A Day Trader Search for Profits Written By: John L. Person, CTA

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1 Buy low sell high, buy high and sell higher or sell low and buy lower. Whatever your method is, the results need to be profitable or a trader s career will be cut short. Most investors, whether that is being a position trader, swing trader or the more popular, day trader, the key is to try and capture a portion of a price move in order to generate a positive cash flow (make money). A traders search for discovering a method that generates consistency in positive results is the primary goal and should be a continuous learning event. There is a method that may help those interested in a little work with the ability and ambition to want to succeed. Blending the strengths and characteristics of Candlestick chart pattern recognition with Pivot Point Analysis has had amazing results, as this article will demonstrate. Let s first introduce Candlestick charting which has developed quite a following over the years and is used in most charting software applications. I use Futuresource due to the reliability and accuracy of data combined with the crisp, clean visual appearance of their charts. Each candle pictured has a different characteristic that represents the difference or distance between the high, low, open and close. Candlestick charting techniques can be used from data for whatever time period you are looking at, hourly, daily, weekly or monthly. Another important point, candlestick charting does not tell you if the close is higher or lower than the previous time period, rather only indicating for each candle or bar whether the close is higher or lower than the open. As for the advanced charting student, there are several books written on the subject with excellent descriptions of the different candles and corresponding meanings of the formations. If you are not familiar with the concepts involved and want to learn then you may want to try Steve Nisons first book, titled Japanese Candlestick Charting Techniques. There are nearly 60 to 70 different classification of named candlestick patterns from one, two and up to several candle components. They can signal reversal, stalled and continuations of a market s price move. Day Traders want to focus on a small arsenal of the more consistent and reliable reoccurring formations. Several patterns that a trader wants to hone in on and recognize are the more powerful reversal formations at tops and bottoms of price ranges. The more frequent occurring bearish formation s that one can use to identify a top reversal signal are Doji s, Bearish Harami s and Harami cross s, Dark Cloud Covers and Evening Star formations. 1

2 As for bottom formations, Names such as Bullish Harami Cross s, Bullish Piercing Patterns and Bullish Engulfing patterns and Morning Star formations are the more reliable two and three candle patterns. They are distinctly recognizable. When candlestick chart pattern recognition skills are learned and then applied with the use of Pivot Point Calculations, a host of benefits will be gained. Just to mention a few, consider the targeted support and resistance numbers like an early warning system. Becoming aware of an important price target level, when accompanied with a candlestick pattern one can then swiftly, and best of all, confidently act on, an informed, calculated, trading decision. I wrote an 18 page booklet titled Swing Trading Using Candlesticks combined with Pivot Point Analysis. For those interested in a continued learning experience go to my private website and click on the request link for your free copy. This booklet covers the top candlestick patterns as well as reveals the pivot Point calculations. One important aspect that I find extremely important is the use of multiple time frame analysis. For those who are familiar with the numbers from the Pivot Point calculations the idea of applying them from any other time period other than the prior days session may make little or no sense. However, I propose that the Daily, Weekly and even Monthly target numbers can and should be incorporated in a traders tool box. Often traders will comment, if I am a day trader what would I want to be concerned with a monthly or weekly market outlook? Consider this in every month there will be a High, a Low and the Close will be somewhere in between. Right? In one week, a high or low will be established and in one day of the week the market will form that point of interest and potentially, more often than not, in an hour or so trades will take place that will establish that high and subsequently that low! Now that the means of market analysis has been introduced, the weapons need to be used on a market. I want to introduce to you the e-mini-size Dow Futures as a galleria in which to participate and illustrate the techniques used to show an excellent trading vehicle. Charles Dow, first established the Dow, in 1896, it originally consisted of only 12 stocks. It has the longest and most established notoriety of any stock index. I always believed in three main ingredients are needed to maintain a successful futures market. One is participation by professional large traders, one is participation by Commercials, in this case Hedge Funds, banks or institutions and the third is activity-involving speculators. The mini-size Dow has those ingredients as well as the accessibility of an online trading vehicle. Combining Candlestick charting with Pivot point analysis has had amazing results with this product. 2

3 Look at the chart below. The data used to calculate the daily support and resistance was from 11/12/02. The high, low, close figures were 8496,8397,8397, The R-1 resistance was and S-1 support was If you examine the target numbers you will see how, not only, the Daily but how the weekly key target support numbers from the Pivot point calculations helped identify the support levels. Using the data from the prior week ending 11/08/02 the High 8777, the Low 8475, the Close 8495, yielded 8280 as the S-2 support number. The Daily and Weekly target numbers are wonderful setup numbers to watch and since they are on two different time frames, I believe they offer a more potent source of support and resistance from which the market reacts off of. This allows and knowledgeable trader to swiftly act upon. Take a look at the next example below. 3

