Risk Disclaimer

There is a very high degree of risk involved in trading. Past results are not indicative of future returns. SirIsaacPublishing.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information.

Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. By downloading this book your information may be shared with our educational partners. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of SirIsaacPublishing.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. 

Privacy Policy

Copyright © 2016 by Sir Isaac Publishing.  37 N Orange Ave STE 500 Orlando, FL 32801 http://SirIsaacPublishing.com All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Sir Isaac Publishing

J. Crawford, LearnToTradeForProfit.com

As I have often shared, the last thing a trader wants to be guilty of is chasing the market…

However, sometimes we do have the opportunity to capitalize on acceleration mid-move. 

The candlestick pattern I want to show you today is often a good indicator of that type of acceleration. 

[Speaking of patterns, My TOP 3 Price Action Pattern Report Can Be Downloaded Free Here] 

It’s not a strategy in itself, but it will go a long way in your arsenal as a weapon for fast-moving, momentum-filled price action. 

What is momentum trading? 

Momentum trading is piggybacking on a market moving strongly in one direction. The sharp move can be due to news, another type of event or just market volume and volatility. 

If you’re smart, you’ll avoid jumping into the market just because it’s moving fast and excitement is on the horizon. Yet, quick moving markets are some of the best opportunities for strong returns in a short period of the time, so we don’t want to stand idle and miss all of the potential. 

In this article, I want to give you an acceleration pattern I often look for in these types of conditions. 

Here’s the key: 

The majority of traders who jump into momentum moves lose money because they get shook out of the trade… 

Either they are so late that the market has a complete reversal or they simply jump into the market and can’t manage the trade so they get whipped out even if it does end up going in their direction. 

While this acceleration pattern is far from perfect and no strategy can eliminate the market knocking you out of a potentially good trade on occasion, it does give you an opportunity to take advantage of high-profit potential conditions with higher probability. 

With this pattern, you can jump into the midst of a strong move and still know it is very likely that the market will continue in your direction WITHOUT a big retracement which is key for being able to use a tight stop loss and still catch a portion of the move. 

In these examples, I’ll use a moving average as a guide as most of my readers prefer a visual aid to confirm direction. The pattern itself, however, is based on price action. The sample chart setup is shown below.

Defining the Pattern:

1. Three consecutive bars it should be above/below the 13 and the 20-period exponential moving average.

2. Prior to the signal bar, there should be a minimum of three bars forming consecutive higher highs and higher lows (or lower       lows and lower highs in a downtrend)

3. Our acceleration signal is the first bar that makes a lower high in the sequence (in an uptrend)

4. Once we see the “dip” we can potentially place an order to buy one tick above the high of the signal bar. If the next bar               breaks out above the signal bar, our order is filled and our trade is live.

5. The low of the signal bar would be the stop loss for the trade.

6. However, if the bar after the signal bar doesn’t move one tick higher than the signal bar, our trade doesn’t get filled and we         abandon the setup and start afresh.

Here’s an example:

Entry, stop loss and exit rules

1. For long positions, we place a buy order one tick above the high of the signal bar.

2. If the next bar to the signal bar doesn’t trigger the trade, we abandon the setup, because, many times, a break in momentum     can lead to a consolidation or a reversal. Hence, we want to enter only when the momentum reasserts itself after a pause of     one bar.

3. The initial stop loss for the trade is just below the low of the signal bar.

4. As long as momentum continues, you may choose to trail the stop loss 1 bar behind the current live bar or simply keep an         eye on the trade and click out when you see momentum fading.

Why does this pattern work? 

Once price is above the short-term moving averages, it signals a trend. Three consecutive bars with higher highs and higher lows, signal a momentum build up. 

Intraday traders and scalpers tend to take profits when they get a windfall. On the other hand, the short sellers are looking to short, as they believe that the trade is overextended. 

The market LOVES to crush over-aggressive reversal traders which is often why we see a short, small pause before an additional run that kills those positions. 

Being on the other side gives us a quick momentum-filled trade in our direction. 

Example of a short trade 

This setup works equally well in a falling market as it does in a rising market, as shown in the chart below:

The EUR/USD starts to drop and we get our signal bar after three consecutive bars, which make lower lows and lower highs. Our signal bar doesn’t make a lower low. We place a sell order one tick below the low of the signal bar, which gets filled and our trade is live.

