So I looked at a chart today and tried to approach it like a puzzle. The question was, What kind of strategy could I use to solve all the trouble spots in the picture? I’m not sure if this is how I’m suppose to solving these kinds of problems, but it’s a style I’m personally familiar with.
The picture is a 3 month daily chart of C. Yesterday I noted that when things don’t move, it’s hard to trade. The ranges are so small, it’s hard to tell or predict which way it’ll break, and additionally, if I were to pick a side, which should I be picking?
Here is the blank chart:
^the past couple days/full week look like there isn’t a good way to trade. Remember that my question from yesterday was something along the lines of: can I make profits when it seems like the market isn’t moving? I noticed this pattern (5th and 6th from the last):
Is this suppose to be a reversal signal? It is a doji, a signal of conflict and secondly, the wicks are roughly at the same low so it could be that there isn’t enough pressure to move price lower, and the 3rd candle confirms this by moving up.
I thought this would be a problem, because this 2 candle wick top out/bottom out seems like it would be quite common along general congestion and consolidation in the market when prices really aren’t moving. So I looked. Lets go to the now annotated chart.
^ there are about 4 or 5 occurrences of this type of pattern here. Trading purely on seeing this 2 candle pattern would lead to mixed results. Specifically the double block on 3 candles in the middle is a bit strange. Going with this new wick strategy, (which would be buying after a 2 candle bottom, and shorting after a 2 candle top) it’s a top out followed by an immediate bottom out..Not very productive.
So here’s what I came up with:
Box 1: Cautiously enter a short position based on the pattern. At the end of the 2nd candle, once this “pattern” has been established, set a stop to trigger into the trade under the low of the 2 candles, and set another stop to get out if it moves up more than 1% of the price.
Box 2/3: Strategy works here as well. The block would be worrying me because price isn’t really moving in my direction, but at least it isn’t moving against me. I could either get out of the position at candle 4-6 and catch a tiny profit/loss, or hold it waiting to see if it breaks the fib line.
Box 4: This strongly looks like a bounce to me. Price isn’t moving down for 2 candles, and it’s right on the fib line. However, I would be safe if I put in a stop position to get in above the high of the 2nd candle, which wouldn’t have been triggered. This is an order that I’d cancel once the next day is revealed to be a red candle.
Box 5: So is it a reversal? I’m starting to think so actually. Even though it’s below the fib line, they’re often not perfect. I’ll consider putting in a stop position above the high for Friday, and go long on C, even though the sector is still weak.
Lesson learned: In setting up a long position, place the stop above the high of the last candle. In setting up a short position, place the stop below the low of the last candle.