In our last article, we looked at three key patterns: ratio of green to red candles, wide-range green candles in an uptrend, and continuations above 50/100/200 moving averages. In this article we’ll focus on strong intraday momentum candle patterns for day trading stocks.
Day Trading With Visual 1-Minute Candle Patterns
As with swing trading, candles can show the net buying and selling pressure as seen in price-action breakouts. For active day traders, spotting the strongest new breakouts as they occur in realtime is a core trading skill that needs to be mastered.
Pattern #1: Increasing “Momentum 1-Minute Candle” Ranges
Spotting breakouts above prior-day highs is an essential professional day trading skill. The challenge is to be able to quickly avoid false breakouts, while getting in on trades that continue up once a trader has initiated their position. A favorite pattern is one in which, following a minor bullish cup, a 3-candle pattern of increasing candle heights is observed, indicating new buy pressure for a day trading entry.
For example, in Figure 1 Best Buy Co. Inc. (BBY) , this 2-day chart shows a strong breakout trade setup. Looking at the closeup view, there’s three green candles in a row, with the body heights getting taller and taller from 31.6 to 31.8. Subsequently it ran all the way up to 32.3 before pulling back, which is an ideal 50-cent move for a day trading entry.
It’s an ideal setup for several reasons: high-frequency trading (HFT) algorithms kick in and initiate buys above prior day’s highs, and visually looking for a 3-candle momentum entry pattern reveals the right price and time to enter the trade, which is usually .10 (ten cents) above the high of the 3rd candle, using a maximum .10-cent trailing stop for a $30 stock like the one discussed in this example.
Pattern #2: 5-Minute Cup and Candle Breakouts
For those who prefer using 5-minute charts for intraday trading, a classic cup and handle breakout pattern often works well. This is especially true if the cup breakout occurs following a wide-range opening candle that occurs from 9:30 – 9:35am ET, as seen in Figure 2, SolarCity Corp. (SCTY) .
In this chart, the 2-day high breakout occurs during the opening 5 minutes of the 2nd day, with a wide-range candle as highlighted in Figure 2. After this wide-range opening candle, a pullback then gets new buyers, forming a bullish cup with resistance at 69.3, which then broke out to new highs for a 2-point upside move.
When using this pattern, an additional buy confirmation signal is provided by the higher volume during the breakout day, as seen in the chart. This candle-and-cup breakout pattern is a favorite and may be readily observed on many of the market’s current strongest breakouts. By focusing on these classic momentum intraday patterns, the astute day trader can quickly spot the strongest charts as they take out new highs, providing additional trading opportunities.
Pattern #3: Slowing Momentum 3-Candle Pattern
To see Pattern #1 in reverse, for when selling pressure is slowing down, refer to Figure 3, BP PLC ($BP), in which 3 sequential 5-minute candles are growing shorter in height. This indicates sellers are slowing down, which may be followed by a consolidation and/or pivot. The key is to see what the candles are saying in terms of net buying or selling pressure over time.
In this example, selling momentum is slowing, indicating that new short positions should not be entered, and tight trailing cover stops should be used for any open shorts (especially if price action recovers above the high of the smallest third candle).
Learning how to scan for these three patterns, and others in this series of articles, can help smart active traders use visual price-action candle scanning to spot potential new trading opportunities. 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.