CandleSticks in the HPS Methodology

[daytradingradio 10]

As the markets rip higher and push charts to their limits, traders start to look for the market to collapse under it's own weight. I was seeing a tremendous amount of discussion on when to short the market and even myself have started to act on some high flyers by taking some puts and bearish ETF's. But I have seen this before and it's not a fight I want to be in, The more negative talk of the market needing to come back in or to rest, will just grind this market higher. I said this months ago. Not until people feel like they are missing the boat, or even better, my sister getting back into the markets, will this market sustain a correction more than a few weeks.

 

It's only been 5 years since the last financial meltdown, and that scarred a lot of people who had trusted the economy and the markets. Now, they see the Teflon market brush off debt issues, a divided government, unemployment, and anything else they can come up with. Maybe a new crisis? Nope. Been there with the situation with Syria and Russia. Earnings? Nope. Sorry. I know the Hindenburg Omen. Don't get me going on that one. This market might go down when WLT gets bought out, but pigs will fly then too and that we all know is bullish.

 

I don't make guesses in the market based on opinions. Everyone will tell you something's wrong but unless you put blinders on, you might miss the next big market move. I think I will get bulldozed in my puts but they are a good hedge at this point in the market. All I want to do is profit when the markets move up or down and we have. The last month was near perfect each trade a quality High Probability Set-up.

 

For a special post, I decided to share what I will be looking for, in detail, when it comes to an opportunity to short this market. I probably will not initiate any new shorts until i see a clear reversal in the markets. For me, I focus on adding the reversal candles to the HPS core indicators, as we are extended and technically overbought and up against my target trend line 1745. I want to look for that reversal candle to show up. This could be in the indexes or individual stocks. Below is something you will see in a educational course I am writing for the HPS. This is a rough draft of a small section but felt it is important for the up coming week's

 

The candle is comprised of two components; the body and the wick (sometimes referred to as “shadow”). The body shows the open and closing prices and the wick shows the high and low points throughout the trading period. The image below gives a basic understanding of what a candlestick looks like and how it works.

 

 

Over time, as the HPS methodology was developed, I was able to add important indicators to the formula to increase the probability of the success for the trade and continue to see the results that would unequivocally prove that this was the most successful method of trading in today's market. I would be fine with just keeping things as simple as they are, but over 19 years of trading I have noticed one more consistent signal that the markets produces that alone would be enough to trade on. When added to the HPS method and the underlying 5 studies (indicators) give us a tremendous entry for any trade long or short. To emphasize how good I know this is, if I was asked “John, do you think there is a "Holy Grail" in trading?" (I of course know there is no such thing) would answer by saying, "The HPS indicators are like baseball players. You are not going to hit a home run every time, but if you go back through history and took all the greats and put them on one team, that would be the HPS. Adding these 5 reversal candles to the formula it really ties everything together."

 

These reversal candles are, in a sense, the 6th indicator to be considered when they appear with any of the core indicators.

 

And the rules apply still that we need 3 or more core indicators converging to be considered a HPS. Personally, I would probably trade 2 cores and a reversal candle stick.

 

3 or 4 cores indicators and a reversal well that's as close as you will be to the Holy Grail.

 

Lets take a look at those candlesticks.

 

To be considered a reversal, there should be an existing trend to reverse. It does not have to be a major trend, but should be up for the short term or at least over the last few days. A dark cloud cover after a sharp decline or near new lows is unlikely to be a valid bearish reversal pattern. Bearish reversal patterns within a downtrend would simply confirm existing selling pressure and same for Bullish reversal patterns if we were to see a Piercing Pattern in an uptrend it really is just a continuation of the trend.

 

HAMMERS:

 

Hammer candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during a decline, then it is called a Hammer.

 

 

DTRS TIP: This is my favorite reversal. Knowing that the HPS method we are already looking at quality names and usually in a pull back that has extended far enough to signal oversold levels on the stochastics and most likely pulling back to a lower area of interest defined by a channel or support area. The hammer tends to test those limits and violate them taking out the remaining weak hands , stops etc. Then reverses and close on or near its highs and usually above the areal or support. This is a great set up and the hammer really confirms the entry zone.

 

 

SHOOTING STAR:

 

A single day pattern that can appear in an uptrend. It opens higher, trades much higher, then closes near its open. It looks just like the Inverted Hammer except that it is bearish.

 

 

Same applies as the Hammer just opposite.

 

 

ENGULFING PATTERN:

 

A reversal pattern that can be bearish or bullish, depending upon whether it appears at the end of an uptrend (bearish engulfing pattern) or a downtrend (bullish engulfing pattern). The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body.

 

 

DTRS TIP: Another great candle to look for, Because it is not very common it is one of the candles technicians pick up on. Even though this is a great candlestick I would only trade it in concurrence with 2 or more core indicators lining up.

 

 

 

Here is what a 2 day cross section of the pattern looks like to see how the stock gaps down and then moves up.

 

 

DTRS TIP: When actively searching and scanning for HPS candidates, and I find a potential stock that is lining up properly, I will focus in on it. If I see a gap down (in the case of a long), and watch the action early on, (because it has multiple indicators lining up) I will look to start a position before the end of the day if we start trading above the previous days close . As I expect it to finish off with a strong candle. I can get a great position and very low risk entry.

 

 

PIERCING PATTERN:

 

A bullish two day reversal pattern. The first day, in a downtrend, is a long black day. The next day opens at a new low, then closes above the midpoint of the body of the first day.

 

 

 

DARK CLOUD COVER:

 

A bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day. The opposite of the Piercing Pattern.

 

 

 

Here is a great example of the combination of oversold stochastics, and reversal candles. You probably could put in an underlying trend line on this chart too.

 

 

We will leave off for here now. There are hundreds of Candlestick patterns but these are the key reversals and when they line up with the HPS indicators they are the best risk vs reward set ups out there.

 

In the next segment, I will show you how to use volume and one of the best key volume signals to trade off of.

 

 

DayTraderRockStar

 

Remember, don't trade over your means and nothing is guaranteed. News trumps all patterns. Meaning outside influences like bad or good news will break chart patterns but there is a great strategies to profit from that, but that's for another post

Edited October 23, 2013 by tradingwizzard