Flash Pattern Strategy by Stock Alphabets

If you are keen to know about the Flash Pattern  and how to trade it then this Flash pattern Stock trading strategy will put you in the right direction.

I must warn you though: if you are a new Stock trader, trying to find a Flash Pattern on your chart may be quite difficult at first.

Why?

Because first you have to identify the XYZ pattern and then once that happens, next thing you need to look for look for is a Flash Pattern.

And a Flash Pattern only forms after the XYZ pattern.

That is what makes it confusing for many.

So if you are going to find it difficult, then try using this Flash Pattern .

What I am going to present here is the most basic form of Flash Pattern trading because If I were to write in detail about how to trade the Flash Pattern, it would be too much information and I don’t want to confuse the heck out of you.

Note:

Price Action Strategy

So What Is A Flash Pattern?

In order for you to understand the Flash Pattern, you need to know what a XYZ chart pattern is and in the XYZ chart pattern Stock trading strategy, I’ve explained that to an extent what that is.

This chart bellow shows what a Flash Patterns  in a downtrend and uptrend:

§  note that first comes the XYZ pattern

§  and second comes the Flash Pattern.

§  note that the violation candlestick is the candlestick that breaks past point 2 of the XYZ pattern.

Flash Pattern Simplified

Most explanations tend to make Flash pattern confusing but my explanation will take the confusion out once and for all.

Look at the Flash Pattern and can you see a similarity between it and the XYZ pattern? I you cannot, then have a look at the chart below:

§  first part is the XYZ pattern

§  then the second part is the Flash Pattern that I’ve marked as “Z-Y-Z.”

Here’s the thing:

the “a-b-c” is another XYZ pattern if you were to mark “a” with X, “b” with Y and “c” with Z.

So in simple terms, a Flash Pattern is another XYZ pattern that forms right after the first XYZ pattern…That’s basically what a Flash Pattern is: two XYZ patterns forming right after the other.

How To Trade The Flash Pattern

There are a few ways to trade the Flash Pattern but I’d like to show you the the most simplest one: trading the breakout of of Flash Pattern:

1.      place a pending sell stop order at least 2 pips below the low of the Flash Pattern which is marked as “b” on the chart below in a downtrend situation or for a uptrend market, place a pending buy stop order 2 pips above the high.

2.      there are two stop loss placement options: place above the high of the breakout candlestick or just above point “c” for a downtrend. Do the exact opposite for a pending buy stop order.

3.      for take profit targets, use a previous swing low as profit target for a sell order and a previous swing high for a buy orders. If these swing lows/highs can be found or they are too far away, then use the risk:reward ratio of 1:3 to calculate your profit target.

Disadvantages of The Flash Pattern Stock Strategy

§  notice that price has moved already after it made the XYZ pattern and you’d be jumping in a bit late if the start of a new trend was confirmed after the XYZ pattern.

§  can be a difficult pattern for beginner Stock traders to identify and trade.

§  if the distance “stretches” between the formation of XYZ pattern and the Flash Pattern, avoid trading it.

§  nothing is ever perfect in Stock trading, there will be false breakouts of Flash Pattern and your stop loss can get hit.

Advantages Of The Flash Pattern Stock Trading Strategy

§  Trading raw price action without the clutter of indicators.

§  a simple breakout trading with the same king of trading rules as the XYZ pattern Stock trading strategy

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Support and Resistance Key Point

Candlestick Charts Stars

What are Candlestick Stars?

So far, in Part 1, we covered the construction of a candlestick chart and common candlestick reversal patterns.

Well, in this article I want to continue down this path and discuss another powerful reversal pattern - candlestick stars.

Stars have small real bodies which gap away from a large real body that precedes it.

Candlestick Example

Candlestick Star

Types of Candlestick Stars

The key rule to a star is that its' real body does not overlap the previous candles real body. There are several variations of the star pattern:

• morning star
• evening star
• doji star
• shooting star.

Psychology of the Candlestick Star Pattern

As a star has a small real body, it represents indecision by bulls and bears.

While the primary trend is still intact, the presence of the star is the first sign that the trend could turn.

This lack of follow thru on the trend will lead to a number of things.

Some traders will exit half of their position to lock in profits.  Others will use the star to establish levels for both entries and stops. So, while the candle is small, it is powerful in that it makes traders take notice and react accordingly.

