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| Pilbara Trade - February/March 2000 |
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Pilbara Chart (1) Resistance can be defined as a relative upper level on a chart at which prices stall. The sellers want to exit the market and the buyers are reluctant to make a new high. At that price level on a chart, demand has become thin. If this line is broken in an upward direction, this signifies that the bulls have managed to drive the price to a new level. It is especially relevant if a significant volume increase accompanies the breakout. You can see this on the Pilbara chart, and this was my initial point of entry. (2) I pyramid into positions (by adding more capital), as I receive evidence that another breakout has occurred. I pyramid out of positions (by removing capital), at reversals for shorter-term trades – but I always adhere to my absolute and trailing stop loss. I exit the full position immediately when the share is no longer co-operating with the view that I established prior to entering the trade. This may be at a reversal pattern for a volatile share, or the break of a support/resistance level for a less volatile share. If the share has an overall uptrending behaviour, a period of consolidation is very healthy. A Harami will often signify this, as it is a pause that allows the share to recover from its vigorous trading activity. The harami is one of the few patterns that permits two of the same coloured candles to appear side by side. Whether a white and a white candle are present, a black and a black candle, or whether candles of opposite colour are represented, the implication is the same. The trend will either reverse, or soften into a sideways trend. In many ways, the harami looks like an engulfing pattern in reverse. The first real body must totally engulf the second real body in order to form a harami. If the shadows are also engulfed, this forms an even more powerful signal,I consider these ranges of consolidation to be like a tightly wound spring. This trading range, like the constricted spring, often builds up a significant amount of potential energy. Once a release of this energy occurs, the bullish breakout can be sudden and explosive. Luckily, this allows us to recognise this change in behaviour and run with the bulls. Once the share price action traded above the Harami, I added more capital to the position (Half of the amount of my initial entry). (3) The Rising Three is a continuation pattern that consists of five separate candles. The first candle is a white long day, and the following three candles are small bodied and usually confined to the trading range of the initial candle. These three central candles can be either black or white. It is the placement of these candles which implies a weak bearish downtrend, not their colour. The final candle is also a long white candle that often opens at, or above, the opening price of the initial candle. It closes above the closing price of the initial candle, indicating a bullish perspective. Once this pattern formed and trading continued above the formation, I added more capital to the position (A quarter of the amount of my initial entry). (4) At the Hanging Man formation, I exited my position entirely. This forbidding top reversal displays a long lower shadow length that is two times the length of the real body. There is typically no upper shadow, or a very small upper shadow. It is easy to see how this pattern derived its name. It resembles an actual hanging man (ie the real body), complete with dangling legs (ie the lower shadow). The hanging man is similar to the shooting star, but appears upside-down on a candlestick chart. Like the shooting star, it reverses an uptrend. Because the hanging man does not display the violent level of rejection of higher prices as shown by the upper shadow of the shooting star, it would sound logical to believe that it is not a strong signal. If you remember however, that markets lose confidence quickly, you will realise that the hanging man is a very potent signal. Do not make the mistake of ignoring them. If confidence is shaken in any way, a decline in prices is likely to occur. Traders who are in profit may be vulnerable to selling pressure. This could create a chain reaction of fear as more and more sellers decide to offer their wares. (5) I re-entered the trade once the hanging man was defied by the breakout on good volume. Subsequent to re-entry, gaps on low volume appeared, suggesting that the market was over-heated, or due for a consolidation, or a reversal. Louise puts on her cape and springs into Daytrader mode to look for a suitable exit … (Just seeing if you’re reading closely). (6) The doji describes any single-line candle that has approximately the same opening and closing prices. The real body must be negligible in size, so even if the open and close are very close together, it will still be called a doji. Due to the visual appearance of the doji, it is sometimes called a doji cross, especially when it is combined with other candlesticks, eg a harami cross. A doji serves as a top reversal, as well as a bottom reversal pattern. The lead-up to the doji is that the share must be trending prior to the trigger candle. If a doji appears, often the share will reverse its upward direction and begin to downtrend, and vice versa. Gaps between the lead-up and the trigger candle would be ideal, but not strictly necessary. If the doji is successful in reversing the trend, the result will be immediate. The reason for the awesome strength of the doji is due to the psychological importance of its message. A doji is suggesting a balance of demand and supply. Whenever the buyers and sellers agree on a price, a trend in the market will cease to exist. Trends by their very definition demand that either the bulls or the bears establish dominance, so the doji signifies the end of one trend and the beginning of a new trend. As a minimum, it suggests a significant pause in market activity, prior to the continuation of the overall trend. It is probably the most powerful candle available due to the lessons about trader behaviour that it confers. I exited one third of my position at the appearance of the first doji, another third at the appearance of the second doji, and was prepared to see if the trend would continue upwards before exiting my final third. (7) Final exit
once the trend did reverse at the bearish dominant candle. I consider a
candle to be dominant if it
is significantly larger in length in relation to the other candles
within the chart, especially within the most recent trading sessions. To
fulfill my definition of dominant, this candle must be accompanied by
high relative volume. Notice the increase in volume in comparison to
the earlier sessions at the appearance of the dominant candle in Pilbara.
If the share price had traded above the mid-point of this dominant
candle, I would have been ready to look for a re-entry – but it
collapsed away and no new re-entry signal emerged.
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