shooting Star
Shooting Star

What are the Clues?

-25% Drop from Signal to Low

in 5 Days

Clue: Divergent Stochastics

 Evening StarTwo Day Pattern
Only occurs after a Uptrend. Body
Resistance inside previous days candle

2nd Down day closes at least way

down candle from 2 days prior

Expected move back to swing low,

trend lines or moving averages

Swing Low
 Evening Star

What are the Clues?

Evening Star
Expectations?

Clue: Divergent Stochastics

 Inverted Hammer
Swing High Only occurs after a downtrend.
Shadow must be 2X the Body

Can be very powerful signal

Expected move back to swing high,

trend lines or moving averages

Hammer Support
 Inverted Hammer
28%+ Gain from Signal to High in 6 Weeks
What are the Clues?

Inverted Hammer

Clue: Stochastics Oversold

Morning StarTwo Day Pattern
Swing High Only occurs after a downtrend.
Body inside previous days candle

2nd Down day closes at least way

down candle from 2 days prior

Expected move back to swing high,

trend lines or moving averages

Hammer Support
 Morning Star
11%+ Gain from Signal to High in 2 Weeks
What are the Clues? 13%+ Gain from Second Signal in 2 Weeks
How many do we need?
Does the Morning Star
really matter?

Morning Star
Bullish EngulfingTwo Day Pattern
Swing High Only occurs after a downtrend. Completely
engulfs the previous days body.

Expected move back to swing high, trend lines

or moving averages

Support
 Bullish Engulfing

12.8%+ Gain from Signal to

What are the Clues? High in 6 weeks

Bullish Engulfing

Clue: Divergent Stochastics

 Bearish Engulfing
Only occurs after a Uptrend. Completely
Resistance engulfs the previous days body.

Expected move back to Swing Low, trend

lines or moving averages

Swing Low
 Bearish Engulfing

What are the Clues? Bearish Engulfing

12.8%+ Gain from Signal to

High in 6 weeks
Whats This?

Clue: Divergent Stochastics

 Piercing Line

Swing High Only occurs after a downtrend. Must

open below and close more than
way up preceding candle.

Expected move back to swing high,

trend lines or moving averages

Support
 Piercing Line

70%+ Gain from Signal to

What are the Clues? High in 2 Months

Piercing Line

Clue: Oversold Stochastics

 Dark Cloud

Only occurs after a uptrend. Must

Resistance open above and close more than
way down preceding candle.

Expected move back to swing low,

trend lines or moving averages

Swing Low
 Dark Cloud
What are the Clues? Dark Cloud

-9% Drop from Signal to Low

in 2 days

Clue: Weak Stochastics

 Bullish Harami
Swing High Only occurs after a downtrend.
Body inside previous days candle

One of the most powerful signals

Only Two Clues Needed

Color of candle doesnt matter

Expected move back to swing high,

trend lines or moving averages
 Bullish Harami
13%+ Gain from Signal to High in 4 Weeks
What are the Clues?

Bullish Harami

Clue: Oversold Stochastics Turning Up

 Bearish Harami
Only occurs after a Uptrend. Body
inside previous days candle

One of the most powerful signals

Color of candle doesnt matter

Only Two Clues Needed

Expected move back to swing low,

trend lines or moving averages

Swing Low
 Bearish Harami
Bearish Harami
What are the Clues?

-20% Drop from Signal to

Low in 5 Weeks

Clue: Divergent Stochastics Turning Down

 Kicker Signal
Rare but very powerful

2 Day Pattern

Investor Sentiment:
o Bullish Kicker: Downtrend, a capitulation like move down, followed the next
day by a gap up move
o Bearish Kicker: Uptrend, Exhaustion move up, followed by a gap down move
the next day

Strong Reversal Clue: Clues Needed Two

 Kicker
Only occurs after a downtrend. Can
Swing High follow sell off gap down.

Very Powerful Signal

Next day opens up with a gap

Expected move back to swing high,

trend lines or moving averages

Gap up
 KickerBullish
13%+ Gain from Signal to High in 4 Weeks

What are the Clues?

How Many Are Needed?

Bullish Kicker

Clue: Stochastics Oversold

 Bearish Kicker
Only occurs after a uptrend. Can
follow exhaustion gap up.

Very Powerful Signal

Next day opens down with a gap

Expected move back to swing Low,

trend lines or moving averages
Gap Down

Swing Low
 KickerBearish

What are the Clues?

Bearish Kicker
How Many Are Needed?

-19%+ Gain from Signal to 100 day SMA in 26 days

Clue: Stochastics Divergence

 Live Examples

GO to the Charts!!