Our initial stop loss is one tick above the signal bar. We trail our stops higher and book profits when our price objective is met. 

A few more examples 

An example of a trade which did not meet our rules, hence, was filtered out.

At times, the next bar after the signal bar fails to break above the signal bar, as shown in the chart above. According to our rules, we leave the trades and don’t chase them.

Sure, sometimes they still work out wonderfully like above… But we’re simply playing the odds with this setup and the percentages say that a break of the high from the next bar increases the odds of a higher run up. 

Another example of a long trade:

The set up not only works on currency pairs, it works equally well for stocks exhibiting momentum, as shown in the charts below.

Long setup on the 5-minute chart of Apple:

An example of a long setup on the 15-minute chart of Facebook:

A quick roundup...

This is a pattern best suited for momentum markets. Spotting the pattern is pretty straight-forward with a little practice.

1. Set up the chart with 13 and 20-period exponential moving average.

2. For long trades, the price should be above both the moving averages.

3. Look for three successive bars which form higher highs and higher lows. This confirms momentum and trend.

4. Now look for the bar, which fails to make a higher high in the sequence of the trend. This will act as our signal bar.

5. As soon as we locate the signal bar, we place a buy order one tick above the high of the signal bar.

6. The next bar after the signal bar should move higher and fill our trade. If it does, our trade is live.

7. We place the stop loss, one tick below the low of the signal bar.

8. Our target is to take profits when price reaches two times the initial risk.

Important final notes... 

Note that this is a potential opportunity and not a strategy unto itself. 

That’s because I am giving you a narrow look at a price action signal. I don’t know all the other conditions of a given pair or instrument. 

I don’t know the longer term trend, key support and resistance areas, etc. 

So this is simply a pattern to look out for and NOT a strategy you should use as stand alone. 

That said, once you get good at identifying this pattern in momentum markets, I think you’ll be able to utilize it with your strategy very effectively.

Free Bonus Report

If you enjoyed reading this article, please accept my Lazy River Scalping Strategy with my compliments.

Back to Table of Contents

Staff Writer, ChartExperts.com

Picture a bungee jumper diving off a bridge. He drops into a free-fall completely trusting the cord attached to him. As  he reaches the  bottom of his descent, the cord starts to stretch, until the elasticity reaches its peak. Then in an instant.  he get's propelled back up ward with high velocity.

Can This Simple Law of Physics Help You Uncover Huge Moves in Stocks? 

It's quite possible. In fact, it happens more often than you might think. Like the bungee jumper in the picture above, a stock will make a move to the downside, pause, and then make an explosive move to the upside, often times with 100% gains or better. 

This move is identified by a simple "hook" pattern:

This hook pattern is coincidentally named after a physicist named Robert Hooke centuries ago, and his formula will be addressed a little bit later in this article. But Hooke's Law can help investors find very impressive returns of more than 100%, and it happens quite frequently.

Let's take a look  at U.S. Steel Group from February to March 2016:

Between February 11 and March 10, its stock price more than doubled, rising 115% in just 28 days.

But if you’d been following steel at the beginning of this year, you wouldn’t have expected anything like that from this company.  

Demand for steel was down dramatically. China was trying to sell their own unused steel at discount prices. And over the previous months, the industry cut hundreds of jobs.  

So to the average investor, U.S. Steel would have looked like a bad bet.  

But if you knew how to spot the Hooke Pattern, you’d have seen this in an entirely different light. Because in early February, the blue line began rapidly diving toward the red line.  

And right here, on February 11, they met. Immediately after, watch what happens… the Hooke Pattern forms and the stock explodes. It surges 115%.

Around that same time, February 9, we see the same thing happening in a lesser known company, Ion Geophysical.

Ion Geophysical provides geological services to a number of industries, including Oil & Gas drillers.

Now, just like with steel, the entire oil industry was taking a beating. And on the surface, Ion looked even worse than most of its competitors. Their VP and Treasurer recently jumped ship, and Bloomberg said Ion was a member of the “Junk Debt Army.” Again, an average investor might not have taken the stock even if you bought it for them.  

