Candlestick and Pivot Point Trading Triggers: Setups for Stock, Forex, and Futures Markets (John L. Person, 2006)

• Efficient market theory lends to the belief that markets are always priced correctly because the current price reflects all factual information. If the markets are efficient, then no fundamental information will give an investor an edge in the market.
• Random walk theory lends to the belief that price movements do not follow any pattern or trend and that past price behavior cannot be used to predict future price movements. In other words, the markets are completely unpredictable.
• History however can repeat itself.
• Basic questions
• Do market conditions warrant increasing or decreasing my position size? 
• Are there reports coming out that may impact the market or my posittion?
• Are my entry and exit targets justified?
• If the market is so bearish, why won’t it go down?
• If the market is so bullish, why won’t it rally?
• Money flow
• Prices reflect forces influenced by supply and demand factors.
• Prices represent the collective action of buyers and sellers who are dictating what the current price of a given product is perceived to be at a given time.
• Volume analysis
• Increasing volume in a rising price environment signals excessive buying pressure and could lead to substantial advances.
• Increasing volume while prices are falling may signal a bear move.
• Decreasing volume while prices are climbing may indicate a plateau and can be used to predict a reversal.
• Decreasing volume with a weaker price environment shows that fresh sellers are reluctant to enter the market and could be a sign of a future downtrend.
• Excessive volume while prices are high indicates that traders are selling into strength and often creates a price ceiling.
• Excessively low volume while prices are low indicates that traders are buying on weakness and often creates a floor.
• COT Report
• If non-commercials are net long, commercials are net long, and the nonreportable positions category is net short by at least a two-to-one margin, look at buying opportunities. In other words, go with the pros.
• If non-commercials are net short, commercials are net short, and the nonreportable positions category is net long by at least a two-to-one margin, look at buying opportunities.
• If non-commercials are net long, commercials are net short, and the nonreportable positions category is neutral, meaning not heavily net long or short, look at buying opportunities and stick with the smart money speculating non-commercials.
• Not all consolidation resume trend
• Moving average
• If prices are above the moving average, look to buy pullbacks or to take buy signals, as the market is in a bullish mode or in an uptrend.
• If prices are trading below the moving average, look to sell rallies or to take sell signals, as the market is bearish or in a downtrend.
• Stochastic
1. The first peak in prices should correspond with a peak in the %K and %D reading above the 80 percent level. 
2. The second peak must correspond to a significant higher secondary price high point. 
3. If the secondary stochastics peak is less than or under the 80 percent level, this signals a stronger sell signal. 
4. Prices should make a lower closing lower to confirm a trigger to enter a short position. Enter on the close of the first lower closing low or the next open. The protective stop should initially be placed above the high of the secondary high.
• Leading indicator (support / resistance)
• Pivot Point—the pivot point (P) is the sum of the high (H), the low (L), and the close (C) divided by three.
• P = (H + L + C)/3
• This is the focal price level or the mean that is derived from the collective market data from the prior session’s high, low, and close. It is the strongest of the support and resistance numbers. Prices normally trade above or below this area before breaking in one direction or the other. As a general guideline, if the market opens above the primary pivot, be a buyer on dips. If the market opens below this level, look to sell rallies.
• Resistance Level 3—R-3 = H + 2 × (Pivot – Low) or (P – S-1) + R-2
• Extreme bullish market condition generally created by news-driven price shock. This is where a market is at an overbought condition and may offer a day trader a quick reversal scalp trade.
• Resistance Level 2—R-2 is the pivot point number plus the high and minus the low.
• R-2 = P + H – L
• Bullish market price objective or target high number for a trading session. It generally establishes the high of a given time period. The market often sees significant resistance at this price level and will provide an exit target for long positions.
• Resistance Level 1—R-1 is the pivot point number times two minus the low.
• R-1 = (P × 2) – L
• Mild bullish to bearish projected high target number. In low volume or light volatility sessions or in consolidating trading periods, this often acts as the high of a given session. In a bearish
• market condition, prices will try to come close to this level but most
• times fail.
• Support Level 1—S-1 is the pivot point number times two minus the high.
