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Pivot Basics:

Trading into a pivot increases risk. Trading long into an overhead pivot acting as an area of upside resistance is dangerous because the market has already told us that this pivot represents an area where a significant number of sellers are sitting. Trading short into a pivot acting as an area of support is dangerous because the market has already told us that this pivot represents an area where a significant number of buyers are sitting. We suggest that in general that you avoid taking a trade that requires a pivot to break, before the trade becomes profitable.

When to anticipate a break of a pivot:

Unlike the areas of support and resistance created by Market Profile, each time a pivot is tested and rejects price it becomes weaker: some of the buyers or sellers sitting in this area are “spent”, weakening the support/resistance area. The third test of a pivot will oftentimes lead to a break and continuation of price to new highs or new lows.

The candlestick formation entry that can be anticipated to break a pivot:

The single most powerful entry signal is one out of Consolidation. Day traders must leverage this entry signal to their best advantage. Consolidation occurs when the power of the bears and the power of the bulls is equal: a period of low volatility. Four or more candles trap traders in both the long and short direction. When consolidation terminates, the break out occurs almost always in the direction of the trend and is powered by two forces: the addition of more buyers/sellers and the fact that the move stops out traders caught in the countertrend direction. Thus, the move out of consolidation occurs with great force and has the power to break pivots.

Conclusion:

The Pivot-trading indicator created via an appropriate algorithm act as strong areas of support or resistance. Trading into them can be fraught with danger and lead to losing trades. Anticipate a pivot break only on a third test or on a trading entry out of consolidation.

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Market Profile Basics:

The VAL and VAH encompass approximately 67.66% of volume at price. This is defined as fair value for the given financial instrument. The POC represents the price where the most volume has crossed at a given price. It acts as a magnate for price and price is drawn to this area (regression to the mean). If you put up higher time frame charts you will see that the VAL and VAH oftentimes correlate with significant trend lines (50-period SMA).

Test of the POC, VAH and VAL:

Traders should never trade into the POC, VAH and VAL. These areas of support and resistance may hold and create a losing trading. You’re goal in day-trading is to avoid (trading into them) risk at all costs.

Re-Test of the POC, VAH and VAL:

When any of these trend lines are broken, traders should look for a retracement and re-test of these areas. If a bounce off these trend lines occur with the appropriate type of Japanese Candle Stick formation utilized as your entry candle a trader can get a successful trade: many of them being very big trades.

Regression to the Mean:

The POC represents the price at which most contracts have been exchanged. This POC acts as a price magnate. Price will always try and regress to this mean price.

There are many Japanese Candlestick patterns described in the literature to help day traders and swing traders create profitable trades. They can be broken up into two groups. The first is a trend reversal signal, i.e., a market top or bottom. The second group signals a trend continuation. We are going to only examine the signals in the second group. At Right Line Trading we do not believe that any set of indicators or Japanese Candlestick patterns can reliably call a market top or bottom: we exclusively are trend traders.In this video we are going to look at three Japanese Candlestick patters that are powerful predictors of trend continuation. They are called the “Engulfing Candle, Piercing Candle and Dark Cloud Cover Candle”. These are candles you want to use to enter a trend. They all exploit traders taking a countertrend position.

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Japanese Candle Stick Basics:

The candle-body is the key element that we look at when evaluating a candlestick formation: very rarely is the wick utilized. A large body in an up candle indicates significant buying strength and a large body in a down candle indicators significant selling strength.

The ABC Candlestick Pattern:

In an uptrend for example, sellers will create a countertrend candle. The long trend is designated “A” and the pull-back candle designated, “B”. The B-candle will be followed by a “C” engulfing candle in which the high of the C-candle body equals or exceeds the high of the B-candle body and the low of the C-candle body equals or exceeds the low of the B-candle body.

Dark Cloud Cover – Piercing Candle

These are trend continuation signals in which the continuation candle body does not engulf the previous counter-trend B-candle but at least pierces its candle body ½ of the way to the upside on a long trade or covers the B-candle at least ½ of the way to the downside on a short trade. These are also signs of strong buying and selling enthusiasm respectfully.