Candlestick Star Variations

Morning Star

Morning Star

The morning star candle is a bottom reversal signal that comes after an extended downtrend.

This pattern is a three candle reversal setup. The first two bars are the typical star setup discussed above. The major difference with this pattern is the third candle in the formation. It is a very strong green candle, which does not have to be a gap and closes at least halfway into the first candle.

Assessing the Strength of the Morning Star Signal

The further it eats in the first bar, the more bullish the formation. Outside of morning star showing itself, look for other indications that this pattern is for real. For example, you want to see high volume in the third candle, indicating strength. I have noticed that the morning star works very well when it occurs at previous support levels.

On the other side of the coin, if you buy a stock that prints the morning star, be prepared for some sort of pullback. It is not uncommon for that to happen nearly 50% of the time. If there is a violation of the lows, then the morning star is negated.

Let's take a look at the morning star candlestick at work with a live trading example.

Morning Star Trading Example

VLO Morning Star

This is a beautiful morning star setup.

First of all, the morning star came in at previous support near the 60.37 level. The star candle came in the form of a hammer.

Refer back to Part 1 to learn more about the hammer. There was high volume that came along with the hammer, and this was an even bigger sign that this level would hold as support. The following day, the stock accelerated with a gap higher and closed well into the top half of the first bar.

As I said earlier, the presence of this pattern does not indicate an immediate rally. As you can see, the gap created from the second to the third bar was backfilled. Smaller gaps, such as this one, tend to fill in the short term. Even if one had waited for the high of the third candle in morning star to be broken above, five points could have been made in a short amount of time.

Evening Star

The evening star candlestick is the bearish version of the morning star.

It is a top reversal pattern that occurs after a sustained uptrend. The evening star is also a three candle pattern.

Evening Star Formation

The first candle is a strong bullish candle. The second candle is the star, and the third is a red real body that closes well into the first candle. Again, as with the bullish morning star, the third candle in the evening star does not have to be a gap. Here are a couple of factors that increase the chances of this pattern succeeding:

1. The real bodies of all three candles do not overlap
2. The third candle closes well into the first one; preferably regaining 75% of the candle
3. Volume should lighten up on the first candle and increase on the third.

Just as the lows of the morning star pattern provide support, the highs of the evening star candle formation serve as resistance to any further upside movement.

Doji Stars

A doji is a candle that lacks a real body. This means the open and close of the bar are essentially the same. It has a strong significance after substantial advances or declines. The lack of direction is a potent reversal signal, especially if it is followed by a candle in the anticipated direction.

When a doji is the star within the morning star and evening star patterns, the formations are known as the morning doji star and evening doji stars.

Doji Star

Abandoned Baby Candle

An extremely powerful version of the doji star is the abandon baby top or abandon baby bottom. This pattern is the equivalent to what some of you have heard of through using bar charts, the island reversal. The abandoned baby candlestick has a doji as the second candle with a gap on both sides. Notice, the Evening Doji star image above is an abandoned baby top, while the morning doji star is not.

If you think about the psychology of this setup, the first gap came in an exhaustive fashion.

The stock was already in a strong uptrend or downtrend, and then it made a gap which closed near its open. This was the first sign that the directional pressure was fading. Now, with the third candle gapping in the opposite direction of the trend, we now have confirmation that a more significant trend reversal has taken place.

Shooting Star

Shooting Star

The final star variation we will discuss is the shooting star which occurs after a strong uptrend (or the inverted hammer that occurs after a strong move down). The shooting star has a long upper shadow with a small real body at the lower end of the candle. This pattern usually presents itself as a sign of a short term correction rather than a more potent reversal signal. The shooting star is telling us that the markets rally could not be sustained. The market opened at or near its lows, shot up much higher and then reversed to close near the open.

Ideally, the real body of the shooting star should gap away from the previous candles' real body. While it is not necessary, it adds confirmation to the validity of the impending reversal. Additionally, take a look at the previous candles; many times you will see overhead shadows on those candles as well. This indicates that the stock is struggling to go higher; just another clue as to what might happen. When a shooting star forms near a resistance level, which also was created with a shooting star, a very powerful resistance level is created. As mentioned before, the shooting star is a short term topping formation, and any break above the high of this candle negates the ramifications of the formation.

