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Visual Candle Scanning for Breakout Trades — Part 1

By  +Follow July 1, 2014 7:04AM
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Sorting through hundreds of charts in search of elusive strong breakouts can be challenging. In this series of articles we’ll focus on how to spot momentum breakout trading opportunities using a visual scanning approach designed to help traders narrow their focus to the strongest emerging trade setups.

Visual Candle Scanning Basics

Candles can show the net buying and selling “story over time” of accumulation vs. distribution (buying vs selling), as it relates to price action. When it comes to spotting the strongest patterns, much of it is common sense, using easily-observed patterns that reveal when institutional buying is at it’s strongest (such as very tall green candles). Other patterns are more subtle, so understanding a variety of these trade setups can be helpful.

Pattern #1: Ratio of Green to Red Candles

All uptrends are not created equal; many are significantly stronger (and tradable) than others. A good basic scan is to look at a 90-day candlestick chart, and visually scan to see roughly the ratio of green to red candles. As long as there’s at least 1.5 times the number of green candles to red, during a 90-day uptrend, these are generally strong patterns for long continuation trade setups.

For example, in Figure 1 S&P 500 Index (SPY) , you can visually check the chart and see there’s many more green candles (N = 43) than red ones (N = 21), which meets our 1.5 green-to-red criteria.

 

Fig1SPX.gif

 

Traders get into trouble by overcomplicating their trading plans by trying to outguess the market using risky pivots on questionable, low-volatility charts.

Instead, focusing on those 90-day charts with a healthy “winning ratio” (1.5x or better) of green to red candles can help simplify the approach to trading, to help decide what’s worth considering for a new entry. These charts are relatively easy to spot, using a simple 90-day daily candlestick chart.

Pattern #2: Wide-Range Green Candles In an Uptrend

Having decided now to look for uptrends with a majority of green candles during a breakout, the next challenge is to further whittle down the list of candidates to a more focused watchlist. One of the author’s favorite stock swing trading strategies is to buy .50 (fifty cents) above the high of a “wide range candle” (defined as a candle whose height is at least twice as high as the immediate past prior 2 candles.

In Figure 2 Newfield Exploration Co. (NFX) the first big green wide-range candle occurred near the end of April, as circled on the diagram. Entering on a day subsequent to this led to a very strong breakout continuation trading opportunity in the subsequent weeks following this candle signal.
 

Fig2NFX.gif

Pattern #3: Cups & Candles: Continuations above 50/100/200 MAs

In an earlier article, we described the use of a wide-range momentum candles at the right side of cups. In Figure 3 Weyerhauser Co. (WY) , this pattern is seen twice, as illustrated in the chart below. The 2 signals to look for are 1) a “cup” pattern, which simply looks visually like a large letter “U”, with 2) a wide-range candle at the far right of the cup. The entry, as in Pattern #2, is to enter .50 (fifty cents) above the high of the wide-range candle, for a swing trade.

 

Fig3WY.gif

 

Another confirming technical entry signal is generated when the price action in this chart is above all three 50, 100 and 200 simple moving average (MA) lines, on the 90-day daily candlestick chart. Visually scanning for the best momentum breakout signals is simplified when looking for these strong patterns with the help of daily candle charts, which serve as an institutional “scorecard” for net buying vs consolidation vs sell patterns.

In our next article, we’ll look at additional momentum breakout patterns and how to visually scan for these with the help of daily candlestick chart patterns.

Recommended reading: For more on candlestick charts, learn from the world’s foremost authority and author’s colleague Steve Nison, in his book Strategies for Profiting With Japanese Candlestick Charts (2011, Wiley Trading). For more on using this pattern, see the author’s complimentary Saturday “Trading Week Ahead’ webinar events at DaytradingUniversity.com/free.

Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus and is the founder of TradeMastery.com and DaytradingUniversity.com, popular online educational sites that reach tens of thousands of active traders worldwide.  

