Why Use Stock Volume to Reveal Weak Candlestick Patterns? - Candlestick Patterns Explained by TechniTrader®

How Retail Traders Avoid Whipsaw Trades

Many traders still rely solely upon Price and Price Indicators, which leaves them highly vulnerable to whipsaw trades. Stock Volume reveals weak candlestick patterns, and so it is critical to use it in the automated markets today. This is because the giant Buy Side Institutions using Dark Pool Alternative Trading Systems (ATSs) 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 they will provide examples of how stock Volume reveals weak candlestick patterns. In candlestick chart example #1 below, the first blue arrow on the left shows a common gap up to a long white candlestick. It has an extraordinarily long stock Volume bar in the middle chart window which is the footprint of High Frequency Trader (HFT) orders.

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The stock did not move up strongly after that HFT action because stock Volume was weaker near or below its moving average line after the one-day stock Volume spike.

The second blue arrow points to the last candlestick, which is an Engulfing White. However, see that stock Volume is dropping well below the stock Volume Indicator’s Moving Average.

This is a warning that this stock lacks sufficient buyers. In addition, the Balance of Power (BOP) indicator in the bottom chart window is showing a red bar as price action moves up. This is a divergence pattern indicating that a giant Buy Side Institution is rotating slowly and carefully out of this stock without affecting price.

Often, Engulfing White Candlesticks (aka Bullish Candlestick Patterns) are commonly used for entries, but because stock Volume reveals weak candlestick patterns, this example shows that it is not a buy signal by itself. Look at price action for the two days prior to that candlestick forming and see that the stock had two reversal candlesticks, 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 Buy Side Institution is selling while smaller lots are buying, and this weighs the Balance of Power indicator to the downside. The Engulfing White represents about a 1-point gain, which is minuscule given the Risk/Reward Ratio and the price of this stock.

In candlestick 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 stock Volume.

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

At this point, a Retail Trader has less than a 1-point gain. This is insufficient to be profitable when all the costs of the transaction are taken into account, such as time and broker fees. Most Retail Traders would hold, unaware that stock Volume was insufficient to drive price up. In addition, resistance is just above the current price, as shown by the top red line. Resistance is more substantial than it appears due to the weaker stock Volume AND the Sell Side pressure of the giant Buy Side Institutions using Dark Pool Quiet Rotation as price action moves up.

Candlestick chart example #4 below shows what happened next.

The first small black candlestick wipes out half of the tiny profit. This tends to make traders try to hold, hoping the next day the stock will move up again as it did before. Sure enough, the stock opens at the prior close, but then it falls further that day, as indicated by the top red arrow.

The following black candlestick wipes out all the remaining profits. See that red stock Volume bars are rising, indicating that larger lots are selling and taking control as fewer small-lot buyers are moving in. It is a huge down day with a 2-point loss.

Exiting the third day indicated by the bottom red arrow either meant a 3-point loss or containing the loss to about 2 points. The Risk/Reward Ratio was inverted for Retail Traders. The large lots were selling into the bounce, and smaller-lot traders had a whipsaw trade.

Summary

This is why many Retail Traders have chronic losses with intermittent profitable trades. Stock Volume and stock Volume-based Indicators are critical in the Stock Market today because stock Volume reveals weak candlestick patterns. Not using stock Volume means that the trader has no idea which side of the transaction the giant Buy Side Institutions are trading. Do not trade against giant Buy Side Institutions, but instead always trade with them.

Some Retail Traders would argue that they would have gotten out of the trade on the first day or the second day, but in reality, most do not. If a Retail Trader is taking 25 cents off the table and thinking it is profitable, they are actually most likely losing money or breaking even due to fees, costs, and time spent. How much is your time worth, just minimum wage? Calculate the time spent including going to seminars and webinars and searching the internet for answers, and then add it all up. Many Retail Traders are losing money by setting their profit expectations too low. Stock Volume reveals weak candlestick patterns and weak candlesticks, and thereby using it in stock analysis before buying into a stock can help a trader avoid whipsaw trades.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using TC2000 charts, courtesy of Worden Bros.

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