• S-1 = (P × 2) – H
• Mild bearish to bullish projected low target number in light volume or low volatility sessions or in consolidating trading periods. Prices tend to reverse at or near this level in bullish market conditions but most times fall short of hitting this number.
• Support Level 2—S-2 is the pivot point number minus the high plus the low.
• S-2 = P – H + L
• Bearish market price objective or targeted low number. The market often sees significant support at or near this level in a bearish market condition and is a likely target level to cover shorts.
• Support Level 3—S-3 = L – 2 × (High – Pivot) or P – (R-2 – S-1)
• Extreme bearish market condition generally created by a news-driven price shock. This level will act as the projected target low or support area. This is where a market is at an oversold condition and may offer a day trader a quick reversal scalp trade.
• Simple moving average
• Market direction = (pivot + pivot + pivot) / 3
• After a downtrend, closing price > M/A = go long or exit shorts
• After an uptrend, closing price < M/A = go short or exit longs
• In order to execute a trade, you need to see a change in market direction and commitment from the market to illustrate a change in market direction by closing above or below the moving averages.
• You need to follow some simple rules, such as take buy signals at sup port and take sell signals at resistance
• Day trading
• I find the most reliable day trade signals are confirmed in the 15-minute time frame and triggered in the 5-minute time period as well.
• When both time frames are in sync with each other and when like markets have similar signals, this generates a higher probability trigger.
• Doji
• Buy on the close or on the next open after a new closing high is made from the previous doji candle high, especially when the market is against a key pivot point support target number.
• Place stops below the lowest low point of the doji. Stops should be initially placed as a stop-close-only, meaning you do not exit the trade unless the market closes back below the doji’s low.
• Sell or exit the trade on the close or on the next open of a candle that makes a lower closing low near a key pivot point resistance number.
• Sell on the close or the next time period’s open once a new closing low is made from the previous time period’s doji’s low, especially when the market is against a key pivot point resistance target number.
• Place stops above the highest high point of the initial doji candle. Stops should be initially placed as a stop-close-only, meaning you do not exit the trade unless the market closes back above the doji’s high.
• Buy or exit on the open of the first candle after the previous candle makes a higher closing high than the previous candle.
• Jack Hammer
• The hammer formed is a secondary low with the close at or near the primary low’s low.
• It does not matter whether the real body is formed with a higher close than open or positive assigned value; however, it is generally a more solid signal when the close is above the open.
• This action generally completes a bullish convergence in the stochastics or MACD oscillator.
• Buy on the close of the hammer or the next time periods’ open; initial risk is a regular stop below the hammer’s low.
• Give additional importance if this pattern develops near pivot point support targets, especially if there is a confluence of pivot support targets from different time frames.
• Stock traders should watch for an increase or a volume spike, which indicates an exhaustion bottom is confirmed.
• If the stop level is too great a distance, lower or reduce your contract size.
• Place hard stop below the low of the hammer candle.
• Scale out of positions when the market gives you a windfall profit, and move stops on balance of position above your entry price.
• Identifying what the market condition is—overbought or oversold bullish, bearish, or neutral.
• Identifying the levels that the pivot points lines are at, using the various time frames—monthly, weekly, and daily periods.
• Setting up your charting software parameters with these specific pivot points moving average values.
• Experimenting with variation settings on your own.
• System validity
• Total net profit
• This number tells you how much the system made after slippage, commissions, fees, and losses.
• Payout ratio
• This tells you based on a profit/loss the percent that winners outpace losers.
• Average number of bars for winners.
• This category shows what the average time period was  before the trade was offset in order to establish a profit.
• Win percent
• This figure shows how many winners versus losers were generated. 
• Kelly ratio
• A math calculation used to derive the number of contracts to trade in relation to the ratio of winning trades to losing trades.
• Largest win
• This figure shows the largest single winning trade. We look at this number to see if profits on a single trade are larger than 20 percent of the overall net profit. If it is, it indicates the trade signals may be invalid.
• Largest loss
• This category helps traders identify if single losses are bigger than winners so they can implement a better risk management approach.
• Average win trade
• This shows what to expect on the average-size winning trade.
• Average losing trade
• This shows what the average-size loss is. Return percent This is the percent of profit on the initial size starting account.