Trading based on long black candles

Now it's time to see how you can trade using long black candles in the real world. Figure 5-19 is near and dear to my heart because it represents a trade I actually executed while writing this book. This is a chart of the November soybean futures contract that trades at the Chicago Board of Trade. At the time, I wanted to take a short position in the soybean contract, but was waiting for a confirming trading signal or bearish chart pattern before I executed my position. The long black candle highlighted in Figure 5-19 provided the short signal I sought.

Getting a good bearish signal from a long black candle

I've noticed in the past that long white or black candlesticks are generally followed by continuations of their up or down moves more often with commodities than with stocks. Futures on commodities tend to have strong trends. This tendency makes me quicker to initiate a position in futures than in stocks. And by the same token, I'm usually quicker to concede that I'm wrong on a futures trade than on a stock trade. Keep these differences in mind and use them to your advantage. (Chapter 11 covers trends in more detail.)

Back to my soybean trade. For fundamental reasons, I was looking for a signal that told me to short the soybean futures contract. When I saw the long black candlestick on a particular day, I put on a short near the close of that day. I was quickly rewarded the next day, as another very bearish day followed.

Figure 5-18:

An opening black marubozu.

Figure 5-19:

A long black candle that provides a nice sell signal.

Figure 5-19:

A long black candle that provides a nice sell signal.

If things hadn't worked out as I'd planned, I still wouldn't have suffered big losses, because I also entered a protective order called a buy stop, which is the opposite of the sell stop mentioned earlier in this chapter (see "Understanding long white candles"). My buy stop level was the high of the long black candle — the resistance level that if broken, would negate the sell signal given by the long black candle.

Keep in mind that resistance levels are where chartists believe sellers will be brought into the market and keep prices from going higher. In candlestick charting, resistance is generally the highest level of one of the candlesticks that created a sell signal. After this resistance level is broken, the signal isn't considered valid anymore.

Luckily, that level was never reached, and the trade turned out to be a profitable one. I continued to monitor the short position from day to day and exited on the day indicated on the chart. The pattern for that day is a regular doji, which often signals the reversal of a trend. I cover regular dojis in more detail in Chapter 6.

Was this article helpful?

0 0

Post a comment