"80-20" - a simple candlestick pattern

Dmitry Demidenko, trader, iLearney trainerIn the master class "Be a Trader with iLearney"

Formation of simple candlestick patterns always attracts close attention of sophisticated investors: first, such configurations have a clear logical justification in terms of supply and demand, second, they are somewhere between technical analysis and understanding of market conditions, and, finally, third, they give time to prepare rational trades.

I refer to such graphical configurations as combinations of one or two barsThe emergence of which makes it necessary to consider a particular financial instrument as a potential object for medium-term investments.

Fundamentals of identifying the candlestick model "80-20"

"80-20" - a simple candlestick pattern
"80-20" - a simple candlestick pattern

"Pin" and "doji"The more time they are used in real trading, the more peculiarities a trader notices.

Model "80-20", first described in the world bestseller Linda Raschke and Lawrence Connors, Secrets of the Exchange, also belongs to the category of simple graphical patterns. It is characterized by a wide range (spread) and the proximity of opening and closing quotes to opposite extremums. In the classical sense, Open and Close should be in the lower (upper) 20% of the trading range of a particular bar.

In this case, as for any other simple configuration, the intraday dynamics of the quotes plays an important role, allowing to decompose the model into components and try to understand the logic of the buyers and sellers.

The strategy of work with the model "80-20" and peculiarities of its formation

"80-20" - a simple candlestick pattern
"80-20" - a simple candlestick pattern

On the hourly chart of silver futures on November 29 this year, the market opened near its low and closed near the top, which allowed the formation of candlestick model "80-20" on the daily time interval.

As recommended by Linda Raschke and Lawrence Connors, sell order should be placed under the condition of further growth of quotations with the subsequent return to the level of the maximum of the current daily bar. In the opinion of the authors, model shows overbought market and allows you to use one or more tests to determine a correction or even a market reversal.

In fact, the following points are of fundamental importance: the place of formation of the model and the dynamics of the volume of operations.

In case the "80-20" pattern is formed after a long consolidation with a breakout of its upper or lower boundary at higher volumes, it does not make sense to implement the above strategy. Most likely, we are dealing with the emergence of a new trend, which is still far away from the corrective movements.

Another thing is a long growing market, characterized by the presence of an empty space (window) on the left side of the screen.

Candlestick pattern "80-20" through the eyes of VSA analysis

On the daily chart futures on silver the trend reversal occurred after the formation of the model "80-20" on low volumes. At the same time, the presence of large sellers was confirmed by high volumes of transactions on the previous and subsequent bars, characterized by a low closing price, which indicated a bearish pressure.

The earlier 80-20 bar could also be traded, but only short-term, as there was still interest from buyers in the market.

Returning to the intraday bar structurewhich served as a herald of the reversal, we can also note that the good movement was taking place on low volumes. That is, the buy orders were not executed, and the price constantly had to go up, which indicates not the presence of a large number of buyers, but the interest in buying on the part of a small group of investors. They are not strong enough to make the market move further according to their personal preferences.

Thus, simple graphical models allow you to better understand the mechanism of interaction between bulls and bears and make trades with this understanding in mind. By combining methods VSA-analysis and key bars you can understand the nature of market fluctuations and use it to improve the efficiency of personal trading.        

Leave a Reply

Back to top button