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Extreme Candles Stock Trading System
According to Steve Nison, who first brought the idea of Japanese Candlesticks to America from Japan, certain candlestick patterns work best at market highs or lows. With this in mind, I decided to develop a system that focuses on identifying patterns at extremes. To determine what an extreme is I use Bollinger Bands and look for candles that occur above Bollinger Band tops or below Bollinger Band bottoms.
I am currently doing most of my work with 5 minute real time charts. I use Metastock and custom Metastock formulas I've created to identify the candle patterns. In some cases, I use indicators based on other technical studies such as the Chande Momentum Oscillator.
Below is a chart showing 5 winning trades that were triggered for KLAC on 3/7/2003 using this system. Click here if you'd like to see a multimedia presentation on this system. The indicators were all created before 3/7/2003 and the buy sell signals were triggered automatically by the system.Whether you use Metastock or some other system, I think you may be able to benefit from using some of the trading ideas I present in this tutorial.
As you may notice, the candles have different colors. Metastock lets me highlight various candles with different colors depending on whether the criteria in a formula has been met. Here, themagenta color denotes a "squat" which shows that although volume has increased over the previous bar, the price movement from high to low has slowed down." (Bill Williams first identified the squat pattern.) aAfter a squat, the price often (but not always) reverses direction and the movement tends to be decisive. Usually the movement after a squat points to the direction the stock will move for the next several bars. For more information on squats, you may want to see the discussion about Bill William's Fakes, Fades, Squats and Greens.