Okay guys, today I want to give you a blinder of a trick to try on your charts – so apologies for a few things straight away:
This trick is to help anyone using candlestick patterns on any timeframe.
As a lot of you know, my team and I focus a lot on volume profiling and order books.
Recently we gave a bit of an intro to these, but I know it wasn’t massively in depth and, in fact, not super easy either.
So today I’m going to simplify it right down to a simple trick for you to use. Obviously this is only one part of the big picture, but it’s a start.
For those who are familiar, I am going to cover points of control today, but I won’t be referring to it as such.
What I want you to think of is a typical candlestick pattern on any timeframe. Take your engulfing, inside or pin bar style set-ups. I want you to imagine you have a really clear signal, bullish or bearish.
Now you take the trade- and it goes completely against you.
Well, the trick to improving your odds on these is to look at the volume profile. I am going to focus on my favourite pinbars, but this works with any.
The idea is to look at where spikes occur in order to give some idea of whether your signal will follow through.
I have taken the image below directly from the FTX course, where we will cover this and many more advanced techniques on order flow in a lot more detail.
Here, POC means point of control, but all I want you to think of the POC as is the price level for the candle where most order have built up, i.e. the price where we have the most orders in the market.
The key to this trick is to compare the closing price with the point where the orders are:
-If the closing price is above the price where all the orders are, then the signal is Bullish.
-If the closing price is below the price where all the orders are, then the signal is Bearish.
The point is that the markets like to test orders. If the price has tested lower than the orders in the example above, but then bounced, it means there are more buy orders, and so your signal is more supported. If not, there’s a chance to be more sell orders.
Hopefully you understand that from this very quick piece. The rule is very simple: if the closing price is above the majority of orders, the signal is Bullish; if it’s below the majority, it’s Bearish.
Okay, so how do you get this info, and how do you read it?
Firstly you need a volume profile tool.
This uses tick volume to plot the spikes in order and plots them on your chart. Big spikes are where the orders are.
The other indicator is volume zones, this uses red and green to represent order book pressure. If there is more red than green, then there is selling pressure; if there is more green then red then there is buying pressure. It’s not as good as the volume profile, but it is a simple proxy.
The most important thing about this is ensuring you have a good price feed. Kinetick, which NinjaTrader recommend, is actually very good, but there are others out there as well.
The chart below shows how they will look, and I have marked on a few signals so you can see exactly what I mean and how this helps.
A quick trick to help you win more of your candlestick pattern trades.
FYI – hopefully you see how cool this order book stuff is. This was a Eureka moment for me about 5 years ago now that really helped me, so I hope it helps you too. It gets a lot cooler as well as the FT guys will see when we go into this in more detail, and better still when you get yourself a room of super computers, a group of developers and some quant traders to help you do everything you ever wanted to try…