But the Hooke Pattern was telling a different story. At the bottom of the chart, you can see the blue line bouncing off the red line. Just like the bungee jumper, this stock had stretched to its limit, and then propelled itself upward from #3.87 to $9.42 per share for a profit of 143%  

Tesla did the same thing in the face of negative news in 2013:

Which must have come as a surprise for the big banks and media outlets that were predicting Tesla’s demise.

- JP Morgan analysts said Tesla was “fraught with risk.”  

- Business Insider declared: “The Electric Car Is Dead.”  

- And even the NASDAQ – the exchange where Tesla’s stock is listed – reported that this company is “a cash burning     machine.” The press and the so-called experts had written Tesla off.  

And this caused too many Americans to miss out on this stock. 

But the story would've been completely different if they knew how to spot the Hooke Pattern.  

You can see the blue line on your screen quickly moving toward the red line. Then on April 9, it reaches the bottom and forms that distinctive Hooke Pattern. 

You would have pocketed a 127% profit in just 34 days.

Learn How the Hooke Pattern Allowed  a Chemical Engineer to Quit His Job, 
Launch a Hedge Fund, and Make More Money Than He Ever Dreamed Possible. 

Get the Full Hooke Pattern Report Here

D.R. Barton is not a Wall Street Insider. He was a Chemical Engineer working at DuPont. Like many, he had a 401(k) account and started to dabble in investing. The problem was... he wasn't any good at it.

His trading was erratic and none of his outcomes were repeatable. An engineer without a system. He read multiple books on fundamental and technical analysis. He studied charts and developed spreadsheets. All  of his study of the markets still yielded inconsistent results. 

He came to understand that he wasn't an economist, he was an engineer who understood physics. 

Physics is far more accurate than economics. Nobody questions Sir Isaac Newton's Law of Gravity or Einsteins's Theory of Relativity. 

This brought Barton to another law of physics that nobody questions: "Hooke's Law"

Let's go back to our bungee jumper.

- When he jumps off that bridge, gravity begins pulling him down. That’s F. 

- There’s another force in play here. That’s k, or the elastic resistance of the bungee cord.   

- If you divide F by k, it gives you X. This is what I call the Zero Line.    

This is the point where all the downward movement grinds to a halt, the momentum shifts, and the person springs rapidly back upward.

It’s simple physics.

And there it is. That Hooke Pattern should look familiar by now.  

Now, obviously no stock can actually be impacted by the laws of physics that we learned in high school science class. 

So Hooke’s Law itself will not tell you what a stock is going to do.  In order to adopt this formula to the stock market, Barton  had to add some other minor calculations to round out his strategy.  

And it worked like a charm. Better than he ever thought possible.  

For the past 26 years, the Hooke Pattern has appeared 
just before huge leaps in ordinary stocks.  

Let look at exactly how this works with a stock from his early days analyzing this pattern. This is a one-year chart of Amgen from 1998 to ’99.

From the beginning of April to the end of July, you can see the stock rise about 40%.

Then it pulls back significantly in August. But at the end of the month, seemingly without warning, the stock begins a 175% surge.  

Now most people would have never seen this coming.  But you could have by remembering one simple rule:  

Always wait for the Hooke.  

Look at the box below Amgen’s chart.

The blue line at the bottom is a day-by-day measure of how far away the stock is from its 20-day moving average.

In other words, that’s the stock’s elastic resistance (k) on any given day.  

Now, look right here at the end of August…

You can see the stock pull back very quickly.

- The speed of that movement gives us the stock’s Force (F). 

- Now, if you divide that Force (F) by the resistance (k), you can determine the Zero Line. 

Again, that's the red line right at the bottom.  

Once the stock hits the Zero Line, it can’t go any further. And as you can see here, once the Hooke Pattern appears, the stock’s price does exactly what we expect.  

It rapidly shoots upwards!

In this case Amgen rocketed up 175%.

And this happens over and over again…  

Here are a several more examples where you could have 
used the Hooke Pattern to identify extraordinary opportunities:

How can you determine which stocks to target?

D.R. Barton built a custom screener that searches for any stock that’s exhibiting the Hooke Pattern.  

It can be listed on the New York Stock Exchange or NASDAQ…  

It might be a big company on the Dow Jones or S&P 500… or it could be a small cap or midsized company.  

Anywhere the Hooke Pattern develops, the system will find it.  

But on its own, the Hooke Pattern won’t tell you how far or how fast you can expect the stock to move.  

