Volume Indicator Reveals Weak Candlestick Patterns

How Retail Traders Avoid Whipsaw Trades

Many traders still rely solely upon price and price indicators, which leaves them highly vulnerable to whipsaw trades. A volume indicator reveals weak candlestick patterns, and so it is critical in today’s automated marketplace to use them.

This is because giant Buy Side Institutions using Dark Pool alternative trading systems place 80% of all orders in the stock market, which are processed automatically via a computer program set to fill large orders over time without moving price.

The series of four charts within this article are the same stock over a period of time, and will provide examples of how a volume indicator reveals weak candlestick patterns.

In the chart example #1 below the first blue arrow on the left shows a common gap up to a long white candle with an extraordinarily long volume bar in the middle chart window, which is the footprint of High Frequency Trader orders.

The stock did not move up strongly after that High Frequency Traders action because volume was weaker, near or below its moving average line after the one day volume spike.

The second blue arrow points to the last candlestick which is an Engulfing White. However see that volume is dropping well below the Volume indicator moving average.

This is a warning that this stock lacks sufficient buyers. In addition the Balance of Power indicator in the bottom chart window is showing a red bar as price moves up. This is a divergence pattern indicating a giant or large fund is rotating slowly and carefully out of this stock without affecting price.

Often an Engulfing White aka Bullish Engulfing candlestick pattern is commonly used for entries, but because a volume indicator reveals weak candlestick patterns this example shows it is not a buy signal by itself. Look at price for two days prior to that candlestick forming, and see that the stock had two reversal candles as indicated by the short red arrow, where sellers attempted to sell the stock down. However buyers moved in triggered by the support from the highs indicated by the lower red line, which is a technical bounce area for this stock. A giant or large fund is selling while smaller lots are buying, and this weighs the Balance of Power to the downside. The Engulfing White represents about a 1 point gain, which is minuscule given the risk to reward ratio and the price of this stock.

In chart example #2 below the following day the stock forms an indecision day candlestick, rising slightly above the previous high and settling back to the close with much lower volume.

In chart example #3 below which shows the next day, the stock moves up about 1 point again on rising volume but with more rotation shown by the red bars in the Balance Of Power. The stock moves up to the weak resistance level as shown by the red middle line, but pulls back before the close of the day as indicated by the wick on the candlestick. Remember that a volume indicator reveals weak candlestick patterns, and see that volume is still below its average.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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