My Three-Candle Method Of Daytrading

  • October 22, 2002
  • John Gregory

There
are many different styles of trading, and no one style is the right one.
But which one is right for you? That is the question we all need to figure out
for ourselves.

Here is a style I use in my daytrading, which I call the 3 candle method. It
seems a little complicated at first but is very simple to follow. In the chart
below I will attempt to get my thoughts across.



Arrow
1:  Is resistance level



Arrow
2:  Is the first candle
that broke resistance level – which actually is not the 1st candle
but the first to break resistance. The next candle needs to be above resistance
level. As you can see the next 3 are up, this is not the entry but the next
resistance level that needs to break to go higher. After 3rd candle
look for a pull back to the 1st resistance level (indicated by the 4th
arrow and exclamation point) this would be your entry point.



Arrow
3:  Is the 3rd
candle – this sets resistance level – top of candle not the tail or shadow but
the candle body itself.



Arrow
4:
Is the support level it should bounce off of. 
This would be your entry.



Arrow
5:  Is the 1st
candle to break resistance level. So next 2 out of 3 need to be up candles or
open.



Arrow
6:  Is the 10-day MA moving
above the 50 day MA which is a good signal we should go higher.



Arrow
7:  Is the 1st
candle through, but we failed on 2nd so we go back and start over
looking for 1st candle to break this resistance level.



Arrow
8:  Is the 100% pullback to
1st resistance level on arrow 1. If candle would have broke that
resistance level and gone through the 200 day MA (in red) we would be headed
lower. But as we look for 3 candles going up we also look for 3 candles going
below support. We did not break arrow 3 support with 3 candles so we are still
good to hang on to position. We can look at a 5 minute and a 10 minute chart to
confirm direction.  Remember to keep
checking the 5 and 10 minute charts.



Arrow
9:  Is the 1st
candle to break resistance level. The next candle did not break down to
resistance level so we are still good to go.



Arrow
10:  Is the next Resistance
level, now we stand a chance to retrace 50% of last big candle and of the move
up from last resistance.



Arrow
11:  Is the next move up
since we did not break down below the last resistance which is support at 31.96.



Once we have 3
candles that break down below support, wait for it to come back up to support
before exiting. It will be 3 candles down and then a bounce to support, this
will be your exit. This like every other method is not 100% but a speculation it
will move one direction or the other. I use this method of 3 candles with my
other charts to confirm directions. But the setup here depicted in chart shows
the best setup.
(
KLAC |
Quote |
Chart |
News |
PowerRating) from the entry of 31.60 ran up to 32.60 a full point
gain from 12:30 to 2:15.






John Gregory is a plumbing/fire
protection engineer in Parker, Colo. He began trading three years ago, mostly
swing trading until the beginning of 2002 when he began daytrading.