When Doji Candles Fail
08/12/2009 12:01 am EST
A reader recently asked me a very interesting question that I wanted to discuss with everyone.
The question was in regards to a perceived sell signal in Whirlpool Corp (WHR) due to a doji candle after a large run-up. The question was: "Why did the doji fail?"
Let's take a look:
The trader shorted Whirlpool on a Friday near the close, virtually certain that a pullback retracement would occur to take price down, thus resulting in a profit. He was upset with today's 2% rise in the stock and he's worried if he should go ahead and exit.
Now, I don't give specific trading advice, so I'll keep this in educational terms. Remember never to make a trading decision based on a single candlestick alone. Always look for confirmation, or additional reasons that support the initial bias.and have an open mind about what the price and/or chart is telling you.
Also, never think that something "has" to happen in the market. If we knew what was going to happen (i.e. every doji results in a trend reversal), then we not only would not use stop-losses, but we would have no need for money management. We would just put our whole account in with options and profit richly from foreknowledge.
Let me first say that the sell signal is still valid as long as we're below the high of the doji, and the stop should be whatever distance you feel reasonable (as in, not one penny above the high at $56.50, but probably less than $3.00 above the high, depending on your timeframe, risk tolerance/position sizing, etc.).
In addition, don't expect price to move suddenly in your direction the second you initiate a position. Give the market a little "wiggle room" and never expect perfection in either your entries or exits. This helps take the stress and pressure off.
Be sure to take into account the broader trend, which is clearly up, and realize that this is a countertrend scalp trade, which bucks the trend. Now it's not to say that you can't make money countertrend, but it's more difficult and requires more precision.
Here's what a trader misses when looking at a single candlestick doji: Price is in an uptrend, and momentum has registered a new high along with a fresh new high for 2009. Volume has picked up, so we are seeing plenty of confirmation of higher prices, which suggests higher prices are yet to come (following a retracement).
Yes, odds favor a retracement swing down to test support off this level, but there are powerful bullish forces driving this particular stock higher. On the weekly chart, we see the $55 level is prior support, which could play as current resistance.
However, other than this fact, during the time of this chart, we were seeing far more bullish evidence than bearish.and a single candle is not going to overcome that.
By Corey Rosenbloom of AfraidToTrade.com