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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
Mother of Sin
26 May 15 06:43:11
Sold my $SPY JUL 210 Puts for + .60
26 May 15 06:42:57
BLOG: 5/26 setups http://t.co/3NYpq4QUeQ $SPY $BMRN $FEYE $MYL $SINA $GLUU $GE $SWKS $AMZN $GLOG $JD $HABT $USDJPY http://t.co/KjMAA8f9YS
Stock Market Picks
26 May 15 06:42:48
$AVGO $CHTR $CTRX long and short #stocks from #NASDAQ, up to 2100% in cumulative profits since 2010. http://t.co/81YbAC6E15 $QQQ $SPY
Van Castle
26 May 15 06:42:23
RT @ukarlewitz: Breadth - on a down close, a s-t breadth extreme possible $SPY http://t.co/HI76CIVooh
Blossom Doucette
26 May 15 06:41:58
RT @JPDesloges: TSX60, Cdn Dollar and SP100: Canadian Stocks Cheapest since May 2005? $SPY, $USDCAD $FXC http://t.co/sQigldl9mk http://t.co…
26 May 15 06:41:41
Markets Selling off $DIA $SPY $QQQ and That POS $TVIX is Def Broken it dont track the $VIX at all
Venky Srinivasan
26 May 15 06:41:35
$SPY Open Interest from weekend. http://t.co/QewDQiz9ts
Stock Market Picks
26 May 15 06:41:29
Exclusively for all Global AutoTrading clients DowStockTips offers 15% discounted subscription rates. http://t.co/vkRMOSt2q9 $DJIA $DIA $SPY
Stock Market Picks
26 May 15 06:41:08
Stock Market report on Apple INC $AAPL powered by StockTipsDeal: http://t.co/KWHYxXWy8k $QQQ $SPY $DIA $DJIA
Dr. Duru
26 May 15 06:41:01
$USDX soaring. $SPY seems to care little. Should be at least worth some higher volatility ahead. $UVXY $VXX #forex $USDJPY $EURUSD
Stock Market Picks
26 May 15 06:40:52
Stock Market report on Starbucks Corp $SBUX powered by StockTipsDeal: http://t.co/ZbviadVQak $QQQ $SPY $DJIA $DIA
Stock Market Picks
26 May 15 06:40:38
Stock Market report on Netflix Inc $NFLX (May 21st 2015): http://t.co/JgLRWGlYLq $QQQ $SPY $DJIA $DIA
Stock Market Picks
26 May 15 06:40:31
$AGG $AMLP $DBC $UGAZ $DGAZ $DUST $EDZ $EEM $SPY $QQQ $EEM $GDX $VXX $EWJ $IWM Check our Market report about ETFs: http://t.co/mKt7kC5WIa
The Street Mentor
26 May 15 06:40:14
Failed continuation on the rising wedge on $SPY http://t.co/lYZM0YoCbW
26 May 15 06:39:55
$SPY sitting on tenkan-sen S2=212.01 and prev pivot at 211.97 should see buyers. If not we're going lower. Wait 4 OR http://t.co/iN9DSjp7Hf
26 May 15 06:39:02
Opening a start $SPY 212.5 call position for next week
Mr Feller
26 May 15 06:38:31
Callin it. Da bull market is OVER today. $SPY
26 May 15 06:38:13
$SPY right into that support from 5/15 5/18 at 211.85 then stalled , for now
Marc Eckelberry
26 May 15 06:38:08
big level for $ES_F at 2113.25. $SPY
Many Ways To Trade
26 May 15 06:38:03
Market Breakout: How To Trade It Using Options $SPY $SPX $IWM $RUT $VIX http://t.co/xyVFbu6Ith
26 May 15 06:37:46
not bad of a day, still short $WTI $SPX n long $ANF $GES $TWTR. still got long ways to go with $SPY short
26 May 15 06:37:43
RT @_thebigbadwolf_: The US is now the most hated equity market for global managers. New from The Fat Pitch http://t.co/3vACk8FUd4 … $SPX $…
26 May 15 06:37:37
RT @_thebigbadwolf_: Investors pulled out $1.8 billion from domestic equity funds, over the week ended Wednesday http://t.co/BPEIiuhs3v $SP…
26 May 15 06:37:22
