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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.


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Results for SPY
OptionsGenius
23 Oct 14 01:54:06
Morning folks its 2 am in west coast and premarket is looking very good for our picks. $spy $fb $twtr $uvxy
Awaken Design Co
23 Oct 14 01:53:14
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
OptionsGenius
23 Oct 14 01:52:17
$SPY $FB will open way up.$UVXY will go down below 28
GW Tech Collective
23 Oct 14 01:48:59
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Mike
23 Oct 14 01:44:35
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
ColoradoSprings News
23 Oct 14 01:43:04
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
leopardtrader
23 Oct 14 01:37:33
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Marshall Louise
23 Oct 14 01:32:52
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
John Michael
23 Oct 14 01:30:18
RT @SeekingAlpha: Is The Fed Altering Asset Prices? http://t.co/6EaaxykFTp $SPY $VTI $QQQ $DIA $IWM
Seeking Alpha
23 Oct 14 01:28:08
Is The Fed Altering Asset Prices? http://t.co/6EaaxykFTp $SPY $VTI $QQQ $DIA $IWM
HoustonsFirst
23 Oct 14 01:27:17
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Michael
23 Oct 14 01:22:45
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Britney Wright
23 Oct 14 01:18:01
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Terry Lyons
23 Oct 14 01:13:57
RT @AsianOptionGirl: Source: Spike in ISIS-related chatter targeting Canada leading up to shooting http://t.co/eaVfQbmrlO $SPY $SPX $UVXY $…
Real Estate Expert
23 Oct 14 01:08:42
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Zachariah Starnes
23 Oct 14 01:06:25
RT @lancejepsen: GST Stock Trader News $SPY $IWM $QQQ http://t.co/tcS9pPPnZN
Jake
23 Oct 14 01:05:03
Holy Bananas! $SPY Gapper. So do we rally to $196 today ? That would be as Borat would say...."vearrryiuee nauuuiceee"
STOXX
23 Oct 14 01:04:32
: Today's Business News 10222014: http://t.co/oeiq8yk8cG $spy
♥ @MyOrgone ♥
23 Oct 14 01:02:59
Ditch $AAPL stock! You can turn $666 into $1 million with THIS Apple! http://t.co/zb3UZNiUN6 $QQQ $SPY
Marvin
23 Oct 14 00:59:14
RT @StockTwits: THE ANALOG OF DOOM IS BACK. 1987 STYLE. -> http://t.co/rd9fQU1EYQ $SPY $TLT http://t.co/7ehcGa8LUA
MesaAzgov
23 Oct 14 00:56:04
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
♫♪ Soul Girl ♪♫
23 Oct 14 00:55:52
RT @chessNwine: I analyzed $AMZN $DDD $YELP and much more in my video market recap from earlier: http://t.co/HJVaJ795fO $SPY $STUDY
Erin
23 Oct 14 00:51:13
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Mike Brown
23 Oct 14 00:51:10
RT @RyanDetrick: October volatility rules. $SPX daily change in Oct is 1.04%. By far the highest month in '14. $SPY http://t.co/HUiX4dGxDC
Mike Brown
23 Oct 14 00:49:57
RT @RyanDetrick: $SPX with no 3% up days the past 3 yrs. Had 19 in '08. Hammers home big moves aren't bullish. $SPY http://t.co/ZjKBgnuINp
Stockaholics
23 Oct 14 00:45:36
Our Penny Stock Picks Gained 371% In 2 Weeks! Get Our Next Pick Early: http://t.co/z2noBUWrEP $LEN $SPM $SPY
gregstuart
23 Oct 14 00:40:07
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Sleek Money
23 Oct 14 00:38:01
SPDR S&P 500 ETF Trust Short Interest Down 5.8% in September $SPY http://t.co/cAvw9qVLxI
PA Circle K
23 Oct 14 00:28:48
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Marian Zöllkau
23 Oct 14 00:28:23
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Mrs. Danyelle Kozma
23 Oct 14 00:22:14
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Gregory A Anderson
23 Oct 14 00:15:16
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
TradingView
23 Oct 14 00:15:02
$SPY - SPY Resistance at 195 - https://t.co/rg2YBJAZ9J
Forex Fractals
23 Oct 14 00:06:50
Tell us what you think about this weeks $SPY alert. How are you trading it? http://t.co/YWPYQioiUa
FA_TradeAlerts
23 Oct 14 00:05:04
What is the $SPY http://t.co/0HcFoatjMS going to do next? Get real time alerts and analysis.
♥ @MyOrgone ♥
23 Oct 14 00:02:04
Forget trading $AAPL stock! You can turn $666 into one million with THIS Apple instead! http://t.co/zb3UZNiUN6 $SPY $QQQ
Columbus Mullins
23 Oct 14 00:00:21
RT @lancejepsen: $SPY VS $IWM Would have liked to see more leadership from IWM throughout the day but what a surge into the close! http://t…
Joseph Szadkowski
22 Oct 14 23:57:46
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Lach 14
22 Oct 14 23:57:33
$SPY The $IBM Dinosaur: Monthly chart shows damage, Downside target 100MA and 147. -14% for 2014 http://t.co/1cS5Xvt3ga
702
22 Oct 14 23:56:01
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Craig Verley
22 Oct 14 23:48:40
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Tad Murillo
22 Oct 14 23:45:26
RT @lancejepsen: High Yield Debt Explodes Higher on Bullard Comments $SPY http://t.co/1BpqqVmtA3 #UsEconomy http://t.co/XgO6s0yWug
Abel Sherwood
22 Oct 14 23:45:21
RT @lancejepsen: Money Inflows Into Russell 2000 Hit 14 Year High Shocker $SPY $QQQ $IWM http://t.co/ab7mOwHb3S #StockTrading http://t.co/…
Michael Maresca
22 Oct 14 23:45:00
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Bobby
22 Oct 14 23:40:42
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
MoneyOva CEO
22 Oct 14 23:35:22
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Jordan Hopper
22 Oct 14 23:34:56
Expect money to flow into $AAPL during market weakness. Below market multiple, above market growth rate, accelerating margins. $SPY
LostArtRecords .
22 Oct 14 23:33:42
RT @philstockworld: Will our "Recovery" Run out of Gas? #Stimulus #Steriods #KansasCity #Fed #Kleptocracy #5%Rule $SPY $DIA $IWM -- http:/…
Tower Ten Trading
22 Oct 14 23:32:29
$spy half of you will not be around this time next year. Watch your volume at swing points. Up and down! Becareful out there!
Tower Ten Trading
22 Oct 14 23:28:22
$spy if your long this market. Take precautions. Seen this too many times. Remember trading $kmrt by touch tone tele?
				
				
By  +Follow July 1, 2014 7:04AM
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