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The Close Line Tactic: Pivot Points and Candle Chart Patterns

Wed, May 16 2007, 09:51 GMT
by John L. Person

National Futures

The Close Line Tactic

There are many trading methods one can employ to actively trade including various mechanical trading systems and manual trading tactics. The constant changing of market conditions can require system traders to adapt and update the parameters for the trading decisions. I often prefer the hands on visual approach which is more of a manual method while employing mechanical risk management techniques. The visual approach is aided by the use of candle charts. The draw back is one must have a basic understanding of this form of charting to begin with. The upside is once you learn the basics, a new meaning of how markets act may open up to you.

It amazes me that candle charting was one of the first forms of tracking commodity prices some 400 years ago, today it has become more popular, however, relatively few Futures traders implement it in their analysis. The myth surrounding this method is that it is a highly complicated means of charting. The fact is it is a relatively simple method and enhances the visual effects in charting. Candle Stick Charting is a basic building block method that immediately shows a trader the important connection between the four most important aspects of price analysis. That is the relationship between the Open, High, Low and close of a given session. It involves colors to differentiate the relationship between the open and close referred to as the real body, it acts as an immediate way to illustrate and help identify the current markets environment and the current time frames acceptance or rejection of a specific support or resistance level in a clear visual manner. If for example, on a given trading session prices move higher from the opening price, establishing the high and then fails, the distance formed from those points of interest is called the shadow.

In my Book “Technical Trading Tactics: How to Profit using Pivot Points, Candlesticks and other Indicators” I demonstrate many powerful ways to anticipate support and resistance levels. In my Trading course I teach specific trade setups and confirm signals to trigger or execute trades, how to manage a trade and know when to exit or even reverse a position. One such method I reveal in the course is combining the Pivot Calculations and what I call the “Close line approach” in candle chart patterns. It is a simple and basic approach that is a high probability winning strategy.

This article points out such a method that may help you improve your understanding when combining these two methods of analysis that allows you to develop a consistent winning trading strategy. Consider this your own personal trading system that is based off of proven and powerful techniques. For a moment I want you to envision the concept of epoxy glue, it requires two compounds. Separately they are not very reliable or in fact a very strong bonding substance. However, when combined, a chemical reaction occurs and forms an amazingly strong and powerful bond.

Using the methods of Candlesticks with Pivot Points can give you that same result if you know what to look for. The implementation of longer term analysis using Pivot Points will give a trader a fantastic means in which to anticipate a point from where a trend change could occur, thus helping one to not only prepare but to act on a trade opportunity.

Here is a Bullish setup:

• When the market approaches a key Pivot Point, buy on the close or on the next open once a new closing high is made above the previous bullish reversal candle pattern. • Place your initial risk management stop below the low of the lowest low point of the bullish candle pattern on a stop close only basis. • Exit the trade on the close or the first open of a candle that makes a lower low after a prolonged uptrend. • One can use a “Filter” or back-up process to confirm the buy signal against a major Pivot Point number such as a bullish convergence stochastic pattern.

A bullish Candle pattern can be a Harami, Harami Doji Cross, Bullish Piercing Pattern, A Bullish Engulfing Pattern or my favorite, but a rare occurring pattern called a Morning Doji Star.

The setup:

One can implement different time frame analysis besides Daily work but include Weekly and even Monthly Pivot Point calculations. Take for instance the Weekly numbers. They are compiled from the previous weeks High, Low and Close. This method of analysis after calculating the numbers alert you well in advance of a potential Support and or resistance level. If you have you calculations figured out on the close of business on a Friday then you are prepared before the weekend starts and now have a general guide of what may be the next weeks potential High, Low or both. In the setup process you develop the concept to enter in a long or short position and identify the target area to enter and what you wish to establish as your risk or your risk objective. Another event that occurs in the setup process is you now can “set up” your order to buy on your trading platform with the selected contract amounts. In other words, prearranging the commands on the electronic order ticket. Now all we need is confirmation so I can pull the trigger or click my mouse to establish an entry in the market and my position.

The bullish trigger:

After a specific candle makes a higher high but more significantly, a higher closing high gives us the trigger to buy as that candle period is closing, or on the open of the next candle.

Once again the rules of engagement are as follows: • Buy on the close or the open of the next candle after a new closing high was made from the previous time period’s reversal pattern candle. • Exit on the close or open of the first candle that makes a new closing low than the previous candle. • One can use a “Filter” or back-up process to confirm the signal such as a stochastic pattern.

When investors first discover Pivot Points, most often their first impression is one of pure amazement. Mainly due to its ability to predict what a specific time frames overhead resistance or support might be. Moreover, more times than not the High, Low or even both are right on target as the exact number for that given session. Make no mistake Pivot Point analysis is impressive. However, its real power and value does not end there. Pivot Point Analysis deals with pin pointing not only Time but also Price. It is what I consider the “Right Side” of the chart indicator. It also gives you a method for identifying the trend and how to determine the typical price or fair value of a given time frame. After all, that is what the actual Pivot Point number is. If prices deviate too far from that point the outer calculation numbers can help you determine at what point a market is most likely to turn. One can use this feature to develop a moving average system when combined with the visual aid of certain candle patterns will give you guidance as to when and where you can enter and exit positions. Traders who want every edge in their approach for the highest probability of success will benefit from this simple but yet time tested method.

This is just one of the strategies taught in full detail in my phenomenal new trading course. Feel free to contact me at jperson@nationalfutures.com so that we can speak further.

All the best, John L. Person

Published on  Wed, May 16 2007, 09:52 GMT

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