Powerful Day Trading Pattern – The Butterfly


In the event you plan to succeed in day trading over the prolonged haul, you’ll will need a reliable way of distinguishing between high-probability and low-probability day trade setups. Blindly taking all trading signals produced by most buying systems is simply not a great idea and will likely be a road to ruin in many cases. I began day trading in the late 90s, and as a result, I have come across numerous methods for separating the great trades from the poor ones. A filter that I still use to this day is one that I call the Butterfly Pattern. This pattern uses moving averages on different time frame basis to reveal the true supply and demand forces which can be driving a stock.


I have found that when a Butterfly Pattern exists, it is important to aggressively purchase stocks on pullbacks for long trades and sell stocks on rallies for short trades. This design can be a good way to screen many of your signals for the greatest trading candidates mainly because you can instantly see which side – i.e., the buyers or the sellers – is in control of a stock.

Even though a Butterfly Pattern is a highly effective screening tool, the rules for identifying the structure are remarkably uncomplicated. 1st, you have to choose two unique chart intervals which are greater than the chart interval in which your entry signal occurs. 2nd, a Butterfly Pattern exists when the 20-period simple signal typical is above the 200-period simple moving average in each of the greater chart intervals. That’s truly all there is always to it.

A very good rule of thumb is usually to need the first larger time frame be more substantial than the entry signal time frame by an aspect of five and the second larger time frame be more substantial than the primary higher time frame by a factor of 12. For instance, if the entry signal occurs about the 1-minute chart then pick both the 5-minute and 60-minute charts for your increased time frame analysis. Therefore, in order for a valid bullish Butterfly Pattern to confirm a 1-minute entry signal, the following criteria must each exist (note: reverse the logic for a bearish Butterfly Structure):

The 20-period simple moving average should be over the 200-period simple moving average for the 5-minute chart (i.e., first larger time frame).

The 20-period simple moving average must be above the 200-period simple moving average for the 60-minute chart (i.e., 2nd higher time frame).

Why is this pattern so powerful in picking out excellent trades? From the case of long trades, significant new purchasing activity would have to occur on the higher chart intervals for the shorter term 20-period moving average to cross above the longer-term 200-period moving average. A moving average crossover on two different larger time frames is clear and compelling evidence that a bullish change in sentiment has occurred. Apply the reverse logic for short trades.


Candlestick Patterns – Are All Signals Valid?


I lately had been questioned by a trader that he could not properly use candlestick reversal patterns to forecast a change in market psychology. He was searching in the stock placed a quick trade after seeing a Bearish Engulfing Pattern that completed itself about the eleventh. The price of the security promptly rallied almost ten percent a couple of days right after the trade, stopping him out with a loss. Immediately after a look in the chart, the difficulty was obvious; he hadn’t learned to filter out invalid reversal signals.

You have to know that invalid reversal signals are typical with candlestick charts as well as the trader who wishes to be profitable merely has to learn how to filter out the invalid signals. Can it be performed? Absolutely, and it’s not that difficult! You see, the stock in question had just made a strong move via technical resistance two days prior to the Bearish Engulfing pattern completed itself. It’s essential to don’t forget that once technical resistance has been broken and successfully retested, it then becomes service. The stock did truly pullback slightly for a few days immediately after forming the Bearish Engulfing Pattern but stayed above the broken resistance line.

This brings us to the question: so what was the correct signal? What the trader failed to at least notice was the Bullish Kicker that presented itself directly at the point with the new found support (former broken resistance). With that signal, the stock has rallied nicely ever since. The Bearish Engulfing pattern was just the initial day of a successful retest of technical support. The stock was simply forming a slight consolidation that proved to be a continuation pattern, not a reversal.

An effortless candlestick trading rule to recall is to trade short or close long positions at a bearish reversal signal that presents itself at technical resistance. Go long or close short positions on a bullish reversal signal that presents itself at technical assistance. Candlestick trading is, in my opinion, the easiest and most profitable method to trade stocks when performed properly. The dilemma is there is a lot of details readily available about the subject that does not tell the complete story and traders become frustrated and stop using candlesticks. Study the art of candlestick trading, keep trying and soon profitable trades will practically jump off the chart at you.

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