A BEGINNER'S GUIDE TO SHORT TERM TRADING, 2nd Ed. (Toni Turner)

   This book was a nice trip back to the basics. Solid practice and solid theory behind a lot of Turner's trading advice. I actually wish I had read this book when I was starting out (but I guess they didn't have it back then). Had I, I may have just skipped using OHLC/bar charts altogether. Toni loves candlesticks sand shares her favorite patterns in this book, and that's what I'm going to put here. A few patterns, backed by graphs in the book to hit-them-home. -Enjoy!

SINGLE CANDLE PATTERNS

DOJI

-bears & bulls in deadlock.

-reveals indecision

-usually indicates a shift, or reversal

HAMMER

-may signify downtrend is coming to an end

HANGING MAN

-could signal uptrend is over, but need to verify with following candle

TWO STICK CANDLE PATTERNS

BULLISH ENGULFING PATTERN

BEARISH ENGULFING PATTERN

DARK CLOUD COVER

-appears at top of uptrend

-opens above close of first, then closes low deep in first candle

-indicates a storm is brewing

-opens below, then closes at least half over previous candle

-the greater the second pierces the first, the greater the chance it's a strong reversal

THREE STICK CANDLE PATTERNS

MORNING STAR

EVENING STAR

MORNING DOJI STAR

EVENING DOJI STAR

-Star patterns represent strong and valuable reversal warnings.

-Knowing how to identify strong reversal patterns in the making not only alerts us to potential setups for entries; they also offer efficient profit-taking signals. Because if you are long a stock, and you see a reversal pattern forming that indicates the stock may make a U-turn soon, you can grab your gains quickly, while buyers are keeping the price aloft.

-to qualify for "star" billing, the candlestick should appear at the top (or bottom) of an uptrend (or downtrend), have a short real body, and gap away (open higher in uptrend, or lower in downtrend) from the previous candlestick.

-The co-stars: in the context of an uptrend, the first real body should be long and clear. The third real body should be long and dark, penetrating the real body of the first candle. In a downtrend, the first real body is long and dark; the star appears next. Finally the first real body moves up, well into the first dark real body.

-The Japanese call the first star and evening star and the second a morning star. When the star emerges as a doji, it's an even more powerful warning that a reversal may be impending.

PATTERNS OF INDECISION

NOTES OF CANDLESTICK PATTERNS

-Traditionally, the doji opens and closes at the same price. But if you spot a "near-doji," where the prices are within a few decimal points of each other, it's still a significant signal.

-A doji that appears in a sideways consolidation move, accompanied by other doji and short real bodies, is not a powerful beacon of change. These candles must appear at the top or bottom of a price pattern to emit a strong reversal signal.

-Doji can be viewed as more powerful at stock/market tops, rather than bottoms. This holds especially true when preceded by a long clear candle, such as in the doji evening star pattern. Think: Long, clear real body equals strong bullish opinion. Then, a doji develops. Doji equals indecision by market players to pay a higher price. Result? Possible pullback or profit-taking may soon follow.

-Doji than confirm trend tops or bottoms many times turn into support or resistance areas.

-When a stock in a an uptrend pulls back to support and then forms a doji, it indicates the stock may be ready to turn and resume its uptrend. The same is true of a stock in a downtrend; a rebound to resistance, followed by the formation of a doji, may indicate the stock will drop back to the downside. Notice the operative word here is may. Always wait for the next candle to confirm price direction. 

EXAMPLES

Josh Approves Advances in Technology

Excellent Charting Software

ActiveTick, advanced charting software

   Very recently I tried a new way to track price action and stumbled upon this little guy. ActiveTick offers high quality, real-time, low latency charting for stocks. There are a few features about this guy worth mentioning. First, not only are the first 30 days free, but only costs a meager $20 thereafter!

ActiveTick allows you to custom arrange windows, get advanced quoting, and set chart activity to update on numerous variables; 1 min. 1/10hrs, 1hr. 1/10days, 1 day, 1/10 weeks, 1 week, 1/10 months, etc.

Chart action could also be set to ticks (which updates on volume, instead of time), a must have for intraday traders. I'm not quite there yet, but decided that if ever I am, ActiveTick will be a nice arrow in my quiver.

A Note on Volume

   It is believed that volume should increase in the direction of the price.  If the prevailing trend is up, volume should be heavier on the up days and lighter on the the down days. If the trend was down, volume should be heavier on the down days, with lighter volume on the up days. This makes sense because in an uptrend there should be more buyers than sellers, and in a downtrend there should be more sellers than buyers. If volume should start to diminish, it could be a warning that the trend could be losing steam and that a consolidation or perhaps a reversal could be ahead.  If the trend was up, and now we're seeing more volume on dips than on rallies, it should be an alert that buying pressure is waning and sellers are becoming more aggressive.  The reverse would be true in a downtrend. If volume starts to shrink on the sell-offs and picks up on the rallies, once again, it could be a sign that the trend is in trouble, and buyers are starting to assert themselves. When volume moves in the opposite direction of the price, this is called divergence.

One of the reasons why volume has a tendency to diminish during periods of indecision is for just that reason. During periods of sideways movement, often traders will avoid a market, preferring to commit their funds once a clear-cut breakout is seen.  However, while it's typical for volume to diminish during these times, volume can give clues as to possible future direction by measuring the level of conviction of the buyers and the sellers.  Seeing if there's heavier volume on the up days or on the down days could be useful in getting positioned during a sideways move or a formation of a pattern.  The idea being that if there's more volume on the up days than the down days, the buyers are probably the more aggressive and the market should more than likely breakout to the upside.  The reverse being true if the volume is heavier on the down days, with the market likely to breakout to the downside.

So while it seems as if chart patterns, volume and technical analysis in general all have some forecasting abilities, none are foolproof.  Used together, they can be quite helpful in your trading and investing, but should be looked at more as helpful hints as to a markets bias, more than anything else.

Technical Analysis

In a fly-by-the-seat-of-the-pants operation, I’ve decided to break down the fundamentals of technical analysis to provide an overview as well as a source of reference.

Technical analysis can be broken down into three parts:

I.                    Overlays (things that go over your charts: averages, bands, channels, etc.)

II.                  Indicators (volume, momentum, accumulation, distribution, consolidation, etc.)

III.                Price Patterns (banners, pennants, flags, wedges, etc.)

I. OVERLAYS

Movings averages

Bollinger Bands

Keltner Channels

Parabolic SAR

II. INDICATORS

Accumulation/Distribution Line

Average Directional Index (ADX)

Average True Range (ATR)

Commodity Channel Index (CCI)

Chaikin Money Flow (CMF)

Moving Average Convergence/Divergence (MACD)

On Balance Volume (OBV)

Percentage Volume Oscillator (PVO)

Momentum (MOM) & Rate of Change

Stochastic Oscillator

Triple Exponential Average (TRIX)

Williams %R

III. PRICE PATTERNS

There are many types of patterns. Basic patterns are:

Symmetrical triangles

Ascending triangles

Descending triangles

Head and shoulders

Inverted head and shoulders

Wedges

Flags and pennants

Rectangles

    

Other types of price patterns include:

double top reversals

double bottom reversals

head & shoulders top (reversal)

falling wedges (reversal)

rising wedges (reversal)

rounding bottoms (reversal)

triple tops reversal

bump & runs (reversal)

flags, pennants (continuation)

rectangles (continuation)

measured moves bullish

measured moves bearish

cup with handles