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2019issue C1216-19

Failed candlestick fades with breakout permission and scale-out

When a hammer, doji, shooting star, inverted hammer, or inside bar fails to deliver implied follow-through, the next objective is trapped-order-liquidity beyond that bar. Entry waits for a lower-timeframe-breakout, and two consecutive down candles start the scale-out.

  • A failed-candlestick locates trapped-order-liquidity beyond the bar as the fade objective, not as a forecast of a new trend.
  • Set the invalidation-level first. Entry price is secondary to keeping the distance to that price small versus the stop-cluster target.
  • Fade only after a lower-timeframe-breakout, including an inside-bar-failure plotted on a faster chart than the parent bar.
  • Once the swing is open, a scale-out-trigger of two consecutive down candles begins reducing the position.
Entries in this reading3 entries
Current trackScale-out position reduction22 readingsCandlestick patterns149 readingsBreakout confirmation205 readings

A failed bar is still a trade hypothesis

A failed-candlestick is a hammer, doji, shooting star, inverted hammer, or inside bar that does not produce the follow-through the textbook reading implied. Once a strongly bullish or bearish candlestick such as a hammer or doji fails to deliver that follow-through, the next objective is the area where traders caught on the wrong side are likely to have resting protective stops.

Those resting protective and breakout stops are trapped-order-liquidity. In the archive workflow they are the fade's objective rather than a forecast of a new trend.

Invalidation first, then the stop cluster

The invalidation-level is a price that should not trade if the failed-pattern reading is correct. Entry price is treated as secondary to keeping the distance to invalidation small versus the stop-cluster target.

If a shooting-star or inverted-hammer bar does not produce the expected decline, the fade looks for buys whose objective is buy-stop liquidity above that bar's high.

Daily inverted hammer, hourly permission

On the 13 May 2019 WTI daily chart, a large inverted hammer printed as 63.30 resistance held. The expected next-day decline did not appear. Two days of consolidation met resistance near 62.10, and the inverted-hammer high plus 63.30 were taken out on day 3.

After that daily failure, hourly permission was a lower-timeframe-breakout: a break above a short-term declining trendline or a rounded retest of broken hourly resistance, with a tight invalidation under the thrust candle that caused the breakout and an objective above the daily inverted-hammer high at 63.30.

Inside-bar failure on a faster chart

An inside bar concentrates buy-stops above its high and sell-stops below its low. If one side of that range is triggered and then fails to follow through, price can be drawn toward the opposite cluster. That sequence is an inside-bar-failure.

In one gold inside-bar case, a break of 1279.21 lacked downside follow-through and price then tagged the opposite side at 1285.80. In a later case a break of 1319.93 faded and price later traded through the prior inside-bar high at 1407.65.

Those inside-bar failures are executed by plotting the parent bar's high and low on a lower timeframe and acting only if trap evidence appears there.

Open swing, then scale out

A 45-degree-angle breakout may be entered immediately after a tall, high-volume bar or later once a tight rising channel is in place.

Once a swing is open, two consecutive down candles are treated as evidence the advance is reversing and as the cue to begin scaling out of the position. That pair of down candles is the scale-out-trigger.

TradersWeek editorial reading: the scale-out-trigger is a holding-period rule. It belongs on the same sheet as the failed-candlestick and the lower-timeframe-breakout so the fade can be tested as one procedure.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
18 of 18 in the Scale-out position reduction track
1990Track finished · Next track: Session analysisConstructing a second-hour session residual exponential index36 readings
All readings on this track · 18 readings
  1. 1989One add option sizing with a scale-out and a trail
  2. 1991Precommit scale-outs and puts to replace impulse
  3. 1991A written game plan for checklist, scale-out and staggered stops
  4. 2004Name the stop, require a 1:3 reward, then scale out half
  5. 2005Why pre-target scale-outs lower expected value
  6. 2008Preplanned butterfly exits with stops and scale-outs
  7. 2010Qualified trend, volume breaks, and a staged scale-out
  8. 2011Gated entry and scale-out after a climactic selloff
  9. 2011First-target review: scale out or flatten
  10. 2012Tiny scale-out as a systems decision test
  11. 2014Written size and exit scripts for scaling and risk
  12. 2017Constructing livable scale-out exit rules
  13. 2017Why the simpler looking system is harder to run
  14. 2018Prewritten scale-out and exponential moving-average exit procedure
  15. 2019A dual-career swing procedure that must output entry, scale-out, or abstention
  16. 2019A same-session opening-range breakout with a whole-number stop and scale-out
  17. 2019Grade the first seasonal long-put gain as a maintenance exam
  18. 2019Failed candlestick fades with breakout permission and scale-out
By fieldEntry and exit rules327 readingsBy year2019140 readings
All 22 readings tagged Scale-out position reduction
Also on Scale-out position reduction5 readings
2010Qualified trend, volume breaks, and a staged scale-out1989One add option sizing with a scale-out and a trail1989Shorter series need fewer recovery hits and raise scale-in cash1991A written game plan for checklist, scale-out and staggered stops1991Precommit scale-outs and puts to replace impulse