the hAnDbook of technIcAl AnAlysIs- Guidelines for Potential Trigger Levels and Stoplosses
Trading candlestick formations involves four important pieces of information: - The trigger level
- The stoploss level
- The OHLC prices of the preceding candlestick
- Price confirmation via the closing price
Below are some general guidelines for determining the most appropriate trig-
ger level based on variations in height of the preceding and reversal candlestick.
These levels do not refer to any specific pattern or formation, but are intended to
provide a logical basis for the decision‐making process. It is sometimes necessary
to select alternate trigger levels due to variations within the pattern that render
the original or standard entry inappropriate. Here are some general guidelines for
single candlestick trigger levels.
For most double and triple candlestick patterns, the trigger or entry level will
usually be based on the first candlestick of the formation. For single candlestick
reversals, the trigger or entry level will be based on the preceding candlestick.
Here are the various trigger level options:
■ (^) Either midway or at the low of the first or preceding candlestick in a bearish
reversal
■ (^) Either midway or at the high of the first or preceding candlestick in a bullish
reversal
■ (^) At the low of the reversal candlestick itself in a bearish reversal
■ (^) At the high of the reversal candlestick itself in a bullish reversal
■ (^) At the lowest low of the entire formation in a bearish reversal
■ (^) At the highest high of the entire formation in a bullish reversal
An entry is usually only initiated once price closes beyond the trigger level.
This is referred to as price confirmation. The candlestick that penetrates the trigger
level may or may not belong to the reversal or continuation pattern.
Figures 14.13 and 14.14 show the four possible reversal scenarios for initiat-
ing a sell position. In scenarios 1 and 2, should the preceding candlestick be of
relatively average size, the sell trigger may be either at the midpoint or low of
the preceding candlestick. Should the preceding candlestick be relatively long or
overextended, as depicted in scenario 3, the sell trigger should ideally be at the
low of the last candlestick. This helps the Japanese candlestick trader to avoid
getting in at a less advantageous price. Scenario 4 depicts the sell trigger at the
low of a group of relatively short candlesticks, which is preceded by a long
candlestick.
For highly complex patterns, or situations where the exact entry level is visu-
ally indistinct or not obvious to the trader, the trigger level may be based on sig-
nificant inflection points in proximity to the complex pattern. This is rarely used
in Japanese candlestick, but nevertheless provides an alternative for challenging
entries. See Figure 14.15.