4 Using the prior days figures from 12/05/02, the High 8828, the Low 8605 the Close of 8640 calculates out the R-1 resistance as 8777 and the S-1 support as Using the numbers from the prior week ending 11/29/02 the High 8962, the Low 8660 and the Close 8870 yields S-2 support as 8528.The Daily and corresponding Weekly calculations, in addition to the Bullish Harami Cross candlestick pattern alerted a trader to a nearly 150 point Dow rally. This is another excellent example of a textbook setup would help a trader identify an executable trade. Now lets take on a more challenging situation. The chart below illustrates the price action on a day that an extraordinary event occurred. 4

5 That was the day the Federal Reserve policy setting arm, the Federal Open Market Committee, surprised the world with a.50% decrease in Interest Rates. That was the first interest rate adjustment for all of Would that have been a catalyst to incite volatility? You bet! But the Pivot Point Numbers still identified the potential range for that day too! Taking the data from the prior days session from 11/05/02 the High 8675, the Low, 8515 the Close of 8648 provided the R-2 resistance at 8771 and the S-2 support at Examine the next chart, the data from the prior session here was taken from 11/18/02 the high 8638, the low, 8471 the close 8472 produced the R-1 resistance number as 8583 and the S-1 support number as Here there were several techniques that could be applied. Specifically the Pivot Point calculations gave an early warning systems signal the candlestick formation confirmed a potential buying opportunity, but the wedge formation was also instrumental in helping a trader take action. This leads me to one other point. Candlestick charting even allows a chartist to incorporate the same techniques and analysis that are used for regular Bar charts. This chart is also depicts why Educators, Analysts, Traders often claim that trading is not only subjective but rather an art form versus exact science study. The Pivot point calculations targeted 8416 as the potential low or support and the market traded below that level for 30 minutes. There was no exact target level. Rather, the market trades in a general area of price support levels. The actual low of 8397, intersects near the S-1 support of I want to demonstrate the importance that often times the market will only trade close to the actual support and resistance target numbers. In this example, having access 5

6 to these support and resistance number plus combining the Bullish Candlestick set-up pattern s a positive trade result may have occurred. In this example, even if you were not convinced that a reversal would occur, then at least the breakout from the wedge pattern would have enabled a day trader to capture a portion of the ensuing rally. Last but certainly not least is a great example of why these two forms of analysis should be explored even if you are a Day Trader or a Swing Trader. Chart created using Gecko Software's Track 'n Trade Pro. Take a look at the chart above; let's start with the established low in October. The actual low was Using the data from the prior week ending 10/04/02 the High was 7980, the Low 7450, the Close 7550, calculated out the S-2 support as That is a small percentage for a margin of error. It was the Bullish Piercing Pattern supported by the next long white candles higher open that may have helped in catching a portion of that bottom price reversal. Now look at the last three candles. The First set formed a Bearish Harami. That actually concluded the week on 11/29/02 and of course the ended the Month of November. As the week ending 11/29/02, taking the weekly range, with the High of 8962, the Low 8660 and the Close 8660, the calculation reveals 9006 as the R-1 weekly resistance number. On December 2 nd, which was a Monday, the High was 9040, which had a margin of error of 34 Dow points, but on that day, an extremely powerful candle called a Doji formed. This particular Doji, termed a Long legged Doji or Rickshaw Doji had helped confirm the prior weeks Bearish Harami formation as a sell signal. In addition, you had the Weekly Target resistance number of

7 Armed with that collection of indicators should have provided a wealth of sell signals in order to develop a proper game plan. At the very least it would have kept you from buying the high! As the week finished and then continuing into the next week the targeted Support was Again that is based off the data collected from 12/06/02, which was the High of 9040, the low of 8485 and the close of The S-1 support was calculated out as If you were short you may have carried nearly a 600-point decline for your trading account. The established low as pointed out in the chart below was 8441 on 12/09/02. Chart created using Gecko Software's Track 'n Trade Pro. Try to use these numbers and certainly always remember to continue to learn and increase your knowledge as the markets change. You may find this a powerful weapon as a day trader or as an investor looking to make smart moves. About the Author John L. Person is a 22-year veteran trader and commodity-trading advisor. He is publisher of the weekly Bottom line Financial and Futures newsletter and Head Financial Analyst at Infinity Brokerage Services. John also writes the Daily Dow Report found at the CBOT website under Traders Resource section under Traders learning Center. John s name is a familiar one, he hosts a weekly, one hour Radio program, Personal Investors Hour, on Money Watch radio network, a financial AM station. Johns guest list includes The industries premier trading experts like Linda 7

8 Bradford-Rashke, Martin Pring, John Murphy, Steve Nison, Larry Pesavento, John Bollinger and others. He also appears in many news articles as the world s top journalists, such as Reuters, CBS, Forbes, The New York Times and Dow Jones rely on his market insights. He has written articles for Futures magazine and has just concluded writing a Book on Technical Analysis, soon to be released. John presents private seminars and Appears at the Industries top Expos as a guest speaker. John may be reached at jperson@nationalfutures.com or at his private research site 8