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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Results for SPY
ciro vuolo
1 Jul 15 22:25:10
RT @JackDamn: The percent of S&P-500 stocks above their: 20, 50, and 200-day EMAs. $SPX $SPY http://t.co/HPtUxCadiT
Pepe Plata
1 Jul 15 22:21:08
$OREX Orexigen Therapeutics http://t.co/xynX7aQiCX #DonaldTrump #Tsipras #CL_F #ES_F #wheat $AAPL $BABA $GMCR $PMCB $SPY $RHT $CBX
Arz Lubnan
1 Jul 15 22:21:04
RT @AlphaHatInc: $PG is not a good tail hedge. Beta is 0.5 in normal times but snaps close to 1 in extreme http://t.co/GH6CABh5pt $SPY http…
Tomas
1 Jul 15 22:14:36
RT @703trader: $SPY Monthly. Observation. http://t.co/TZrqo1gnsN
GuerillaStockTrading
1 Jul 15 22:12:23
ISM Manufacturing Improving But Dollar Weighs $SPY $QQQ $IWM https://t.co/gnWZR0QH7c http://t.co/uTT0ITluU4
TalkMarkets Recap
1 Jul 15 22:09:03
6 Ingredients For 3% GDP $SPY $QQQ $IWM http://t.co/uWQoQLz8xn
binaryoptionsocial
1 Jul 15 22:07:32
07/01/15 - Today's Market Forecast™ video can be viewed here: https://t.co/p19V43AU06 Discussed: $SPY $USO $TLT $… http://t.co/XG5hVFJGig
Uvxy buy alerts
1 Jul 15 22:06:57
$Uvxy is back in black baby !! BUY BUY BUY $SPY PANIC SEASON BEGINS ! don't be left holding the bag for the boys @GoldmanSachs $UVXY BUY !
ES_fAlerts
1 Jul 15 22:02:27
Confidently trade $SPY http://t.co/Xpcp4a46oD
TMQ Test
1 Jul 15 22:01:34
RT @StockTwits: The blue line on this chart is the S&P 500. The yellow line is biotech. WOW -> http://t.co/zeKXmvIhIs $SPY $IBB http://t.…
Don Draper
1 Jul 15 22:00:41
RT @FZucchi: Know nada re Puerto Rico, but I agree that by not being on any1's radar it might do > damage than thought http://t.co/x8dvYHFK…
Uvxy buy alerts
1 Jul 15 22:00:31
RT @StockCats: $SPY "the stock market soared today" http://t.co/6CSKCsbDmh
Investing Jungle
1 Jul 15 22:00:16
$WMT Did you catch the huge Fib support level dating back 25yrs? Has room to retest failed T/L at 75 $dia $SPY http://t.co/5NYUaBhYzJ
J.C. Parets
1 Jul 15 21:59:48
RT @JLyonsFundMgmt: ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX http://t.co/CiMMWOJkVf
Alysia Sarkisian
1 Jul 15 21:56:10
RT @SeekingAlpha: Closing Out The Second Quarter Of 2015 With The S&P 500 http://t.co/WfUxeiY4Xp $SPY $SH $SSO $SDS $VOO $IVV $UPRO $SPXU $…
Uvxy buy alerts
1 Jul 15 21:55:56
RT @toddsalamone: $SPX total component short interest spikes above its '12-'14 highs to the highest level since '11 $SPX $SPY $VIX http://…
Uvxy buy alerts
1 Jul 15 21:54:43
RT @seeitmarket: New Post - "Welcome To July: When The VIX Comes To Life" http://t.co/PBm9Gt2ls1 by @RyanDetrick $VIX $SPY $STUDY http://t.…
Gretchen Manco Eike
1 Jul 15 21:54:16
RT @StockTwits: The blue line on this chart is the S&P 500. The yellow line is biotech. WOW -> http://t.co/zeKXmvIhIs $SPY $IBB http://t.…
Uvxy buy alerts
1 Jul 15 21:54:13
RT @valuewalk: Volatility Is Stealthy Reemerging Into The Equity Market http://t.co/rXs0uypoUv $SPY $SPX $VIX http://t.co/o3ITZLL6rT
Earl_Millarez
1 Jul 15 21:53:24
RT @StockTwits: The blue line on this chart is the S&P 500. The yellow line is biotech. WOW -> http://t.co/zeKXmvIhIs $SPY $IBB http://t.…
David Settle
1 Jul 15 21:53:04
07/01/15 - Today's Market Forecast™ video can be viewed here: https://t.co/KKdQQ0qAuu Discussed: $SPY $USO $TLT $GLD $EURUSD $XLE $MRO
binaryoptionsocial
1 Jul 15 21:51:53
RT JLyonsFundMgmt: ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX http://t.co/7hH7lS80G7 http://t.co/XG5hVFJGig
binaryoptionsocial
1 Jul 15 21:51:52
"JLyonsFundMgmt ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX" http://t.co/p2XgWiKpqO … http://t.co/XG5hVFJGig
binaryoptionsocial
1 Jul 15 21:51:52
