Beruflich Dokumente
Kultur Dokumente
$
By
Stephen Bigalow
Green Flag
Your One True Signal For Fast Profits
A lot has been written through the years regarding Candlestick patterns
especially the Doji pattern. Of all the Candlestick patterns, the Doji pattern
appears the most often. The Doji represents indecision on the part of
traders and it occurs when the open (or the first trade of the day) and the
close (or the last trade of the day) are almost the same price.
The word almost must be emphasized because the open and the close dont
have to be exact. In fact, its rare that the prices are exactly the same.
When a stock or an index has been declining and reaches an oversold
condition, its quite common for these declines to come to an end with the
appearance of a Doji. At a market bottom, because a Doji pattern indicates
indecision, it must be confirmed on the following bar by positive price
action. If this positive price action results in an open above the high of the
Doji bar, it creates a price gap. We refer to this formation as the Green Flag
Doji Gap pattern.
So Easy to Spot
A 2-Year Old Can Do It!
(Fig. 1)
October 16th was a rewarding day for those initial UNH buyers as the stock
opened well above the high of the Doji day leaving a very sizeable price gap.
At a price of 85.39, the Doji pattern is confirmed by a close above the open
as well as a close above the T-Line.
(Fig. 3)
Finally, on November 7th, as the stock closes below the T-Line our trade
comes to an end at a price of 93.61.
trading at 85.39, the 85 strike price is our best choice. As for the
expiration month, because the Green Flag pattern is so effective,
4 to 6 weeks is usually enough time for a low risk trade. The
November 22nd 85 Call was trading at 2.83. At the end of the trade,
on Nov. 7th the option was valued at more than 11.00 representing
a gain of roughly 290%. Two options could have been purchased
for $566.00 before commission.
Or finally, we could have purchased a Debit Spread by buying the
November 22nd 85 Call and selling the November 22nd 90 Call. Just
before the close on Oct. 16th, the value of this spread was 2.03. On
Nov. 7th, the value of this spread was just under 5.00 representing a
gain of roughly 145%. Three of these spreads could have been
purchased for $609.00 before commission.
Below is a question, but before you answer it, go back and take another look
at the three choices listed above.
Of the three choices, which trade would have offered the most reward
while carrying the least amount of risk?
Before answering, here are a few more things to consider:
If wed have purchased the stock, our profit before commission would have
been $57.54. But if the trade had not worked out and UNH had declined, our
stop would have been the low of the Doji bar (or 80.72). Based on an entry
of 85.39 and an exit of 80.72, our maximum risk before commission would
have been $4.67 per share or roughly 5.5%.
Our second choice would have been to purchase two Call options for $566.
Had we made this choice, our profit before commission would have been
roughly $1,600. Our stop would have remained the same. Wed have closed
our trade when the stock reached a price of 80.72. In the case of options,
its very difficult to estimate what the value of the Calls might have been had
the stock traded down to 80.72, but a good guess would be a loss of $350 to
$400.
When purchasing Call or Put options, a good rule is to limit your
loss to 50% of your cost of purchasing the options. In this case,
Had we taken the third choice and purchased three Debit Spread contracts
for $609, our profit would have been just under $900. Again, our trade
would have been closed when the price of the stock reached 80.72 or if the
value of the Debit Spread contracts reached a 50% loss of $304.50.
Now, back to our question. Which trade would have offered the most reward
while carrying the least amount of risk?
Theres actually no best answer to this question. There are many
variables, and each persons risk profile is different from everyone
else.
For inexperienced or very conservative traders, the best answer is
choice #1, the purchase of stock.
However, for individuals who choose to purchase options, we prefer
choice #3 over choice #2. In our opinion, a properly structured Debit
Spread is much less risky than the outright purchase of Call and Put
options.
If youre a user of the TC2000 service, the software code above will allow
you to search thousands of stocks for a Doji pattern that completed today.
For actual trading, youll need to make sure that the buy signal has been
confirmed the next day by a close above the open.