Using the data gathered by the system, Barton personally vets each stock and identifies the most promising opportunities.  

And he screens only opportunities that have the potential to at least double in under a month.  

So here’s how he determines whether or not a company has the potential to meet this lofty goal.  

He built five unique milestones into his screener.  

If the stock meets at least four – then it’s locked and loaded.  

Here are the Five Milestones: 

1. Massive Momentum. First the system looks at the stock’s long-term momentum. Meaning, if the stock is in an established         upward trend before we see the Hooke Pattern that will accelerate our profits.   

2. Buying Trends. Second, it looks at the buying trends. If the stock is overbought, then it’s going to have a hard time making         a quick move upward. But if it’s oversold when the Hooke Pattern appears, then we can expect a fast move upward.   

3. Sector Strength. Third, it looks at the market sector. If the Hooke Pattern appears with a stock in a sector that’s trending up,     it’s a sign the price can move faster than normal.   

4. Price Range. Fourth, the system checks the stock’s average price range. If it’s already made big jumps in short periods of         time, that’s a good indication that it can happen again.   

5. Volume Action. And finally, the system looks at volume. Basically how many people are trading the stock. If the volume is         lower than normal, it means there’s a lot of room for people to pile in behind us as that stock begins to climb – and that can       really accelerate our profits. 

So to recap – my screener identifies stocks that exhibit the Hooke Pattern – it then qualifies them using these five milestones – this lets me quickly review everything – and if it all checks out, I pass on my recommendation. 

THE SPECIAL OFFER 

Click Below to get instant access to the complete Hooke Pattern Report, and learn how you can start getting alerts to Hooke Pattern opportunities tomorrow!

Back to Table of Contents

Stephen Bigalow, CandlestickForum.com

POWERFUL  IMPLICATIONS OF GAPS

How Do They Produce Profits With Candlesticks? 

Gaps (Ku) are called windows (Mado) in Japanese Candlestick analysis.  A gap or window is one of the most misunderstood technical messages. Most investment experts advise not to buy after a gap. 

This is true only about ten percent of the time. The other 90% of the time, the gaps will reveal powerful high profit trades. Candlestick signals, correlated with the appearance of gaps, provide valuable profit-making set-ups. 

What is the best investment you can make? Simple! Learning investment techniques that make you independent of having to rely on any other investment consultation. You can easily learn and quickly master common sense analysis that will dramatically improve your returns for the rest of your life. You will feel confident in every trade you put on. No more “hoping” that a trade will move in your direction. The unique built-in forces encompassed in the candlestick signals and the strength of a move revealed by the existence of a gap produce powerful trade factors. You can rest easy! Obtaining the knowledge that this combination of signals reveals will produce consistent and strong profits.

These are not “hidden” secret signals or newly discovered formulas that are just now being exposed to the investment world. These are a combination of widely known but little used investment techniques. Candlestick signals obviously have a statistical basis to them or they would not still be in existence after all these centuries. Gaps have very powerful implications. Combining the information of the two produces investment returns that very few investors take the time to exploit. 

Dissecting the implications of a gap/window makes its appearance easy to understand. 

Once you understand why a gap occurs at different points in a trend, taking advantage of what the gaps reveal becomes highly profitable. Where a gap occurs is important. The ramification of a gap in a chart pattern is an important aspect to Japanese Candlestick analysis. Some traders make a living trading strictly off of gaps. 

Consider what a window or gap represents. In a rising market, it illustrates a price opening higher than any of the previous day’s trading range. (For illustration in this book, the “day” will be the representative time frame.) What does this mean in reality? During the non-market hours, something made owning this stock tremendously desirable. 

So desirable that the order imbalance opens the price well above the prior day’s body as well as the high of the previous day’s trading range. As seen in Figure 1, note the space between the high of the previous day and the low of the following day. 

Figure 1 - Illustration of a gap.

Witnessing a gap or window at the beginning of a new trend produces profitable opportunities. Seeing the gap formed at the beginning of the trend reveals that upon a reversal of direction, the buyers have stepped in with a great amount of zeal. A common scenario is witnessing a prolonged downtrend. A Candlestick signal appears, a Doji or Harami, Hammer, or any other signal that would indicate that the selling has stopped. What is required to verify that the downtrend has stopped is more buying the next day. This can be more solidly verified if the next day has a gap up move.