The Path to Becoming a Full Time Trader http://t.co/DiqSGlRJHh $ES_F $SPY $SPX http://t.co/XG5hVFJGig http://t.co/XG5hVFJGig
binaryoptionsocial
1 Jul 15 21:51:51
ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX http://t.co/7hH7lS80G7 … http://t.co/XG5hVFJGig
Christopher
1 Jul 15 21:48:14
RT @racernic: mkts playing with fire here $ES_F $SPY
bushmaninsnow
1 Jul 15 21:47:40
@chartseer your take on current market.China weak. $IWM $IBB showing weakness. $SPY iffy. If numbers come in weak tomorrow, trouble
Mike
1 Jul 15 21:46:44
$SPY we hope you made some money based on our post last week http://t.co/hOfXEfmdIZ
Jordan Thurow
1 Jul 15 21:45:03
RT @JLyonsFundMgmt: ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX http://t.co/CiMMWOJkVf
Maralyn Burstein
1 Jul 15 21:44:35
RT @DowdEdward: $SPY $HYG Truth Is The Greatest Enemy Of This Bull Market! http://t.co/orZYYQHOPr
Nasdaq Trades
1 Jul 15 21:39:30
RT @marketminute: Mish's Daily for 7/2/15 Red, White and Ewe $SPY $IWM $QQQ $DIA http://t.co/A616ciTPNO
binaryoptionsocial
1 Jul 15 21:36:12
"JLyonsFundMgmt ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX" http://t.co/p2XgWiKpqO http://t.co/XG5hVFJGig
binaryoptionsocial
1 Jul 15 21:36:11
The Path to Becoming a Full Time Trader http://t.co/DiqSGlRJHh $ES_F $SPY $SPX http://t.co/XG5hVFJGig
binaryoptionsocial
1 Jul 15 21:36:11
ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX http://t.co/7hH7lS80G7 http://t.co/XG5hVFJGig
Venky Srinivasan
1 Jul 15 21:35:45
"@JLyonsFundMgmt ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX" http://t.co/mtyrTtbmmM
Seeking Alpha
1 Jul 15 21:35:03
Closing Out The Second Quarter Of 2015 With The S&P 500 http://t.co/WfUxeiY4Xp $SPY $SH $SSO $SDS $VOO $IVV $UPRO $SPXU $SPXL $RSP $RWL
Jenny Pham
1 Jul 15 21:33:15
RT @StockTwits: The blue line on this chart is the S&P 500. The yellow line is biotech. WOW -> http://t.co/zeKXmvIhIs $SPY $IBB http://t.…
CodyHindSTA
1 Jul 15 21:32:11
The Path to Becoming a Full Time Trader http://t.co/ol17tR1KwG $ES_F $SPY $SPX
Dana Lyons
1 Jul 15 21:31:34
ChOTD-7/1/15 The Faster $VIX Spikes Are Retraced, The Better $SPY $SPX http://t.co/CiMMWOJkVf
Pug Trader
1 Jul 15 21:28:52
$SPY draws a rather clearly #BEARISH "UH-OH" formation, #SHORT IMHO #TRMX http://t.co/HcMvwHh41w
Jeff Hauschild
1 Jul 15 21:14:04
1-mo. ATM #brazilian real #volatility is at least 3% points too low. Just a thought. #FX #options #currency $EWZ #brazil $usd $spy #Economy
Tweed
1 Jul 15 21:13:19
RT @VictorTellegio: $SPY Data for Tomorrow http://t.co/WzC202CD3P
jyam
1 Jul 15 21:07:21
RT @RyanDetrick: $SPX monthly returns going back to 1928, broked down a few different ways. $SPY http://t.co/1t5MHX97yo
Victor Tellegio
1 Jul 15 21:05:10
$SPY Data for Tomorrow http://t.co/WzC202CD3P
Charles Courtney
1 Jul 15 21:02:54
RT @StockTwits: THIS is the chart investors and traders can't stop looking at -> http://t.co/Nn7Iuyiout $SPY $SPX http://t.co/b34yOrXmxV
CandidBanter
1 Jul 15 21:00:13
$CF has a interesting chart-- 5/1 recent split, lots of indicators positive. #stocks #trading #money $SPY $QQQ http://t.co/pVcY7uvhxD
Traderzz
1 Jul 15 20:58:55
$SPY $CAT the more puts you guys open the higher the max pain will be... wouldnt be surprised to see a huge bounce tomorrow..
FZucchi
1 Jul 15 20:47:32
Know nada re Puerto Rico, but I agree that by not being on any1's radar it might do > damage than thought http://t.co/x8dvYHFKAZ $SPX $SPY
Kevin
1 Jul 15 20:39:51
RT @StockTwits: The blue line on this chart is the S&P 500. The yellow line is biotech. WOW -> http://t.co/zeKXmvIhIs $SPY $IBB http://t.…
Caroline Addington
1 Jul 15 20:36:48
$SPY SPDR sectors are green sans $XLE and $XBI
				
				
By  +Follow July 1, 2014 7:04AM
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