Today’s chart, which should be directly below this post, illustrates something that I have a strong belief.  I don’t know that my view is controversial, but as I watch people trade, not many are able to adhere to this simple principle:  You are only interested in opening and closing prices in the time period you are trading.

On a candlestick chart, the lines above and below the solid portion of a candlestick are called shadows and reflect the range.  It’s really the same  on bar charts, and it’s a matter of personal preference whether you use candlestick or bar charts.

Note:  There are several books out there that pattern candlestick formations and make interesting reading.  Steve Nison’s “Japanese Candlestick Charting Techniques” gives a great history, which dates back to Japan in the 16th century, and some specific techniques for trading using candlesticks.  It’s a good book, I have had varied results using the system.

Anyway, I only trade on the close of the specific time period I am trading.  There are several reasons for this, the most important of which is you will find yourself whipshawing if you trade every little market move.  I look at every bar time period as a little battle to see who wins, and bar and candlestick charts give an accurate view of the buying and selling during your time period.  The idea is to try and trade the spurts of momentum (long and short) that are common in the charts and markets.  Trading on the close also takes some discipline because you may see a nice long bar that is particularly enticing.  But again, keep an eye on your oscillators and fractal formations for good set-ups.  And only trade on the close of a bar.

I run a little timer on my charts, so I know where I am at in the time period I am trading.  I trade 3 minutes bars most often, but sometimes vary that anywhere from 1 minutes to 5 minutes.  Whatever your preference, the close of the bar is the indicator that indicates the final outcome of the time period you trade.  Most indicators use the open or close of the previous bar to calculate the oscillators to which we pay attention.

Bottom Line:  When the timer reaches zero, look at your chart and make a decision based upon your trading system.  If you look at today’s market you will see some very long shadows on some of the bars.   When I start seeing a pattern of long shadows I scale back my number of contracts, or even better, wait to you start seeing more stable bars.   Long shadows indicate a tremendous amount of indecision in the market direction and makes trading very difficult.  You can easily get blown out of a good trade by the market volatility.

Long shadows also require careful consideration of your stops, which I wrote about in a previous article about Average True Range.   If the average true range is 8 and you have your stops set at 3 (12 ticks) you stand a good chance of getting knocked out of a trade.  Of course, you have to assess you appetite for risk if you feel like expanding your stops.

Anyway, trade the close, with discipline