No Follow Through (NFT): A Powerful Message
08/20/2013 6:00 am EST
It was almost 25 years ago that I began my education on the markets and technical-based trading, writes Greg Capra of Pristine Capital Holdings, Inc., and after a time, I realized that indicator-based methods are too subjective.
I saw times (too many) that price could move in the opposite direction signaled by an indicator or a group of them. Pattern recognition was the only concept that made sense; however, the most powerful price concept I discovered was NFT.
Before I get to the concept of NFT, I first have to touch on some basics of candlesticks. Candlestick analysis essentially is the recognition of reversal patterns. There are one, two, or three-bar candlestick reversals have different names like dark-cloud cover, morning star, evening star, shooting star, star, hammer, inverted hammer, doji, and there are many more. All indicate a turn and the probability of a price movement in the direction of the reversal. Some with a stall in momentum first or at the same time as the reversal pattern. It all depends on the time frame being viewed, so candle patterns change or can even conflict.
The explanation of these candle reversals related to multiple time frames (MTF) analysis is virtually non-existent in the education industry. Why? Because an understanding of MTF makes all of these names unnecessary. If you understand that if prices move in one direction and suddenly turned in the other, it’s a reversal. What difference does it make if it happened in one, two, or three candles? A two- or three-candle reversal is a one-candle reversal in a higher time frame and vice versa. It comes down to understanding MFT and retracements between reference points.
As I studied and traded these individual candle or multiple candle reversals that had no follow through (NFT), it became clear that NFT was a very powerful message. Price patterns are a reflection of what traders and investors believe and have acted on with real money. Money, put into action has emotion connected to it, and when beliefs and emotions in the moment change abruptly—it’s a message to pay close attention to. Let’s look at a normal or typical type of a reversal and an NFT. Both are tradable when combined with other supporting technicals; however, the NFT concept expands your opportunities and increases your odds of profitable trading setups.
C and Typical Setups
The above chart of Citibank (C) shows typical reversal signals within an uptrend. It doesn’t matter what the name of the signal is according to the candlestick textbook. Even the novice to candle technical analysis can see the turn. Can you begin to see how the names are irrelevant now? If there was a doji candle between those reversal candles, would it change your opinion of the turn?
In the above chart of Qualcomm (QCOM), there’s a big bearish candle (doesn’t matter what its name is, it’s big) signaling lower prices. Rather than following through lower, QCOM had NFT and negated the bearish signal. Clearly, buyers were in control and were going to continue running over sellers. Can you imagine being a seller inside that big bearish candle? How are you feeling the next day? What are you going to do? As a trader or investor recognizing the NFT, can you take advantage of this?
The concept of NFT is universal to all tradable instruments, since anything traded is affected by human beliefs and emotions. In the above chart of the Aussie dollar versus the US dollar is another big bearish candle that had NFT. The move above that bearish candle hasn’t happened to confirm the signal yet, but the NFT to it suggests that short-sellers are caught and a counter-trend move that will likely test price resistance and the declining 20-MA is coming once prices move above that bearish red candle.
No follow through is a concept that I developed years ago after getting caught in trades based on candles that were negated. The NFT concept along with my bar-by-bar concept will put you on the right side of most trades.
By Greg Capra, President & CEO, Pristine Capital Holdings, Inc.