There is one variation to the shooting star; it is known as the gravestone doji. The gravestone doji is a shooting star with virtually no real body, the open and close are exactly the same. This formation is more powerful than the typical shooting star as portends a more serious reversal.

In Summary

Candlestick patterns are a great way to assess the trend of a stock. The key to its secret is the fact candlesticks are a visual representation of price action.

These reversal candles all tell the potential of a trend change or continuation but remember you need other validation points. These can come in the form of a technical indicator or chart patterns.

20 SMA With RSI Trading Strategy

20 SMA With RSI Trading Strategy

The 20 SMA with RSI trading strategy is also  a very simple   trading strategy which beginner traders can find very easy to use.

Currency Pair: Any

Timeframes: Any

Indicators: RSI (set period settings to 5)  & 20 SMA

WHAT IS THE PURPOSE OF 20 SMA?

The  20 SMA for  identifying and whether the trend is up or down and here’s how:

• if the price is above the 20 sma, the market is in an uptrend.
• if the price is below the 20 sma, the market is in a downtrend

WHAT IS THE PURPOSE OF RSI?

Its purpose is to confirm the strength of the trend.

• you also need to set the 50 RSI level on your chart
• when the RSI peaks above the 50 level and starts to turn down, it indicates that the uptrend (or minor rally) is weakening and it is a good time to be looking for a sell signal to trade.
• when the RSI bottoms below the 50 level and starts to head up, it indicates that the downtrend(or minor pullback) may be weakening and it may be a good time to look for a trade entry signal to buy

TRADING RULES OF THE 20 SMA WITH RSI  TRADING STRATEGY

Refer to the chart below for the trading rules:

Selling Rules:

1. Price has to be below the 20 SMA-indicating a downtrend.
2. Wait for price to rally back up to touch the 20SMA line.
3. Once 20SMA line is touched, look down to see if the 5 period RSI has peaked  above 50 level and has started to turn down-confirming a weakening upward momentum.
4. Place a sell stop order under the low of the candlestick (after it closes). This candlestick should coincide with the RSI starting to turn down.
5. Place Your stop loss above the high of that candlestick.
6. Your profit target: 3 times what you risked. Another option would be to exit with whatever profit you have when the opposite trading signal is given (which is when a buy signal is given-this can bag you hundreds of pips easily in a nice trending market).

Buying Rules:

1. Price has to be above the 20 SMA-indicating an uptrend.
2. Wait for price to pullback down to touch the 20SMA line.
3. Once 20SMA line is touched, look down to see if the 5 period RSI has bottomed  below 50 RSI level and has started to turn up-confirming a weakening downward momentum.
4. Place a buy stop order above the high of the candlestick (after it closes). This candlestick should coincide with the RSI starting to turn up.
5. Place Your stop loss below the high of that candlestick.
6. Your profit target: 3 times what you risked. Another option would be to exit with whatever profit you have when the opposite trading signal is given (which is when a sell signal is given).

DISADVANTAGES OF THE 20SMA WITH RSI  TRADING STRATEGY

• as with all  trading strategies based on moving averages, this strategy performs really poorly in flat or ranging markets.
• sometimes price may not rally or pullback to touch the 20 SMA line until very later on and by that time that price movement would have been already exhausted and the market may be looking to reverse direction.
• moving averages indicators are lagging indicators-you are waiting for price to come back to a 20 SMA when price may have already made a big move.

ADVANTAGES OF THE 20 SMA WITH RSI  TRADING STRATEGY

• this is a trend trading strategy and in a good trending market, will work really well which has the potential to make you a lot of profitable pips.
• the  use of forex reversal candlestick patterns would greatly enhance the entry signals so you should learn about how you can incorporate them into this trading strategy.

Support and Resistance

Support and Resistance has always been the biggest attribute of technical analysis. It is used by a huge majority of traders in the markets, from the big banks, large trading companies, right down to the small retail traders. It is also the most basic technical analysis pattern where you can find where supply and demand meet.

Basically, it is used to refer to price levels on a chart, preventing the price from getting pushed in a certain direction. As we discuss in our guide to using price action and technical analysis, knowledge about the use of support and resistance plays a big role in identifying potential long and short trading opportunities. 

What is Support and Resistance? 

Support is a level at which demand is thought to be strong enough to pause the price from declining. As the price of a security drops and gets cheaper, buyers will tend to buy more and sellers will be less inclined to sell, thus forming a support line.  

