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How To Exit Winning Trades Part 3: Candle Reversals

By  +Follow July 22, 2013 12:37PM
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In this final article in this 3-article series (read part 1 and part 2), we’ll look at how to use candlestick chart patterns along with classic Western technical exit signals to decide when to start exiting winning trades. Candlestick charts were first revealed to the Western world by expert Steve Nison, the world’s foremost authority on the subject. Learning how to exit successful trades with the help of candlestick charts can be particularly effective when combined with classic support/resistance exhaustion signals, to lock in potential gains. This article will cover both swing and day trading candlestick reversal examples.

Using Shooting Stars To Exit Open Swing Trading Long Trades
A shooting star is simply a candlestick that occurs after an uptrend that has an upper shadow of at least twice the real body height, and signals a possible reversal. It looks like a box with a large stick on top of it, visually. Selling right under a loss of this candle is a good idea for exiting any open longs, particularly for short-term trading.

In Figure 1, Zimmer Holdings Inc. (ZMH) , we see that a 15-minute shooting star on this 15-day chart indicates initial weakness following it’s breakout. To exit, we scale out of half the trade if price action gets 1 point under the low of the shooting star. For this ZMH swing trading chart, that would be at (84.5 – 1.0) = 83.5 as the first place to start selling. The secondary entry is to be set at a maximum of 1 full point under the cumulative 2-day low, in this case (80.7 – 1.0) = 79.7 for the second, final exit.

Whenever you are in a winning breakout swing trade, it’s always important to get out fast at the first sign of trouble, at least for 50% of all open shares, to lock in a profit.  Many traders wait far too long to exit their trades, waiting until catastrophic large reversals have wiped out part of all of their unrealized P&L (profit and loss) open gains.  Using the 15-minute shooting star candles on a 15-day chart is a very smart way to signal the potential reversal of the uptrend, to start selling into.

Dual Swingtrading Exits: Shooting Stars and 50 Moving Average (MA) Exits

Many traders like to use multiple timeframes to decide when to exit their trades, and this is a reasonable approach, when done correctly. Daily candlestick charts for short-term trading are best viewed on a 90-day daily candlestick timeframe with 50, 100 and 200-period simple moving average (MA) lines.  

Combining candles with major MA lines that institutional traders use can give astute active traders valuable insights into key buying and selling support and resistance areas to use. Making entry and exit decisions with this timeframe chart is risky if traders use too-large stops and trailing stops, however, so it’s important to keep the 15-day chart patterns in mind when deciding how to exit as well.

In Figure 2, Mattell Inc. (MAT) , we see a shooting star that signified weakness and a potential reversal in the uptrend, which did in fact occur during the subsequent trading days after this was seen.  A loss of the low of the shooting star is a good time to start exiting open long positions. The second and final scale-out sell signal is when the candles start to get below the red 50MA line, which occurred in late May.   

Day Trading Exit Signals Using 5-Minute Candlestick Patterns
In addition to shooting stars, another favorite exit signal is a “bearish engulfing” pattern, in which the real body of a candle wraps around, or engulfs, the prior candle, taking out new lows. In Figure 3 Tesla Motors Inc. (TSLA) we see a bearish engulfing pattern near the 126.5 price level. It’s often wise to wait until price action loses support under the 2nd red engulfing candle (in this case, 126.5 - .35) = 126.15 to exit half the open intraday trade.

A second exit signal is generated by trailing a stop at just under the nearest bear cup pattern.  In this chart, a bear cup was formed beterrn 124.0 and 125.0.  A loss of the 124.0 support line would provide the second sell signal, to close out the remaining open long, if it loses that support line. When day trading, it’s helpful to look for shooting stars, engulfing patterns and bearish cups to tell the trader when to exit their open long positions.

As we explored in the earlier articles in this series, using a series of 2 exits is a smart scaling-out approach since it helps traders stay alive in a trade despite an initial early sell signal (in case it pivots and regains buying momentum).   The best approach is always to exit at least half the open trade at the first sign of trouble, and use a clearly-defined exit strategy with the goal of maximizing profits by selling open winning trades at the first sign of reversals.  

Using these candle signals along with classic Western technical indicators like moving average crossovers and support areas can be a valuable approach when deciding how to trade more professionally.

