hammer candle, on high volume, signalling more buying in the market.

The
response
is muted with the up candle, which moves higher on low volume, not a sign
of
strength, but is followed on the next candle with rising volume and a wide
spread
candle, so an encouraging signal. The insiders then test on low volume, and
move
higher on solid volume, before weakness starts to appear with a wide spread
up
candle and a subsequent failure at the same level.
What happened next was that SLV then drifted along at this level for some
time,
before selling off again the following day.
It would be very easy for me to show you hundreds of examples where VPA
gives us
great trends and great trading opportunities. It does. But what it also does, is
giv c
dofor e us sound common sense logic on which to base our trading decisions,
and
more importantly to quantify the risk on the trade itself, which is what trading
is all
about.
In this example we are looking at this opportunity as a scalping trader.
However, if
you were an aggressive trader, then you may well have taken a position based
on the
hammer alone. After all, this looks like a strong signal. However, the
following
candle suggests weakness at this level. The volume is well below average,
and at this
point we would be wondering if this was a wise decision. Any stop loss by
the way
would be below the wick of the hammer, with the market setting this level for
us.
Assuming we continue to hold, the next candle is much more encouraging, a
wide
spread up candle with high volume, so a good sign. No reason to exit just yet.
The next candle suggests weakness, a shooting star (although not at the top of
a
trend, weakness nevertheless with the deep upper wick) and above average
volume.
We are expecting a reversal on the next bar, when in fact we see a positive
signal – a
low volume test which is followed by a wide spread up candle with above
average
volume once more, with a further pause before the final leg to the top of the
move.
At this point a more cautious trader would have seen the initial response to
the
hammer, and taken this as a sign of weakness, which it is, and decided, based
on this
signal to stay out of the market for the time being, and perhaps waited for the
second
candle, which IS a sign of strength, before entering a position. If so, in this
case, this
would probably have ended as a small profit, a small loss, or perhaps break
even.
But my point is this.
The examples I have chosen here are designed to teach, to educate and also to
show
you VPA applied in a variety of time frames and markets, and perhaps more
importantly, that all trends and trading opportunities are relative. Here we
might