$PCLN thing is always a little delayed but it gest hit with drops in the $SPY like that
26 May 15 06:36:59
$SPY $DIA $QQQ $UVXY 1st signz uv life in 2 months, bowt fukin time
26 May 15 06:36:57
$spy $iwm pull bak as predicted last week via options flow
26 May 15 06:36:41
RT @GREEDisG00D: I Think the STOCKMARKET CRASH will happen before Oct 2015 $SPY $SPX $VIX $TVIX $DIA $QQQ $TNA $SPXS $SQQQ $GLD $UGLD $URTY…
26 May 15 06:36:34
RT @SPYculator: $SPX $SPY Losing Power
26 May 15 06:36:26
$SPY dump
Keith McCullough
26 May 15 06:36:00
Lets tweet about that instead of whoever chased charts at the all-time $SPY high
Justin Pulitzer
26 May 15 06:35:59
$ES_F below Over Night low. $2114.5 is key and then $2107. $SPY
26 May 15 06:35:54
Out $SPY puts
26 May 15 06:35:46
Weak action this morning with the $SPY, glad i held on to puts :)
Scott R
26 May 15 06:35:36
$SPY in fail mode here /...avoid
26 May 15 06:35:25
RT RT RT RT #toptickertweets $TWTR $FB $AAPL $PBMD $SPY $DAX $BAC $TWC $AMZN $CHTR #sentiquant 20150526 09:25:11:4… http://t.co/XG5hVFJGig
Terry Danish
26 May 15 06:34:50
%AGE STOCKS > 40 DAY MVG AVG (4 HR CHART): Indicators heading south for moment / will need to see that reverse. $SPY http://t.co/Pq1vYNnC7f
26 May 15 06:32:54
RT RT RT #toptickertweets $TWTR $FB $AAPL $PBMD $SPY $DAX $BAC $TWC $AMZN $CHTR #sentiquant 20150526 09:25:11:457 … http://t.co/XG5hVFJGig
26 May 15 06:32:16
$spy $de still to me fundamnteyl best short I see out there
26 May 15 06:31:52
$spy $de envrionemtn for this company gets worse and worse... they will never be able to put another story like this in the next quarter
26 May 15 06:31:15
$spy $de shorting mroe here into my swing trade. hard stop still 96 bux, 1st target 90 bux. still think this is a joke, but lets see ;-)
Urban Carmel
26 May 15 06:30:22
Breadth - on a down close, a s-t breadth extreme possible $SPY http://t.co/HI76CIVooh
Calvin Chicoine
26 May 15 06:30:18
RT @ivanhoff: The True Nature Of Predicting - http://t.co/4oMp18Iimg $SPY $QQQ $STUDY
Scott Jensen
26 May 15 06:29:39
Really liking this $Ewj $Spy gap down. Let's see if we can get a nasty 4-8 week pullback.
26 May 15 06:29:15
RT RT #toptickertweets $TWTR $FB $AAPL $PBMD $SPY $DAX $BAC $TWC $AMZN $CHTR #sentiquant 20150526 09:25:11:457 … http://t.co/XG5hVFJGig
Van Castle
26 May 15 06:28:38
RT @DanZanger: $SPY $SPX $ES_F Consolidation stalling http://t.co/DG8vtRbfbt
Analytical Traders
26 May 15 06:28:27
#ES_F 2124 is a key level to decide whether bulls or bears win for today. For bears, 2113 is target and for bulls, 2132. $SPY $SPX
26 May 15 06:27:47
RT @kunal00: RT @szaman: Watch List 05/26/2015 http://t.co/4CjZOXDdjg $AST $EYES $MNKD $RWLK $SHAK $SRPT $TASR $TROV $UEC $SPY #stocks #t…
26 May 15 06:27:27
Market Minute Video 5-26-15 http://t.co/5J8Cc88uwL $SPY $TLT #usdollar #gold $GDX
26 May 15 06:27:15
RT @seeitmarket: New Post - "The Rotation Report: Preparing For The Week Ahead" http://t.co/bZEMef7xdb by @ATMcharts $SPY $TLT $IBB $IYR $R…
26 May 15 06:26:02
S&P 500 keeps inching up http://t.co/G5k84tKo8B $SPY
By  +Follow July 1, 2014 7:04AM



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