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 ZMH
Ticker Report
23 Oct 14 09:44:06
Zimmer Holdings, Inc. $ZMH Issues FY14 Earnings Guidance http://t.co/EfoMyPVmaw
US Banking News
23 Oct 14 09:33:22
Zimmer Holdings, Inc. $ZMH Releases FY14 Earnings Guidance http://t.co/XCMr6vH9rd
Точка Входа.Трейдинг
23 Oct 14 09:28:50
$ZMH long 104.61
Sleek Money
23 Oct 14 09:21:15
Zimmer Holdings Price Target Raised to $150.00 $ZMH http://t.co/87n41WSsNn
US Consumer News
23 Oct 14 09:19:30
Zimmer Holdings's PT raised by Brean Capital to $150.00. buy rating. http://t.co/kJWYICaKBe $ZMH #ZMH
InterCooler
23 Oct 14 09:18:27
Brean Capital Increases Zimmer Holdings Price Target to $150.00 $ZMH http://t.co/wqWSwO5Saz
Analyst Ratings
23 Oct 14 09:13:38
Zimmer Holdings's PT raised by Brean Capital to $150.00. buy rating. http://t.co/0O9N05Pphf $ZMH #ZMH
US Banking News
23 Oct 14 09:12:20
Brean Capital Raises Zimmer Holdings Price Target to $150.00 $ZMH http://t.co/gnFEzgefiR
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23 Oct 14 08:52:33
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23 Oct 14 08:18:53
Zimmer posts Q3 earnings above expectations, narrows guidance http://t.co/nmeVdM2FAh $ZMH #medicaldevices #orthopedics #earnings #wallstreet
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23 Oct 14 08:13:59
$ZMH Zimmer price target raised to $150 from $125 at Brean Capital: Full Story http://t.co/QbGKgPnOnt
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23 Oct 14 07:54:39
$ZMH is hanging out near this Decl Trend-line now after the post-Earnings pop http://t.co/XQepgqHZOk
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23 Oct 14 06:52:26
$ZMH - U.S. Hot Stocks: Hot Stocks to Watch http://t.co/CvlFWY2zJS
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Zimmer Holdings $ZMH Announces Quarterly Results http://t.co/FyRDjiSyhm
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23 Oct 14 05:56:45
Zimmer Holdings, Inc. updates FY14 guidance to $6.05 EPS. http://t.co/KkhNwHtJ3W $ZMH #ZMH
FirstWord MedTech
23 Oct 14 05:41:23
Zimmer posts rise in third-quarter sales, profit http://t.co/Qg6pO2WT5w $ZMH #medtech #meddevice
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23 Oct 14 05:40:24
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@TrembFredrick Your estimate for $ZMH Q3 2014 has been scored – http://t.co/Nk4cImnWKZ
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@macol30 $ZMH just reported earnings for Q3 2014 – http://t.co/0PU7UTSvsj
Estimize
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Estimize
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$ZMH beats the Estimize EPS Consensus by 3c and the Estimize Revenue Consensus by $14.02M - http://t.co/bTrhGDxKhH
Estimize
23 Oct 14 05:35:30
$ZMH reports FQ3 earnings of $1.35 EPS and $1.11B Revs - http://t.co/HCLDY9ehzT
Domani Capital
23 Oct 14 05:31:15
RT @theflynews: $ZMH Zimmer reports FY14 gross margin ratio to be 73%-74%: Full Story http://t.co/5IckNtaAwI
Ticker Report
23 Oct 14 05:28:49
Zimmer Holdings $ZMH Releases Quarterly Earnings, Misses Expectations By $0.04 EPS http://t.co/EuzQnSFyXX
US Banking News
23 Oct 14 05:25:51
Zimmer Holdings $ZMH Releases Quarterly Earnings, Misses Expectations By $0.04 EPS http://t.co/M0gwIVTfEp
Barry
23 Oct 14 05:23:18
RT @theflynews: $ZMH Zimmer reports FY14 gross margin ratio to be 73%-74%: Full Story http://t.co/5IckNtaAwI
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23 Oct 14 05:23:15
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23 Oct 14 05:23:08
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23 Oct 14 05:05:58
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23 Oct 14 05:00:02
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23 Oct 14 04:55:08
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NASDAQ
23 Oct 14 04:40:10
$ZMH - Current Report Filing (8-k) http://t.co/BSnBSF2nzO
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23 Oct 14 04:40:09
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23 Oct 14 04:37:02
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22 Oct 14 15:16:53
ZMH 100.20 Stock Charts $ZMH Zimmer Holdings Inc. (NYSE) Last Updated: 10/22/2014 17:16:51 ZMH Stock Chart - 1 http://t.co/JnJG2zBC8l
				
				
By  +Follow July 22, 2013 12:37PM
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