Many investors are apprehensive about buying a stock that has popped up from the previous day’s close. A risky situation! Yet a Candlestick investor has been forewarned that the trend is going to change, using a signal as that alert. A gap up illustrates that the force of buying in the new upward trend is going to be strong. The enthusiasm shown by the buyers trying to get into the stock demonstrates that the new trend should have a strong move to it. Use that gap as a strength indicator. 

Gaps occur in many different places and forms. Some are easy to see, some are harder to recognize. This chapter will focus on a few situations where a gap has appeared. Each situation will be explained in detail, (1) to give you a full understanding of what is occurring during the move and (2) to provide a visual illustration to become familiar with the formation, making it easy to recognize. This allows the Candlestick investor to spot an investment situation as it is developing. 

GAPS AT THE BOTTOM 

Knowing that a gap represents an enthusiasm for getting into or out of a stock position creates the forewarning that a strong profit potential has occurred. Where is the best place to see rampant enthusiasm? At that point, you are buying near the bottom. Obviously, seeing a potential Candlestick “buy” signal at the bottom of an extended downtrend is a great place to buy. In keeping with the concepts taught in Candlestick analysis, we want to be buying stocks that are already oversold to reduce the downside risk. What is better to see is the evidence that buyers are very anxious to get into the stock. 

Reiterating the basics of finding the perfect trades, as found in my book “Profitable Candlestick Trading”, having all the stars in alignment makes for better probabilities of producing a profit. Consider the Housing construction industry mid September 200l. The indexes were bottoming out after the 9/11 debacle. 

The Housing stocks indicated the best evidence of capital inflow. The initial move to the upside was evident with a large number of good signals found in those stocks after doing a scan of the charts. Investors were really liking the residential home builders. This is clearly seen in Figure 2 - CTX, Centex Corp. It gapped up the same day, illustrating that buyers were coming into this stock with a vengeance. The initial gap is very important. It will indicate how strong the new move will be. 

Figure 2 - Centex Corp.

Upon witnessing a gap up, an individual signal, such as the dark candle in the above chart after the gap up, has less relevance. When a large gap occurs, it is not unusual to see immediate selling as the traders take their quick profits. The overall message is that the bulls are in strong. The next few days demonstrated that the price was not going to back off, the new trend had started.

The long-term investor, after analyzing the monthly chart, could have established a position, with the knowledge that funds were flowing into this sector with much more enthusiasm than other sectors, which could have been just rising with the overall tide. A great indication for where to position your funds! 

MEASURING GAPS 

A gap that occurs well after the beginning of a trend reversal, where stochastics are still in the midrange of an uptrend, has different implications. How do you distinguish whether a gap is a potential measuring gap? Evaluate where the stochastics are in the trend. If they are still relatively low, the trend has more room to create another gap before getting to the overbought area. Note in the CTX chart, Figure 9 - Centex, how the trend started with a small gap up. The next few days, another gap forms, in the midrange of this trend. The bears could not push prices back down through that gap over the next few days.

Eventually the bulls gapped up the price again. Notice that the beginning of the trend up to the first gap [B] is about the same price movement as the move after the second gap to the top of the trend [A]. This simple measurement gives the gaps their name. The telling ingredient is the fact that the bears could not push prices back down through the first measuring gap. That factor gives the bulls renewed confidence and they step back in. The next day they gap it up again due to not being afraid of the bear camp.

GAPS AT THE TOP 

The gap that appears at the top of a trend is the one that provides the ominous information. Remembering the mental state of most investors, the enthusiasm builds as the trend continues over a period of time. Each day the price continues up, the more investors become convinced that the price is going to go through the roof. The “talking heads” on the financial stations start to show their prowess. They come up with a multitude of reasons why the price had already moved and will continue to move into the rosy future. 

With all this enthusiasm around, the stock price gaps up. Unfortunately, this is usually the top. Fortunately, Candlestick investors recognize that. They can put on exit strategies that will capture a good portion of the price move at the top. Consider the different possibilities that can happen when witnessing the gap up at the top of a sustained uptrend. Most of the time the gap will represent the exhaustion of the trend, thus called an Exhaustion Gap. Or it could be the start of a Three Rising Windows formation. Or big news, a buyout or a huge contract is about to be announced. 

