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Visual Candle Scanning for Breakout Trades — Part 1

By  +Follow July 1, 2014 7:04AM
Tickers Mentioned:

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.




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.


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.




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
7 Oct 15 09:36:20
$AAPL Get Apple off Corporate Welfare @realDonaldTrump $SPY $QQQ
Gerasimos Tsimaras
7 Oct 15 09:34:58
Shorting the screaming Short signal $DAX $FDAX #DAX $SPY $EURUSD $STUDY #daytrader https://t.co/s6VgwF7WFC http://t.co/Ry4G725kKg
John Constantine
7 Oct 15 09:34:54
"@VisualTrader: $SPY $ES_F I hope folks didn't get shaken out of their shorts because 1940 test is in the cards." 1404 Next
7 Oct 15 09:34:50
$AAPL ' no plans to bring the money back to the U.S' #APPLEGETOFFWELFARE $SPY $QQQ $AMZN
Stock Aced
7 Oct 15 09:32:54
RT fintechna: RT stockaced: #toptickertweets $SPY $AAPL $FB $BA $BZQ #FinTech #trader http://t.co/TnLZSF9QJ2 20151007 08:00:06:725
Jeff Quiggle
7 Oct 15 09:31:53
@SusanLund_DC EPOP drop: US lags all but 4 #OECD economies in EPOP (share of 25-54 population employed) http://t.co/PYJxdOnxAO $SPY $MACRO
7 Oct 15 09:31:39
@KymLang $SPY gap on the weekly chart never lasts long. Rejection of daily MA(50) adds another point to $195 short term target.
ARCA Capital Inv.
7 Oct 15 09:31:16
FMD Capital
7 Oct 15 09:30:16
Consumer staples and discretionary sectors are killing it this year - via @NASDAQ http://t.co/02BXi354LA $XLP $XLY $SPY
7 Oct 15 09:30:03
$SPY "Any thoughts on this action today? eom" on TheLion message boards: http://t.co/Kx5htYiOz4
Stoyan Bojinov
7 Oct 15 09:30:02
RT @ETFcom: Small Differences On Big S&P 500 ETFs. $SPY Sometimes it pays to think beyond the label when it comes to the giants. http://t.c…
7 Oct 15 09:29:40
Small Differences On Big S&P 500 ETFs. $SPY Sometimes it pays to think beyond the label when it comes to the giants. http://t.co/6nr8E8r48M
Cedex F
7 Oct 15 09:29:28
RT @Stox151617: #Saturn in #Ophiuchus $VIX #2015shift #USA $SPY #recession #Beliebers #Kardashian #HRH #papa (cont) http://t.co/uzZ8…
pasquale cataldi
7 Oct 15 09:29:27
Stocks are still expensive here. You must believe past 2 months did not exist to buy here. It can happen but better wait #dax #ftse $SPY
7 Oct 15 09:28:32
momentum lost.... Gartman must have flipped bullish yest ;-). someone should start an 'inverse gartman' etf/fund. $CL_F $SPY
Arro Financial Comm
7 Oct 15 09:27:57
"We see no reason for a recession on the horizon, and equities still look cheap." from @ftportfolios >> http://t.co/EYtxHUa07W $SPY $STUDY
The Sniper Trader
7 Oct 15 09:27:42
Depending on what you own from bottom picking, 10% to 35% return in a week is nothing to shy away from. #Trading #Study #markets $SPY
7 Oct 15 09:27:32
IMO $SPY has a gap down to $195 that it should close.
7 Oct 15 09:27:21
@DayTradeWarrior $SUNE has been an ATM for at least 6 weeks. Such a strong correlation to $SPY most of the time.
7 Oct 15 09:26:51
S&P 500 stalls at 2000 ahead of earnings season http://t.co/Oed4XD7SKZ #Trading $SPY $SPX $DJIA $DIA $EURUSD #FTSE #DAX #TSX #Stockmarket
7 Oct 15 09:26:39
now it's 2nd test of day low, if bears cannot make a decisive new low then game is over, so key time $SPY $SPX $ES_F http://t.co/EKHq0ygNqr
Chris Mayes
7 Oct 15 09:26:38
Trade: Bullish VERTICAL on $SPY: NOV15 201/202. http://t.co/Gxlan0XDLZ
DayTrading Power
7 Oct 15 09:26:13
bidding $SPY 197.77 once filled target 198.07 #intraday #stocks
The Sniper Trader
7 Oct 15 09:26:08
