Using Candlesticks for Daytrading

Ken Calhoun,   Daytrading University

Main Points

• I've put together a solid comprehensive reference of the most important bullish long candlestick chart patterns.
    

• The primary value of candlesticks to the daytrader is to be able to spot when reversals are beginning to occur.
    

• Reversals, also called pivots, are important to be able to spot early, before the crowd does, for two types of trades, when trading long:
    

• 1) When protecting an open profit, you want to trail a close stop, and look to exit on any sign of weakness in the chart patterns. Candlestick patterns can tell you when buyers are done, and sellers are starting to come into the stock ( eg dojis and others).
    
• 2) They are also good for "bottomfishing" as a second indicator, beyond cup pattern reversals and volume reversal patterns. You look for signs like hammers and dojis at the bottom of a cup, before buying the breakout over a new whole number to the upside.
    
• Time interval for candlesticks: since my roundtrip trades can last from 3 to 15 minutes or so, I need to use fast candlesticks, and prefer 1-minute candles. Note that you will need to limit your chart timeframe to the 8:30am til 12 noon timeframe, to be able to clearly see the candles, when using 1-minute time intervals.
    
• You should experiment for yourself with 2-minute and 3-minute candlesticks.
    
• Add stochastics, MA lines and volume to help you with your candlestick charts.
    
• I have not found candlesticks useful for things like risk management, other than to alert me to possible tops, for open long positions. You need to use time & sales and level 2 for close risk management. The candlesticks are used to get you into bounce trades, and to get you out of open profitable positions, when you start to see reversal patterns occurring.
    
• Not the MC type, this is instead a reversal pattern, similar to the doji (to be covered below, next) that shows a possible top or bottom after a sustained run in one direction or the other.

Bullish Candlestick Pattern #1

The Hammer

XLNX Example:

You can see here the hammer I've outlined at 10:38 or so in the stock.

It looks like the letter T with a small body at the top. The inverse pattern is good for tops (and is covered in the bearish candlestick lesson).

As the name implies, it looks like a small sledgehammer. The buy here using my strategy would be buy over 42 3/8 (with a stop loss at the 42), and an initial exit at around the 43 1/8 or so.

Bullish Candlestick Pattern #2

The DOJI

A Doji is a + type pattern, and can look like one of three candles, as you can see in this EBAY example's notes to the right.

EBAY EXAMPLE:

The thing I want you to spot in this EBAY bounce play is the doji where I've highlighted it and drawn an arrow to it.

Do you see the small red doji at the bottom? It looks like a plus sign. Don't let the color of the candle, for dojis or hammers, make a difference, the main thing is the size and relative position of the candle to the preceding and following candles.

Here the buy is over 42 3/8 after spotting the initial doji. On dojis, remember to not buy the doji just because it looks like a doji, you need also a cup pattern and for it to clear the whole number above the doji, and also to watch volume and time & sales.

These indicators are all meant to be used together.

Bullish Candlestick Pattern #3

The Morning Star

A morning star is a consolidation and bounce pattern using 3 different candles in a row. It's a bit tougher to spot at first, since there's a sequence of 3 candles off a bottom you're looking for.

ITWO EXAMPLE:

You see one red candle on the way down, a candle with higher/lower tails, followed by a bullish candlestick in green on the way up.

The entry is over the highest part of the middle (reversal, red in this example) candle, and we'd wait til it clears the 30 3/8 decade and whole number level for an entry.

Bullish Candlestick Pattern #4

The Bullish Engulfing

Bullish engulfing patterns are easy to spot.

You are looking for a sequence of two candles in a row, one red one that is followed by a larger green one.

The green candle has to have a high and a low that is higher and lower than the red candle preceding it. In other words, the range of the bullish green (2nd) candle needs to be larger than the sell range in the red candle.

VRTS EXAMPLE:

Here you can see two things I've highlighted, the first is 2 doji-like candles that were Not a bottom (so we'd have to stop out on this first attempt).

The bullish engulfing pattern is following it, you can see the red candle at right after 10:30 am followed by the green, larger candle.

The correct entry on this is over the 57 3/8 previous support, over the whole number above the first 'engulfed' candle.

Daytrading   University