The Power of the 'King Candle'

I am a veteran analyst, strategist, and educator. My trading “mistake” list is long, yet dwindling. From each wrong decision there is a lesson to be learned.  After joining the Market Taker Mentoring team as an educator, I quickly learned a weakness in my lessons and approach. The assumption that students or non-professional traders already had a good understanding of market fundamentals and technicals was wrong. Without a solid foundation we eventually fail. Not gonna happen here!  

Feedback from members incited me to share my experiences at the Chicago exchanges. Good and bad experiences shape us. I prefer to share the scary ones because they teach the best lessons. We expect to win. Bad trades will happen and are tough to swallow, but if you do not learn from them the road to success will be filled with potholes, like a Chicago street in January. We have potholes here that could swallow a Volkswagen. If we are doing it right, good trades will eventually outnumber the bad ones.

My time in the trading pits was invaluable. I had the privilege of watching the auction process in its most basic form, a trading pit. Trading pits are nearly extinct. To adapt to the digital world, my ambition was to show in charts, the lessons learned from those extraordinary arenas. Price movement tells a tale of the battle between bull and bears. Now, there is mainly just digital data (no pits) that programmers use to forecast. With the right technique I believe social and psychological characteristics can be quantified as well. Reading price action or market generated information is a skill and that is what I teach in the MTM Daily Edge class.

We all trade with the lottery in mind, catch that big move with perfect timing along with little, if any, risk. I would like to trade from a fishing boat or golf cart. Not likely to happen, yet it could! The greatest thing about markets is that every day presents a unique opportunity or puzzle. To catch a trend, strive to identify patterns that increase the odds for a vertical move. First, find a pattern that is prevalent prior to an acute vertical move. Scan for markets that have below average ranges and volume. This is an indication of impartiality. Three to five consecutive small-bodied candlesticks with similar ranges are an indication of neutrality as well. These conditions are the fuel for a breakout or above average vertical move.

If the conditions above occur, prepare for a sharp vertical move. The chart below illustrates a couple of examples. Note the long-body green candle after the congestion phase. Candles with small wicks and long bodies show dominance. I think of them as “King Candles.” It means bulls or bears were dominant throughout that time frame. They are particularly powerful directional signals if the previous candles (pawns) have small candle bodies and long wicks. Such long-body candles are prevalent at the onset of trends.

John Seguin, Market Taker Mentoring

Trader Education