It so happens that the doji is able to teach much of candlestick theory. If an undecided market contemplates retracement or pauses a while to reconsider the trend upon which it has embarked, this of itself will demand no alteration in price. When the market tests various levels and yet returns to its original price the premise is even more securely made. Here it is found that the greater the extension of the shadows on either side of the real body of the doji, the more pronounced the market’s reassessment. That the market has tested vast levels to the upside or to the downside as well is of great relevance to the issue of price discovery. When it has rejected these extremes to return not to a new found level of value but its original opening price, it is not merely a coincidence but an indication that momentum has come to an abrupt halt. For swing traders the doji must be understood in all its forms, for it provides one of the clearest signals for entry into the market or exit thereof.

When the market has tested the downside thoroughly and shows a doji at the peak of the candlestick with a long shadow extending downward, the contention goes to market strength rather than weakness; it has convincingly rejected lower prices and recovered to close at its highs – at its open. Still, the doji is an indication of indecision and needs further confirmation before entering the market. However, while the fact that an upper range has not been pursued balances out any bullish optimism, it may well be that the downside has been preoccupying the market however, and so the Dragon Fly Doji depicted below is inherently a bullish signal. When it occurs after sustained retracement it suggests a reversal is imminent, and when after an upward trending market, the suggestion that the trend has played out its natural course and has come to an end is patent.

Similarly, the Gravestone Doji below mirrors the Dragon Fly already discussed. Here the market has given extensive airing to the upside and has yet concentrated price discovery upon not only its lows, but its opening price. That the downside has not been more thoroughly explored is valid, but hardly able to dilute the bearish signal exuded. When at the end of an uptrend it clearly indicates a reversal is likely; when at the bottom of the market – indecision is rife, but any short positions ought to be covered.

Original article by Walid Khalil and David Steckler in Stocks & Commodities
AIQ Code by Richard Denning

The AIQ code for Walid Khalil and David Steckler’s article,
“Entering The Price Zone”, is shown below. I coded both the Price Zone
Oscillator (PZO) and Volume Zone Oscillator Indicator (VZO) (from the
prior month’s article by the same authors) along with the system that
uses the PZO or VZO indicator. There is an input at the top of the code
called “usePZO”. When this input is set equal to “1” then the indicator
and system use the PZO. If set to any other value, then the indicator
and system use the VZO oscillator. I had to use my own interpretation of
what the divergence sell/cover rules of their system mean since the
exact code for this part of the system is not given in the article. Also
note that the non-trending case is provided with this code but tests of
the rule “BuyNoTrnd” showed that trading only when the market is
trending was the better choice. As a result, my tests below were of only
the trending portion of the system as I had done in last month’s tests.
I ran a back test using the Portfolio Manager module from 1/1/98
to 4/8/11 using the NASDAQ 100 list of stocks. In Figure 1, I show the
test results of simulating trading the NASDAQ 100 list of stocks, using
the following parameters for capitalization:

1) Maximum positions per day = 3
2) Maximum total positions allowed = 10
3) Choose candidates using ADX values in descending order
4) Size each position at 10% of total account equity recomputed every day

For the test period, the average annual return was 11.3% with a maximum drawdown of 67.7% on 02/07/03.

In last month’s issue, I ran a similar test using the VZO
indicator and the results were slightly better than using the PZO
indicator with this system.

The short side test was unsuccessful as the system lost all
its capital during the early years of the test. These results are not
shown in any figures. I tried adding an index trend filter but this did
not save the short side from total loss.

Captions:
Figure 1
– PZO system equity curve trading longs only using the NASDAQ 100 list
of stocks compared to the SPX index for the test period 1/1/98 to
4/8/11.

EDS Code for Entering the Price Zone:
EnterPriceZone.EDS

(right click and choose Save As) 

Steve Palmquist.Author of ‘The Timely Trades Letter’. ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. I got an interesting email from a potential trader who was concerned that trading might ‘take too much time’. Apparently the new bailout mentality in the country has people thinking they should be able to make a lot of money quickly with little investment in education, tools, or experience. Trading, like most other professions takes time to learn. It will take a couple of years, not a couple of weekends, to learn the process of trading. It takes time because traders need to see how things work in different market conditions, and it takes time for the market to cycle between these different conditions. On the other side, the actual trading process does not require one to be glued to a computer all day, it can generally be done in minutes. The trading systems I use are based on end of day data. They have been developed and tested by looking at daily patterns, not five minute charts. Since I trade the daily patterns, I do not need to see the five minute charts.
I run the scans, pick the setups, use market conditions to determine whether to focus on longs, shorts, or cash, and then implement the trading plan. It takes me less than thirty minutes to check the setups on the watch list if I do it manually, and less time if I have my broker text me alerts when a setup hits a price level of interest. It takes time to learn trading just like it takes time to learn to be a doctor, engineer, or electrician. Once the trading skills are learned, the actual time spent trading can be quite short.
Holding periods and profit taking should be based on current market conditions. Take profits quickly in trading range markets, and give positions more time to work in trending markets. In non trending markets holding periods are usually not more than a few days. In trending markets holding periods may be several weeks or months. In non-trending markets consider taking profits after the initial pop from the trigger. Look to exit as the stock approaches the Bollinger Band, a recent high, a trend line, or when the market approaches support/resistance. In order to find out what the usual, or normal course of action is, I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy.