Seeing a failed confirmation

Figure 7-12 is a chart of an unconfirmed bullish inverted hammer of the stock for Caterpillar, Inc., the manufacturer of large construction equipment that trades under the symbol CAT. With a downtrend in place and after a down day, a bullish inverted hammer appears. But on the following day, the opening price isn't higher than the previous low or the low of the inverted hammer. The pattern's bullish signal isn't confirmed, and no trade should be initiated.

Figure 7-12:

An unconfirmed bullish inverted hammer on a chart of CAT.

Figure 7-12:

An unconfirmed bullish inverted hammer on a chart of CAT.

You may be asking, "Why look at a signal that ends up not being a signal at all?" This won't be the last candlestick pattern that requires some sort of confirmation on the opening or even the closing of the day after the pattern appears, so it's worth getting used to the concept. And you can also rely on similar confirmations when trading on some of the patterns I cover in previous chapters of this book. Instead of buying a close on a bullish signal, you can wait until the next day and buy the opening if it appears to be going in the same direction of the signal or doesn't negate the previous day's signal.

Finally, although I spend all my working days in front of monitors looking at charts and markets, most new or casual traders don't. Being able to look at charts outside of market hours and then being prepared to initiate a trade the next day can be very appealing for traders who can't or won't be glued to a monitor all day.

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