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candlesticksmadeeasy (1).pdf Hey guys, my friend, a very happy options trader, sent me this book on candlestick analysis. Some of what is in here is covered in Andrew's videos, and some of it is new -- and he goes into a "how and why it works" explanation when discussing candlestick patterns. A few people in the chat wanted to read it so I am posting it here. Enjoy
Dear group, Recently I reached out to Andrew for guidance on identifying a good setup for an opening range breakout (ORB). He asked that post my email on our shared forum so that everyone can benefit from the exchange. For those who are new to day trading, the ORB is a strategy that allows the trader to find an entry point into a trade after the 5 minute mark. How you manage the trade is a different conversation, but the mechanics are pretty straight forward. For the first five minutes of the market you allow the buyers and sellers to compete. Once the first five minute candle is formed, you note the opening and closing prices which create a “range.” An indication to go long is when the stock price moves above the range. An indication to go short is when the stock price moves below the range. But the ORB is not only based on price action. In order for the ORB to be an appropriate strategy, other criteria must be met. Getting a better understanding of this criteria is why I initially reached out. I complied some ideas from Andrew’s books and recaps and list them below. Keep in mind that these are my notes so that they may be incorrect. What indicates an optimal setup for an ORB? Here is what I have so far. · Med float between 20 to 100 dollars per share. · A large premarket gap. I’m not sure what this means but I assume that at a minimum it should be 2 percent. I also assume that it can be too large. I talk more about this below. · Level 2 information. For an ORB out, you would like to see a large number of credible bids to signal a bearish market. Likewise, for an ORB down you want to see a large number of credible asks for a bullish market. I don’t think Andrew has ever said this in the context of the ORB, but he has mentioned it elsewhere. · Relative volume should be around 5 percent and 1000 percent in 1 min. This is picked up by a scanner. · Where does the stock close relative to the VWAP after the first five minutes? If the candle is bearish and it closes below VWAP, this is an indication to go short. If the candle is bullish and it closes above the VWAP, this is an indication to go long. · You do not want the opening range to be too extended. You ideally want the five minute closing price to be somewhat close to the VWAP. This is a subjective evaluation and I assume will come with experience. · Opening range should be lower than the ATR. · Order flow should be relatively quick with many small orders. You do not want slow order flow with one or two large orders. · It is preferable to have small wicks. · Be aware of the spread. For the style of stocks I trade this means no more than 15 cents. This probably applies to all strategies. I also provide some thoughts based on my specific issues with the strategy. In general, I have two problems. One is knowing how to distinguish between a pull back and a reversal. Here is an example of a reversal where the trader went short around 52.38 but was on the wrong side of a reversal. So even though the price “broke out” of the opening range, this is an example of when you would not want to use the ORB. Here is an example of a good set up for an ORB. Ideally the trader would go long around 25.13 and manage the trade for profits until 26.13. My problems is the pull back to 24.88. As a new trader I don’t know how I would realize that the dip in price was just an adjustment and that I should stay in the trade. Based on my experience (third week in the simulator) I typically panic and cut my losses at 24.88. The other problem I have is mostly psychological. Currently I only trade from one screen which is a dell desktop (I have a mac laptop which I use for the chatroom). Because I only trade from one screen, I am only able to look at one stock at a time and I typically bounce around from stock to stock. Sometimes we have a pretty large watchlist which means I cycle through 9 or 10 stocks within seconds. Because I have a fear of missing out I tend to be undisciplined in my trading and usually enter two or three ORB trades at a time. Most often these trades are entered by observing price action only. This obviously isn’t smart trading so I am hoping there is something in the premarket or within the one minute charts that can help me focus on only 2 or 3 stocks at a time. If I can do this I can look at other indicators like volume, ATR, etc. to confirm a good setup. Here are my initial attempts towards addressing the mentioned problems. Keep in mind that this is just brainstorming and I have no idea what is good advice and what is not. Premarket. What do we look for in the premarket to help identify an opening range breakout? Everything on our watch list gaps at least 2 percent, but is there some sort of gap that is more indicative of an ORB? Are some gaps too big? If a stock experiences something extreme, like a 25 percent increase overnight, I would expect it to be bearish at the open. I assume a 25 percent return is too large to leave on the table. Are there candlestick patterns in the premarket that would suggest a breakout or breakdown? What about the daily levels? Do they tell us if we should expect a break out or break down? If our opening price is above all of the daily levels (y & yy close, y & yy open, PCL) should we expect an adjustment in the form of a bearish market or is this indicative of an upward trend? Is gap direction important? That is, if the stock gap upwards premarket should we should expect an ORB out? One minute chart: What do we want to see in the 1 min chart to help identify an opening range breakout? Is there a certain pattern we should look for? Higher highs and higher lows for an ORB out? Lower highs and Lower lows for an ORB down? If we see the first 5 mins has choppy 1 min candles, should we avoid this stock? Wicks: What about the wicks of the opening range? Andrew has mentioned to stay away from candles with very long wicks, but it seems intuitive to be on the opposite end of a long wick. For example, if we have a bullish candle stick with a long bottom wick and a short top wick I think there is a logic to go long because it suggests that the buyers are in control. Can we apply the ORB to a doji? I would think to go long on a on a bullish hammer and short on a bearish shooting star.