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| Pilbara Trade - February/March 2000 |
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Let’s look a profitable entry set-up condition using candlesticks. One of the patterns with a high probability of success that I have discovered is a candlestick one-line reversal pattern, with an upper tail, that occurs as a breakout on heavy relative volume, above a previously well-defined resistance line, during an existing medium term uptrend. Usually this set up is initiated with a gap, and can often be found at an all-time high. The resistance level is often at a round dollar figure and the gap that initiates this pattern will often hurdle this level. Have a look at this set-up using Peptech (PTD) as an example. My aim is to enter the trade close to the end of the trading day in order to benefit from any subsequent overnight gaps. In the Peptech example, I entered the trade at approximately 3.50pm. At that time, the set-up candle was a fully formed shooting star. The remaining 10 minutes of market activity and after-market orders ensured that the price was driven up slightly, so that the tail length of the candle was no longer two times the length of the real body (thus not qualifying for the exact definition of a shooting star any more). This did not effect the ultimate result of the trade. I made this observation regarding the ‘New Money’ set-up pattern several years ago, without fully understanding the psychology behind why it eventuated in so many high probability trades. After some careful thought however, the reasons regarding why this set-up is profitable became apparent. In the ‘novice world’ of trading shares, many people tire of holding a sideways trending share, especially if they have not derived any paper profit. Their tolerance lasts only so long. They may say to themselves: “The next time this share goes over $1.75, then I’m going to sell it”. Collectively, their pain threshold has been reached. They begin selling the share once it has jumped over their target. This creates the one-line candle rejection pattern often above the round dollar figure. The high relative volume associated with this pattern signifies that there is a massive transfer of shares from the bored bulls. New stronger hands are now buying the share. For an uptrend to actively unfold, new trading money must flow into the share. This assists in explaining the logic behind the pattern and reflects why I call this the “New Money” pattern. PTD later went on to form an ascending triangle, and the breakout from this pattern is also shown in the diagram. For the sake of disclosure, my recent trades
with PTD involve entry at $1.87 (04-01-01), exit at $3.03 (11-01-01), and
entry at $2.74 (25-01-01). Exit January
29th, at $2.94 when reversal pattern formed after the breakout shown on the
chart below.
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