What are the best ways to participate in the new potential, if there is any, at the same time knowing that the probabilities are that the top is in? A few simple stop-loss procedures can allow you to comfortably let the price move and benefit from the maximum potential. Hopefully, in the description of the gaps occurring at the exuberance of an extended trend, you have already experienced a substantial gain in the position. Any gap up is adding to an already big gain. Probabilities dictate that this is the top. Possibilities could include more upside gains. 

Upon a slight to medium gap up, the Candlestick investor should put their stop at the close of the previous day. The thinking being that if the price gapped up, indicating that the top is in, and the price came back down through the close of the previous day, the buying was not sustained. If so, the stop closed the position at the level of the highest close in that trend. 

Look at Figure 10 - NXTP, Nextel Partners Inc. If you had bought the stock the day after the Harami signal, showing that the selling had stopped, the open may not have been the strength wanted to show that the buyers were stepping in. After the price opened lower the next day, not showing resumed buying, a good spot to put the “buy stop” would be at the closing price of the previous day. The thinking being that if the price, after opening lower, came up through the closing price of the previous day, then the buyers were still around. Buying price = $4.50. 

After a few weeks, the price starts to accelerate and finally they gap it up. News was probably looking very rosy at this point. Now the Candlestick investor is prepared. Knowing that a gap up at the top indicates that the top is near, they can implement strategies to maximize profits. Most investors will know that their position is up almost 100% in three weeks. 

That is not the type of move that will be missed by most. Upon seeing the bigger price days and volume picking up, the Candlestick investor will be ready for any sell signals that appear. 

When the gap open appears, a number of strategies can be put in place. First, a stop loss can be put at the closing price of the previous day. If prices start falling off immediately and come down through the previous day’s close, then the bears have taken control. You are out at the high close of the uptrend. In this case, as the price moves up, it would be safe to put a stop at the open price.

A fundamental change might be in progress. The same rationale as putting a stop loss at the previous day’s open, if the price comes back down to and/or through that level, the sellers probably have taken over control. Otherwise, if the stock price continues higher, it may stay in a strong spike move for the next few days. Knowing that the stochastics are now well into the overbought area, and the price was running up after a gap, selling one half of the position would be a prudent move. Probabilities say that this is near the top. There is always the low percentage possibility that new dynamics are coming into the stock price, an announcement of a new huge contract or a possible buyout offer, something new and different from the dynamic that ran the price up to these levels in the first place. A surge of buying may create a “Three Rising Windows” pattern, moving prices to much higher levels. The probabilities of this occurring at the top of a trend are very small but feasible.

Moving the stop losses up to each close or next day’s open price maximizes the potential profits from that trade. 

As seen in NXTP, a Shooting Star formed, definitely a sell signal. If the price opened lower the next day, the position should be liquidated immediately. That is what the Shooting Star is telling you, that the sellers are showing up. The next day opened higher and stayed up all day. Things still look good. However a Hanging Man formation appears the next day. This is where the Candlestick investor should be thinking, “a Shooting Star, a sell signal, now a Hanging Man, another sell signal, be ready to get out.” The next day after the Hanging Man, a lower open should have instigated the liquidation of any remaining position. At worst, the average selling price should have been in the $8.10 area. The gap was the alert signal that positions should be liquidated. This trade produced an 80% return over three weeks. Now go find another bottom signal. 

SELLING GAPS 

Now turn the tables over. The same enthusiasm demonstrated by a gap to the upside is just as pertinent for sellers on the downside. A gap down illustrates the desire for investors to get out of a stock very quickly. Identifying clear Candlestick “sell” signals prepares the investor for potential reversals. The Doji at the top, Dark Clouds, Bearish Engulfing patterns are obvious signals to be prepared for further down moves. The Doji is the best signal to witness a trend reversal. 

The Doji should stand out at the top of a trend just like a blinking billboard. Note the Doji at the top of the ISSI, Integrated Silicon Solution chart, Figure 13. The Candlestick investor would have already been prepared upon seeing that a Doji was forming that day as the close was getting near. At worst, the position should have been liquidated when the pre-market indications showed a weak open.

The existence of the gap down demonstrates an urgency to get out of this position. Being prepared for this event prevented giving back a major portion of profits.