Support levels are usually below the price, but it can still trade at or near support. 

On the other hand, resistance provides potential trade entry or exit points. It is a level in which it is thought to be strong enough to pause the price from rising. As the price of a security towards resistance, sellers will tend to sell more and buyers will be less inclined to buy. 

Resistance levels are usually above the price, but it can still trade at or near resistance.  

A trader will trade on a price and determines if it is correct. As the price moves in the right direction, the position may gain you profit. As the price moves in the wrong path, a small loss is expected and the position can be closed. 
 

Trend lines

Understanding the trending and trend lines is very important when learning about support and resistance.

Resistance levels are formed as the price action begins to slow down and starts to pull back towards the trend line. Traders will pay close attention to the price of a security if it falls toward support of the trend line for the reason that it has prevented the price of the asset from moving lower. 
 

Support and Resistance Zone

Support zones refer to a price zone in which a security's price has fallen to a predicted low. The support zone typically occurs around trend lines. On the other hand, the resistance zone is where a stock finds resistance and begins a downward trade. The zone of resistance will more likely occur if the higher volume of trading in the zone of resistance.
 

Identifying Support and Resistance 

As mentioned above, when a market moves up and makes a pullback, the highest point of the pullback is called a resistance. If the market continues upward, its lowest point reached before it started is now what you call support. But how can you actually identify them? There are three ways to identify Support and Resistance. 

'Psych' Levels 

Psychological levels occur when the price ends with multiple 0's. For example, when traders think about what the price will be worth in the future. If the given price is 1.2250, then a trader will more likely round off the price to something simpler, like 1.2300 or 1.2200. The most common psych levels involve price having two zeros at its end (1/10th of a pip is not included), such as 2.2100 or 127.00. The more powerful psych levels end with three 0's, like 3.4000 or 340.00. 

Swing Highs and Lows 

Another way of finding support and resistance levels is to find past levels and mark each where price had difficulty breaking through. Each level that price has bounced off could be a level in the future that tends to bounce off again. This method takes time as it requires you to mark levels on all of your currency pairs. In the long run, it can make you great profits. 
 

Pivot Points 

The use of pivot points is to determine directional movement and potential support and resistance levels. It uses the period's high, low, and close to determine future support and resistance levels. Without a doubt, this is one of the easiest support and resistance levels to use. 

How to Use Support and Resistance? 

Here is an example of support switching roles with resistance.

The idea here is if price is moving between support and resistance levels, then the best thing to do is to buy at support and sell at resistance. 

If you are a day trader and use support and resistance to help find entries and exits, then the price interval period should be short-term, such as 1 minute time frame.

If you are a long-term trader, then use price charts based on hourly, daily, weekly, or monthly interval periods.  It is important to remember that you choose a chart based on price intervals that align with your trading strategy. 

How to Trade Support and Resistance? 

Support and Resistance can be traded using the following techniques: 
 

Support and Resistance Bounce 

As its name suggests, the goal of this technique is to capture the rebound. What this strategy does is tell you if the price does not break the support or resistance.

Many traders make errors on setting their orders directly on support and resistance levels. When you are using the bounce, you probably want to make the odds come in your favor and find some confirmation of a hold of support or resistance. 

Example: instead of buying immediately, you might want to wait for bounce first before you enter. 

 

If you are going to go short, wait for it to bounce off a resistance level before you enter. 

 

With the help of this technique, greater profitability awaits. The bounce helps you avoid moments where price moves fast and breaks support and resistance levels. 

Support and Resistance Break 

You can play support and resistance breaks in two ways. Either the easy way, or the hard way.  
 

The Easy Way 

Instead of entering on the break, wait for a price pullback to the support and resistance level and enter after the price bounces.

The Hard Way 

The best way to play breakouts is to buy or sell whenever the price passes through the zone. What you want to do is enter when price passes through a support or resistance level. 

Recap 

Support and Resistance levels are one of the key attributes of technical analysis. Many traders from all walks of trading use it as part of their trading handbook.

A lot of traders also use the major Japanese candlestick patterns to let them know when price is going to break or hold, and if, or when they should enter a trade.

There are different methods of choosing when to look for support and resistance levels, but its interpretation is still the same. It is an advantage for you as a trader to become an expert at marking them.