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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
Elnietolamorejona
22 Sep 14 06:56:05
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Emini Scalping
22 Sep 14 06:56:03
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Winborn Traders
22 Sep 14 06:56:00
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22 Sep 14 06:55:13
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nobullshytrader
22 Sep 14 06:55:05
$SPY $DIA $QQQ u can buy this dip, guaranteed gap fill, probably by 12pm, trust me, thu free casino iz now open 4 bizzness
Futures Day Trader
22 Sep 14 06:55:03
A business with no staff,no customers,no inventory,no rent&could literally be operated from anywhere in the world $SPX $SPY $DJI $QQQ $ES_F
Renee Ann Butler
22 Sep 14 06:54:45
RT @ppearlman: this is solid... RT @YahooFinance: Your Pre-Market Cheat Sheet http://t.co/emORTlOAYq courtesy of @jamielissette $IWM $QQQ $…
NFactor
22 Sep 14 06:54:36
$WATT 9.75 seller low 9.50 2 nd weekly down test $SPY http://t.co/gVKC4IVKbt
Winborn Traders
22 Sep 14 06:54:34
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Andy
22 Sep 14 06:54:33
$spy $crr cjecl as well http://t.co/lvAVAhJgEg
James Harris
22 Sep 14 06:54:33
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
Renee Ann Butler
22 Sep 14 06:53:43
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
Tom Quirke
22 Sep 14 06:53:19
I sold my entire $BABA position at the open and also most of my long positions. I'm mostly cash waiting for next move @CNBC $SPY $QQQ $NFLX
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22 Sep 14 06:53:16
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Mr. Dolla Maker
22 Sep 14 06:53:06
@GarryFrey Yes, More Downside Possible In $SPY. People Started Hating On Me When I Posted But Look Who's Making Money Now.
Jordi Pallarés
22 Sep 14 06:53:02
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
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22 Sep 14 06:52:38
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Andy
22 Sep 14 06:52:20
$spy $crr Mean Target: 129.80 Median Target: 137.50 High Target: 157.00 Low Target: 71.00
Somerset Trader
22 Sep 14 06:52:18
US follows global sell-off as China cautious on stimulation $spy http://t.co/Bf1y1s7k1k
kdatar
22 Sep 14 06:52:13
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
Family Investor
22 Sep 14 06:52:01
The Fed: There Is No Bubble, There Is No Timeline, There Is No Exit Strategy http://t.co/65JBfn8k8o $SPY $IWM
lander
22 Sep 14 06:51:32
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
Tuan
22 Sep 14 06:51:31
$SPY $IWM not pretty this morning..
marketzone
22 Sep 14 06:51:18
$SPY chart: Confirmed resistance - trading channel breakdown. http://t.co/MQek98g4DI
TV_Trading Ideas
22 Sep 14 06:51:18
Confirmed resistance - trading channel breakdown $SPY http://t.co/OOAjXJeEyM
Mr. Smith
22 Sep 14 06:50:59
Bears lose control if we take out opening high ... so far they have it $SPY $QQQ
Andy
22 Sep 14 06:50:56
$spy $crr adding last part here
Enter The $GLD Crash
22 Sep 14 06:50:10
$MACRO MON MORN FLY BuY 8/24-9/24 $SPY $TQQQ $SMH #meltUP &CRASH IN $GLD # $TBT $UUP $VIX # $SMH $SMH # $GLD PUTS!!! http://t.co/pNxnOZPNjj
JE$US
22 Sep 14 06:50:03
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Winborn Traders
22 Sep 14 06:49:59
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22 Sep 14 06:49:49
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Patrick Jane
22 Sep 14 06:49:46
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
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22 Sep 14 06:49:35
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22 Sep 14 06:49:34
$ES_F $SPX $SPY $DJI $QQQ $YM_F $NQ_F $TF_F $FB did your Trade get Stopped Out because of The Market's noises? we can help you to avoid it!
Silver_1234
22 Sep 14 06:49:13
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
Barry Scott
22 Sep 14 06:49:08
$XLE & $OIH not helping $SPY today, YEN & gold weaker, bonds flat $FXY $GLD $TLT market needs to settle after quad witch OpEx
Andy
22 Sep 14 06:49:01
$spy $crr Short Percent of Float 26.02 %. this ugly move down will deifnitely end up into some profit taking and bounce higher.
Zach Robinson
22 Sep 14 06:48:31
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
UplandsCapitalGroup
22 Sep 14 06:48:10
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
radarthis
22 Sep 14 06:48:03
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
Traderbcn
22 Sep 14 06:47:56
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
Mabasa Thembani
22 Sep 14 06:47:48
RT @StockTwits: "History doesn't repeat itself but it does rhyme." - Mark Twain *LINK* → http://t.co/auX86yF2nq $SPY $BABA http://t.co/v2…
NFactor
22 Sep 14 06:47:38
$SPY A/D-1709 small 1 min divergence -539,023 deltas http://t.co/mOYoB6Kq26
Garry Frey
22 Sep 14 06:47:29
@mrdollamaker $SPY great day to sell off my puts, I don't see this one as a dip I see more downside, I will settle for my 75% gain for now
Option Voyeur
22 Sep 14 06:47:10
RT @ProbabilityOne: 15 min from Existing Home Sales and FOMC member speaking $SPY $QQQ
The Option Fox
22 Sep 14 06:47:10
In $SPY 200 calls heavy position at .86 weeklies
Katy Alexander
22 Sep 14 06:46:48
$spy..199.86..should be close to low for the day.
CandidBanter
22 Sep 14 06:46:47
About time for a bounce appears in her $SPY $199.00. #stocks #trading
Family Investor
22 Sep 14 06:46:45
U.S. Stocks: All Better Now? http://t.co/bSExp5wKkI $SPY $IWM @GerringCapital
Jason Stamer
22 Sep 14 06:46:45
$SPY 18-Oct-14 204/206/193/195 Iron Condor 0.54 bid 675x NBBO .51-.55
				
				
By  +Follow July 1, 2014 7:04AM
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