GAPPING PLAYS 

As always, there are exceptions to all rules. The Gapping Plays are those exceptions. As previously discussed, the gap at the top of a trend is the exhaustion gap. The same is said for the gap at the bottom of a trend. The appearance of those gaps is either the last gasp exhilaration (at the top) or the last gasp panic (at the bottom). However, the Gapping Plays represent a different set of circumstances at the top or bottom. 

After a strong run up, it is not unusual to see a price back off and consolidate before the next leg up in a rally. This could be in the form of a back off in price or a backing off from further advance. The latter is a period of the price trading flat at the high end of the previous uptrend. After the flat trading period, a new burst of buying, causing a gap up, illustrates that the buyers have not been discouraged. This new buying is evident by the gap up. As a gap expresses enthusiasm, this is usually the reinstatement of the previous move, taking prices up to a new level. 

As seen in Figure 16 - ITG, Investment Technology, the gap up after prices had stayed flat and at the top end of the last large white candle, for about a month and a half, finally convinced buyers that the sellers were not around. The gap up should have alerted the Candlestick investor that prices should be moving up to a new level. This becomes a High Level Gapping Play.

The same is true for a declining trend. After a significant downtrend, prices level out. Once the sellers are convinced that there are no buyers around to move the price up, they can sell again with confidence. This confidence is seen in the gapping down of price. At that point, much lower prices can be expected.

SUMMARY 

Gaps have always played an important part in technical analysis. The movement away from the previous trading range signifies an extraordinary shift in investor sentiment. This shift can be more in the same direction as well as a complete reversal of the existing trend. Most important is that a gap has many ramifications. As illustrated in this chapter, gaps identify the force that can start a strong rally, or it can signify that final gasp of enthusiasm. The Japanese observed these movements over hundreds of years and accurately identified the results when combined with the signals. 

With today’s computer capabilities, it is easy to do searches that specifically track gapping situations. Investing in these situations alone can make for a high-profit trading program. Putting the probabilities heavily in our favor, using Candlestick signals to identify a direction and a gap demonstrating inordinate force, will provide a source of profitable trades that no investment advisor is capable of doing. Most investors search years for an advisor, broker, newsletter, or guru that will lead them to consistently profitable trades. The well-versed Candlestick investor has a constant treasure trove for generating big profits. These are not hidden secrets. Yet, the combination of these investment tools have not been utilized by most investors. Having the backup of centuries of actual participation in this profitable combination takes the guesswork out of investment decisions. 

The Candlestick Forum, www.candlestickforum.com. distinguishes itself from other Candlestick sites by enlightening investors to the actual implementation of profitable Candlestick trading strategies. Isn’t that the foremost purpose for your investment plan, finding the best possible places to put your funds? 

Remember, these signals, formations, and philosophy are not the results of some quick, thrown-together back-tested investment program. The investment concepts portrayed in this chapter are the results of hundreds of years of visual observations confirmed with actual profitable experience. Once you have observed the results of a gap up discovered by your search, you will lose past thought processes such as “it is not wise to chase a stock”. A gap up is the indication that a new trend may be starting when it occurs at the bottom. It also warns the investor when the exhaustion buying is occurring, showing the end of the trend. 

You can exploit profits that the common investor will shy away from. You will find profitable trades that most investors do not fully understand. Your wealth will be multiplied by common sense placement of funds, the same opportunities that the rest of the investment community has been advised to avoid. 

You have this knowledge. Use it. If you are a member of the Candlestick Forum, utilize the expertise of the staff. If you have questions about a particular trade or formation, e-mail us. Why experiment when you can learn directly from decades of experience? 

THE SPECIAL OFFER 

Sign up for Stephen’s free video training The Art of Trading Using Profitable Gap Analysis below. In his mini-course you'll discover unique ways to watch "what happens next" with mega-moving stocks, and learn how to catch the "meat of the move"... which, with these behemoths, could mean further 400-1,000% profits in your pockets. 

ACCESS THIS FREE VIDEO TRAINING NOW TO DISCOVER: 

What gaps are and why they are one of the most powerful trading indicators... Why you should be prepared for big price moves based on the location of gaps... The 4 BASIC GAPS and how to identify them... The 2 DIFFERENT BENEFITS that gaps provide to the candlestick investor... How to use other confirming indicators along with gaps to gauge the magnitude of the next price move...