To raise or not to raise interest rates? That is the question? Hesitation usually leads to debilitation. You basically have a 50/50% success rate trying to trade around what the fed may or may not do.
As a trader, I need more than 50% odds, so I’m not going to trade around the fed. The good news is that you will have much higher odds if you simply trade indecision by itself. I’m talking about Indecision candles. For those of you who haven’t studied Japanese candles, allow me to introduce you to the Doji. The Doji has been coined the indecision candle.
Doji form when a security’s open and close are virtually equal, creating indecision.
There are a few different types of Doji.
Let’s start with the regular Doji.
Here is my rule to trading high volume Doji candles. After the high volume Doji forms, you need to watch how it trades over the next 2 days. If the stock closes above the high of the Doji, that’s a bullish sign. I’ll buy the stock putting my stop loss just below the low of the Doji candle. If the stock closes below the low of the day on the Doji, it’s a bearish sign. I’ll go short the stock putting my stop just above the high of the Doji. These are small risk, high reward trades. Take a look at these examples on AAPL.
On February 11th, AAPL formed a high volume Doji candle. Next we wait 2 days to see if AAPL closes above or below that high volume Doji. On February 16th, 2 days later, AAPL closed higher than the Doji on higher volume. It proceeded to go much higher never closing below that Doji again. I drew a black line on the low of the Doji so you can see it never closed below it. Looks like the bulls won this tug of war. Check out this next example on AAPL where the bears won.
On July 20th, AAPL formed another Doji on high volume. Another tug of war, except this time the Bears won. AAPL closed below the Doji the next day and proceeded to go down quite a few points. I drew another black line at the high of the Doji so you can see it never closed above the high of the Doji.
I’m going to share one more strategy with you on one of my favorite Doji, the gravestone Doji.
The Gravestone Doji can be found at the top of a big rally signifying a top, or in other words a death to the rally.
Take a look at this quadruple Doji we spotted on the Dow Jones Industrial average, the Nasdaq composite, the S&P 500 and the Russell 2000 index. All four of these markets last summer, on August 5th, were exhibiting a gravestone Doji on their daily charts at the same time.
Do you remember the flash crash we had last August? This very bearish candle pattern was a huge clue along with all the Dark Pool sell prints we had spotted as well. (If you don’t know what the dark pool is, you can check out my blog page on my website for more info.)
Take a look at what happened to the RUT$ The Russell 2000 index after that Gravestone Doji.
As long as the RUT$ doesn’t close above the high of the gravestone Doji, the index remains bearish. Again, I drew a black line across the high of the Doji and you can clearly see it never closed above it.
I called for a correction after seeing the big boys selling millions of shares and of course this Quadruple gravestone Doji. Here is my tweet on Stock twits from August 11th, 2015
All day long I tweet out where the dark pool is buying and selling, along with candlestick patterns, warnings of corrections and anything unusual happening in the market. You can follow me on Twitter, my user name is TheStockWhisperer@volumeprintcess. You can also follow me On Stock Twits. My user name is The_Stock_Whisperer.
The Grave stone Doji can also be a bullish candle stick pattern when found at the end of a long downward trend. In a down trending market, buyers rally the price briefly, but are not able to get the stock to close above the day’s open. Although this formation is weak in signal strength, the rally illustrated by the Gravestone Doji higher wick is a warning for shorts that the downtrend is losing momentum.
This could signal the death of a downward trend. Take a look at this recent example on September 14th. A nice Gravestone Doji formed on EEM, the emerging market ETF.
As long as the stock closes above the low of the Doji the next few days, this trend change should continue. I drew a black line on the chart to signify the low of the Doji. You can see EEM closed above it and it continued to move higher changing the trend from downward to upward.
You can use these Doji on a 5-minute chart when you are day trading. You can use these Doji on a daily or weekly chart if you’re a longer term trader or investor. So, even if the fed is undecided, we can profit off of indecision.
Until next time,
Stefanie Kammerman, has trained thousands of students worldwide how to Day Trade and Swing Trade over the past 22 years. She is the Founder and Managing Director of The Stock Whisperer Trading Company, www.thestockwhisperer.com where she runs an online educational trading room called “The Java Pit”. Her unique approach of old fashioned trading in a high tech world teaches her students how to trade by reading the tape and following the Dark Pool, which is how she spotted the last 9 corrections weeks before they happened.