If the open on the confirmation day is above the high of the Doji, it creates
a Green Flag Doji Gap. We prefer to wait until the close of the Doji Gap bar
to make sure the close is above the open.
___________________________________
The software code for Think-Or-Swim and TradeStation can be found in the
Appendix.
___________________________________
The first trading day of 2015 came on a Friday. Because many traders were
still enjoying the holiday combined with the fact that it was a Friday, many
stocks finished the day with indecision patterns.
(Fig. 4)
One such stock was Merck (symbol MRK). The mild December selloff left
MRK in an oversold condition and the stock ended the day closing very much
near the open creating the typical Doji pattern.
10
On Monday January 5th, buyers pushed MRK higher resulting in a gap above
the high of the previous trading day. This very simple one-two combination
of a Doji day followed by a gap open above the high of the Doji bar is what
makes my Green Flag pattern.
(Fig. 5)
But as we can see in the chart above, by the end of the day, sellers took
control and the stock finished the day very much near the open resulting in
a second Doji pattern.
An important part of this gap up day was the fact that the close was above
the T-Line. Although the indecision remained, the Green Flag pattern
combined with a close above the T-Line was a positive event for the stock at
a price of $58.04 per share.
11
(Fig. 6)
12
As the trade continued to develop, within a few days, the stock reaches an
overbought condition as the Stochastic Indicator moves up through 80.
(Fig. 7)
14
During very indecisive times, a stock can experience a series of several Doji
patterns in a matter of a few days.
(Fig. 8)
15
(Fig. 9)
16
After a confirmed Doji Gap formation, its not uncommon for the price to
move cautiously higher as more buyers begin to accumulate shares of the
stock.
(Fig. 10)
17
On October 23rd, early morning buying once again created an open that
was above the highs of the previous two days. Upside gaps such as this,
illustrates strong interest on the part of buyers.
(Fig. 11)
But by the end of the day, the tug-of-war between buyers and sellers
continues resulting in yet another indecisive day.
18
Finally, on October 24th, all of the indecision comes to an end as buyers take
complete control, moving the stock higher into the close.
(Fig. 12)
19
The chart below illustrates the effectiveness of the T-Line when used as a
trailing stop.
(Fig. 13)
On November 24th, our trade comes to an end as the stock closes below the
T-Line.
Lets take a look at how we might have traded this Doji signal:
We could, of course, have simply bought the stock. At a price of
$28.28, we could have purchased 18 shares of stock for an
investment of $509.04. Four weeks later, our trade could have
been closed at a price of $30.22 for a gain of $1.94 per share
(or roughly 7%).
Another choice would have been to either buy Call options, or a
Call Debit Spread. On Oct. 21st, with the stock trading at 28.28,
the best choice for a strike price would have been the 28 Call.
As for the expiration date, the November monthly options were
set to expire on November 22nd.
20
21
When a stock or Index is making a top and a Doji appears, its extremely
important to wait for a downside confirmation. When theres been an
uptrend followed by an indecision period with the appearance of one or two
Doji patterns, its not unusual for prices to move higher as the last wave of
buyers come in.
(Fig. 14)
In November 2013, as the stock of Yum Brands (symbol YUM) traded higher,
the 12-Period Stochastic began to show signs of being extremely
overbought. After one final move to a price above 78.00, Doji patterns
began to appear.
When two or more Dojis begin to appear, we refer to this as a Series
of Dojis.
As we can see in this chart, the indecision is finally resolved to the downside
as the price of YUM gaps lower confirming the move to lower prices.
22
After a decline of just over 8%, cautious buyers begin to support the stocks
at a price of around 72.00.
(Fig. 15)
Several weeks later, as YUM trades back into the 77.00 area, the
tug-of-war between buyers and sellers results once again in yet another
Doji pattern.
With the appearance of a Doji when the Stochastic is indicating an
overbought condition, all thats needed is a downside confirmation
bar to tell us that a low risk trade may be at hand.
23
(Fig. 16)
The next day is January 9th 2014 and the stock gaps much lower on the first
trade of the day. This gap to lower prices is the first indication that nervous
sellers are starting to close their positions. By the end of the day, the stock
closes very near the open creating another Doji pattern. That close, by the
way, was also below the T-Line.
At a price of 75.05, if more sellers begin to appear, the first downside
target for YUM will be the recent lows at around 71.00. The next
downside target will be the October lows around 64.00.
Always remember, no matter how good these Doji setups may appear,
theres never a sure thing. The key to successful Candlestick trading
is finding many different low risk opportunities and trading each one
in a conservative manner.
24
After a series of black candles, YUM surpasses our first downside target and
moves into the area of our second target.
(Fig. 17)
The only practical way to take advantage of a Doji Gap Sell signal
is to purchase a Put option. Trying to short the stock is not only
expensive, its quite dangerous.
At a price of 75.05 in the stock, our best choice would have been the 75 Put
option. Near the end of the day on January 9th, the February 22nd 75 Put
option was trading around 2.60. Two options could have been purchased for
roughly $520 plus commission. On January 31st, near the end of the day, the
75 Put had a value of 8.20. At more than three times the intial cost, this
trade would have gained roughly $1,120 before commission.
25
Another choice for this trade was the Feb. 22nd 67.5 72.5 Debit Spread
trading at 1.46. Although Debit Spreads dont usually do quite as well as the
purchase of Put options, they carry less risk. At a closing price of 3.49,
either trade would have more than doubled in value.
Finally, lets take a look at a situation when a Doji pattern appears in a stock
that is not trading at or near recent highs or lows.
(Fig. 18)
In the majority of cases, the best trading opportunities will occur when a
stock or an Index is trading near recent highs (for a sell) or recent lows (for
a buy). But heres an example of a stock getting a Doji pattern while
undergoing a period of price consolidation.
In August 2014, VmWare (symbol VMW) peaked at a price just under $105 a
share. The next 8 weeks, however, were not kind to VMW as the stock
declined by more than 25%. From mid-October through late November, the
26
stock struggled higher. On Friday November 28th, the stock ended the day
closing near the days open creating the Doji pattern.
(Fig. 19)
Although a trade could have been initiated near the end of the
day, conservative traders may want to wait for a close below
the T-Line.
27
(Fig. 20)
With the Doji Gap pattern in place, the close below the T-Line is finally
realized on December 2nd as sellers pushed prices lower.
On December 2nd, the value of the January 85 Put option was 3.15.
28
(Fig. 21)
As the stock traded lower and reached an oversold condition, our trade is
closed on December 17th at a value in the Put option of 6.70.
29
Appendix
Notes about using the Think-Or-Swim platform
Candlestick patterns are already a part of the Think-Or-Swim platform.
Although these built-in patterns do an excellent job of identifying many of
the Candlestick patterns, the code below will identify the patterns that are
illustrated in this booklet.
Software code for the Think-Or-Swim platform
This code is for the Doji pattern:
Def Stoc = StochasticSlow(12, 1);
Def MinVolume = Average(Volume, 90);
Plot DojiPattern = AbsValue(Open - Close) <= (High Low) * .1
And Close > 25 And Stoc < 20 And MinVolume > 200000;
DojiPattern.SetPaintingStrategy(PaintingStrategy.BOOLEAN_ARROW_UP);
DojiPattern.SetDefaultColor(Color.Light_GRAY);
30
The first line declares the variables that will be used in the code.
The second line calculates the Stochastic values.
The third line identifies the Doji pattern.
The fourth line requires that at least 200,000 shares of stock
have been traded (on average) for the last 90 days.
The fifth line will require the price to be above 25. This is done
for the purpose of being able to trade options on the stocks
that are found.
The sixth line requires that the stock be in an oversold
condition with the Stochastic below 20. Be sure to reference
oSlowK.
The last line identifies the bar as a Doji.
Before saving the code, its important to tell TradeStation how
the Doji will appear on a price chart. This is done under the
Properties selection under Chart Style. Make sure the Type is
set to Point. Also, there are 7 choices for Weight, choose at least
#4 or larger.
This code is saved and verified given the name Bigalow Doji.
31
32