Since the major moving averages are trending down, the resistances at these levels can be quite strong. #Study $SPY #Trading
7 Oct 15 09:25:20
RT @SunriseTrader: $SPY 1st test from below 50ma with overbought oscillators on shorter time frame charts resist level worth the R/R in my …
Drew Powers
7 Oct 15 09:25:17
$SPY fail, was wrong on my last $TVIX sale but I dont chase
7 Oct 15 09:23:32
RT @stockguy22: In 10min join me & @stockdarts 12:30pmEST as we talk markets and chart requests http://t.co/5folHkG65w #stocks #markets #t…
Rob Fundora
7 Oct 15 09:23:18
RT @stockguy22: In 10min join me & @stockdarts 12:30pmEST as we talk markets and chart requests http://t.co/5folHkG65w #stocks #markets #t…
7 Oct 15 09:23:08
In 10min join me & @stockdarts 12:30pmEST as we talk markets and chart requests http://t.co/5folHkG65w #stocks #markets #trading $SPY $IWM
Seventeen Mile
7 Oct 15 09:22:28
RT @FZucchi: Cred bears getting destroyed w/ IG CDX ≈ 6bps tighter; lgst move I can recall. May not do it all tdy, but may b time 2 get lo…
alpe pinnazzo
7 Oct 15 09:22:17
$IBB spoofers colapsing correlated algos again, oh my oh my $SPY $IWM
7 Oct 15 09:21:40
RT @elitewealthmgmt: Do you know the difference between a correction and a recession? http://t.co/WNjcyD1mvW $DIA $QQQ $SPY http://t.co/sTt…
7 Oct 15 09:21:39
Looks like the 100DMA (yellow) on the 1min charts has recently been a focal battle ground for $SPY. http://t.co/VfVZf6pVo0
7 Oct 15 09:20:54
It's funny that most people consider themselves contrarian. Nobody wants to be in the dumb consensus crowd. $SPY $VIX
7 Oct 15 09:20:46
$SPY 196.5 Puts at .55 avg weeklies.small hedge for L.T port weekly gains..Target 195 gap fill.
7 Oct 15 09:20:24
RT @HFTAlert: 225+ share sell program hit at 10:51 $SPY
7 Oct 15 09:20:22
RT @HFTAlert: another 175+ share sell program hit at 10:45. $SPY Liquidity Accumulators extended down now.
7 Oct 15 09:20:20
RT @HFTAlert: 175+ share sell program just hit at 10:41 $SPY
7 Oct 15 09:19:41
$SPY 1/5 remaining on short. MA's flattening out on 5 min chart. Over 50ema I'm dumping the rest
7 Oct 15 09:19:10
RT @SunriseTrader: $SPY 1st test from below 50ma with overbought oscillators on shorter time frame charts resist level worth the R/R in my …
7 Oct 15 09:18:46
$IBB Held that 293 again, feels like $SPY at 186.9 last week, boom?
Kym L
7 Oct 15 09:18:13
RT @SunriseTrader: $SPY 1st test from below 50ma with overbought oscillators on shorter time frame charts resist level worth the R/R in my …
Rene Teinberg
7 Oct 15 09:18:13
RT @SunriseTrader: $SPY 1st test from below 50ma with overbought oscillators on shorter time frame charts resist level worth the R/R in my …
Stock Aced
7 Oct 15 09:17:48
RT fintechna: RT stockaced: #toptickertweets $SPY $AAPL $FB $BA $BZQ #FinTech #trader http://t.co/WC8k4g6HCD 20151007 08:00:06:725
Sunrise Trader
7 Oct 15 09:17:34
$SPY 1st test from below 50ma with overbought oscillators on shorter time frame charts resist level worth the R/R in my book for the short.
R J Sullivan IV
7 Oct 15 09:17:16
$SPY $ES_F $CL_F Bulls=This Bus http://t.co/dTcV0LDyCk
Trading Entries
7 Oct 15 09:16:37
$FCX #miners out of the doldrums, Never underestimate #Divergence $SPX $SPY $ES_F $DJIA http://t.co/H0Jy3FKFWP
7 Oct 15 09:16:10
$SPY OI for maturity 10/16/2015. 185.00 Highest put. 200.00 Highest call. http://t.co/tqpdXkdujI
Kartik Gururajan
7 Oct 15 09:15:44
$SPY Hopefully China can knock the US markets down when it opens tonight!
TV_Trading Ideas
7 Oct 15 09:15:37
Shows the rotation into $SPY http://t.co/EzQps1ztKl
By  +Follow July 1, 2014 7:04AM



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