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BEARISH FOREX TRADING PLAN FORMULA - LOW CLOSE DOJI
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The next trading signal, the low close doji (LCD), is the opposite of the high close doji. It is a setup developed on the premise that once the market has rallied and established a high, if a doji forms, it is indicating that there is in decision. Then once we establish a lower closing low below the doji's low, this establishes that there is a loss in bullish momentum and we can initiate a short position. Figure 3.29 shows that the black candle closes below the low of the doji

Watch for this setup after the market has had an extended advance to the upside; and if it is near a predetermined pivot point resistance level, generally speaking, the market will reach an overbought condition as well. Once the doji appears, it is indicating indecision and weakness of buyers to maintain an upward trend. Those conditions make it ripe for a sharp rever sal, allowing for a juicy high-probability, low-risk trade.

Here are the rules to act on when this pattern develops:

• When prices are at or near a pivot point resistance number, sell on the close or the next time period's open when a new closing low is made from the previous time period's (or past three candles) doji. One can use a filter-confirming signal, such as a bearish divergence stochastic pattern or an MACD zero-line cross.

• Initially use an SCO above the high of the doji. Once the market begins to produce a profit and moves in the desired direction, then you can change to a hard stop and continually trail the stop. Whatever time you

are trading, the SCO is specific for that time frame, wherever the signal might occur. For example, if it is an intraday signal, then you need to initially use a mental stop that requires you to wait until the end of the time period, whether that is based on a 5-, 15-, 30-, or 60-minute time frame. Most trading platforms do not have intraday SCO features; rather, they have just the end-of-day orders.

• Buy or exit on the open of the first candle after the previous candle makes a higher closing high than the previous candle.

Let's examine market price action and how to execute this signal. You have your predetermined pivot point resistance levels already mapped out for you. Once you have the predetermined support and resistance num bers, it is the second variable that is just as important, which is looking for a signal that triggers a call to action. Figure 3.30 is a spot forex euro cur rency that shows once again why it is important to wait for sell signals at re sistance rather than buying breakouts.

The euro chart shows the market breaking out above the R-1 level. As a standard rule, I do not like to take buy signals at resistance. I would rather wait for a sell signal to develop and then go with the declining momentum.

I believe one reason why this signal works so well is that many traders

are trying to trade breakouts of pivot point resistance levels by going long once they see the breakout above the R-1 level. Once there is little follow through and prices start to retreat, then they are scrambling to sell to get out of their losing trade. In this chart example, notice, too, where we have a moving average crossover and not only do prices close below the doji, but they also close below both moving-average values. The trigger to sell short was executed at 1.2815, and an immediate reaction occurred as prices plunged. The sequence of events that we want to see, as we do in this ex ample, is lower close than the openings; lower highs; lower lows; and, most important, lower closing lows. Now we can make a decision. Instead of keeping the mental SCO above the initial doji high, we could decide that since the move was a decent distance away from our initial entry, we can place a hard stop on the position.

As the market enters in a consolidation phase, we see that prices never close above the high of the first reactionary low's high. That keeps prices contained in a sideways channel or similar to a bear flag formation. As we follow the flow of the market, notice how the market declines by the end of the day to the S-1 of 1.2750. As a day trader, there is no question as to where you need to exit the position. It is the end of the day, and you have managed a trade all day and ridden a very nice trending market condition. This is a great example of how to use the pivot levels for a profit target.

Figure 3.31 shows a textbook setup in the Japanese yen. This is a five minute chart without the pivot point moving averages overlaid to help you see the progression of the trade and the sequence of the open/close rela tionship that candlestick charts display.

As the market advances toward the projected pivot point daily R-2, traders may assume the market conditions are in a bullish mode. When you get in that mindset, you tend to forget to look at the current market conditions.

The top pattern is not a traditional or classic morning doji star forma tion because the third candle does not close below the midpoint of the tall white candle. However, it does close below the doji's low. That is the con ditional change that takes place, giving us the clue that the bullish momen tum has dried up. First, we have a lower closing low; then the market closes below the open, and prices reverse direction once we tapped the pivot point resistance level. Therefore, we want to sell on the close or the very next time period's open, placing our stop (initially) as a mental SCO above the high of the doji, which is 118.18. That is just three PIPs above the daily pivot point resistance level, too. Again, what we want to see is almost instant follow-through for the price to decline.

As you can see, with this trade, there was immediate follow-through. Notice the progression of the market as it declines from the entry price at 118.07 straight down to 117.87, for a quick 20-PIP gain. The market then

trades back and forth, creating small-range candles, which form a sideways channel. If you look closely at each candle's close, notice how it does not close back above the high of the candle that established the first reac tionary low. As a trader, you may want to hold all positions or, at this time, cover half of your position. One reason we do that is because, as powerful and reliable as these triggers are, we still do not know the outcome of how far prices can or will actually move. The markets could easily reverse back and challenge the highs. By taking money out of the market, you immedi ately have profits on half of your positions; and then you also reduce your risk exposure in the market.

Examine this chart further and see how the candles show the true di rection of the market: The dark candles reflect closes below the open, and there are more of those and they are bigger than the white candles. For the most part, there are more of the dark or negative assigned candles, which are establishing lower closing lows, than there are white or positive as signed candles; but notice that these candles have smaller ranges and hardly ever make higher closing highs. This shows that every time the mar ket rallies just a little bit, sellers are present. Long negative assigned can dles represent bears, or sellers, dominating this market. Therefore, staying short on the balance of the position is warranted. Now as the market price disintegrates, demonstrating the conviction of sellers, we can place a hard

stop at breakeven on the balance of the position and start to adjust the stop to protect profits accordingly. As a short-term trader, it is imperative to trade with the current flow or momentum of the market. Since there are so many variables that can influence your trading decisions, using the meth ods described here will help you keep focused and alleviate the problems of trading on emotional impulses. When you are focused on what the potential resistance levels are, have learned what to look for (such as a low close doji signal), and then applied trade management techniques, you can capture profits. It is literally up to you to pull the money out of the markets. This method cannot tell you how much money you will make on each trade; every outcome will be different. However, there is a strong possibility that based on historic reference, you will see a decline in prices.

In Figure 3.31, we see an immediate reaction as a sequence of lower highs, lower lows, and lower closing lows occurs. In fact, by using the mov ing averages, you will notice the confirmation of a negative crossover and prices closing below the moving averages as well. This short-term down trend ends when we see a change in conditions once the moving averages cross back up and prices start to close above both moving-average values. This is a sign that the negative forces or selling pressure are fading and it is time to exit our position. The key is in being able to identify true condi tional changes that will make you act on facts, triggering a call to action by a set of rules rather than on emotional impulses. If you have the discipline to trade by a set of rules and follow those rules, you will increase your trad ing profits.

Here are guidelines for trade and risk management:

• Get out of half of your positions on the first shift in momentum by a higher closing high, and move your stops. There will be times that you have to make a judgment on whether the risk is too excessive by the distance of the proposed entry and the SCO.

• The SCO is for whatever time period you are trading in. For example, if it is an intraday signal, then you need to use a mental stop that requires that you wait until the end of the time period, whether that is based on a 5-, 15-, 30-, or 60-minute time frame. Most trading platforms do not have intraday SCO features, rather just end-of-day SCO

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