the-signal-candle-and-the-trigger-candle

The signal candle and the trigger candle…

I am glad that this new series is going in a flow and I absolutely love it. The work that I am doing to write these articles is making my trade plan much clear to me. So, I am getting as much benefit as that of yours from these articles. 🙂

Let’s hop on and start the topic. But before doing that, I assume that you are well aware of the word, Last wholesale Price (LWP), which I have talked about in one of my previous articles. I will copy-paste the definition of that here for the sake of convenience as it is very important to stay clear with this topic before going into the topic of signal and trigger candles.

LWP :-

LWP is the price level in our setup location where you expect the stop losses of those traders who are fighting the high probability direction we have predicted are going to trigger.

The definition here is a bit subjective and is a bit hard to understand and apply by a trader who is new to PA trading. So I would like to elaborate a bit about this.

I have been repeatedly saying like a hummingbird that there are four important things to evaluate the odds in favour of a swing trade.

Short term Bias. This is a must. If the bias is not clear, there is no point in looking for a trade.
The corrective move against the bias to fade. I have already explained how we can identify whether the swing is corrective or impulsive on the right side of the chart using the bar by bar candlestick analysis. This corrective move confirms that the market is weak against the bias and gives enough confidence to take a trade in the direction of the bias. It doesn’t mean that the pullbacks cannot be impulsive. They can be, but that rarely happens. It often gives a CPB or some sort of a trap type entry if the first leg is impulsive in the move against the short term bias. It just means that the odds are in favour of the trade when the move against the bias is corrective.
Price level. The supply/demand level which can provide some order flow in the direction of the bias to stop and reverse the corrective move.
Targets. Didn’t talk much about it yet. So I will skip the description for this as of now.
If you are clear with the things so far, congratulations. You have done a great job and are a few steps away from placing the entry order.

Now let’s move on to the third step of the above procedure, Price level. When the market corrects to the price level, the first candle that shows strength in the direction of the bias or/and weakness against the bias is known as the signal candle.

Signal Candle:-

The candle that closes strongly in the direction of the bias or weakly against the bias, at the price level is a signal candle. Like a pin bar, candles that close near high/low, inside bars etc. etc. I will show some charts after explaining about the trigger candles.

LWP:-

If the bias is up, the high of the signal bar is the LWP. If the bias is down, the low of the signal bar is the LWP.

Trigger Candle :-

The candle that triggers the stop entry order that is placed just above/below the LWP is known as the trigger candle. Once that entry is triggered, the low/high of the signal candle becomes the stop. Instead of triggering the entry order, if the market breaks the other extreme of the signal candle, better to cancel the order and wait for another signal candle.

So in short, Signal candle is the one that forms the LWP. Trigger candle is the one that breaks the LWP.

I hope this article gives an idea about the signal candle and the trigger candle. I expect the trigger candle to close strong beyond LWP. If that trigger candle closes weak, I doubt the trade and look to scratch.

In the second example, I have taken that PB trade. When the trigger candle closed weak, I moved my target to the tail of that trigger candle 2, to exit for a small profit. Look at the following images.

My target was initially at the red line. As the trigger candle closed weak, I dragged it down for a scratch. This gave me a 10tick profit.

Whereas in the CPB trade, the entry candle closed strong beyond the level and I gave room for the market to move, reading bar by bar for managing the trade without going aggressive. Both the targets got hit.

If you want to see more examples regarding this weak trigger candles, here they are.

This is the example where I hoped for the trade to workout without scratching the trade on weak trigger candle, took a 5 tick loss.

One final point I would like to add before concluding this article. The entries are given in the signal candle (limit entries using LTF charts) gives lower risk, but I suggest beginners stay away from that. The entries given in the trigger candle gives higher odds of success. When you progress as a trader, you will learn to balance these odds and risk associated with trade and is a life long work in progress.

This completes the entry procedure. The next thing is to set the targets and manage the trade which are the topics of future articles.

User says:
Just to make the things clear, in the First example, whenever we identify the signal candle, we have to wait till the CLOSE of the signal candle (LWP), then place a limit order above the signal candle (vice versa for shorts) during the second candle (trigger candle) formation. Once order executed, the low of the LWP will be the stop loss (vice versa for shorts) – is my understanding is correct?

Reply:
Yeah correct. I assume that you meant stop entry when you used limit entry in the comment.

User says:
Slightly off-topic but can you briefly comment on a typical trading day now that you are primarily trading 5m charts only. Such as … How many markets do you follow during the day? How many trades do you typically take per market? How many hours a day do you trade. And how do you maintain focus between setups given that setup may take 2-3 hours?

Reply:
I am still testing that thing. I am tracking three markets at a time for trade opportunities as of now, but I just manage only one trade at a time. I mean, if a trade is taken in one market, I will not look at other markets until I exit that trade.
I trade the London session and the morning session of the US. That’s almost 7-8 hours per day. But I don’t sit in front of the computer all this time Once the bias is formed, my job starts only when the market starts moving against that bias to give a corrective move and I avoid one and two candle pullbacks most of the time unless the trend is too strong. So checking the charts every 15mins will do it for me.
Regarding focus, I screw up big time. After a series of winning trades, I tend to make bad decisions. So, I take a half an hour break after 3 trades. And I split my trading in terms of ticks and time outs. My target is to make 50ticks consistently in CL every day on the whole position. So, if I get a 30tick trade in the London session itself, I stop trading till the Nymex open.
The point is, it depends on your trading goals, your stats, and your grip on your trade plan.

User says:
Do you have a Daily Target (eg 100 ticks on 2 contracts) and Daily Loss Limit? I’ve also noticed you will often increase position size if up for the day. Does this occur often?

Reply:
I do have a daily target as I mentioned before. ie. 50ticks in CL. But I don’t stop trading once that got hit. I take some extra risk after the daily target got hit.
Let us say my position size is 2contracts, and let’s assume that my daily PnL reached 1500. Now, in the next trade, I will take a 5contract trade risking that extra 500 (My avg. stop is 10ticks). If I lost that money, I will be back to the 2contracts again. If that trade some extra profit, I will take a bigger position, risking ‘x’ percent of the profit above 1k. It is a very aggressive position sizing technique and suits only to the smaller accounts and my personality.
P.S – Whatever the PnL is, the setup has to suit the trade plan.