Alphatrends founder Brian Shannon has a clever strategy for using candles.
Instead of drilling down to a time frame of 60 minute candles, he uses 65 minutes.
"The market is open from 9:30 to 4:00 each day," Shannon told the Benzinga crew this week on Benzinga'sPreMarket Prep. "We have 13 periods that are 30 minutes long. If we're looking at 30-minute candles, then we have 13 periods each day. If we look at hourly candles -- 60-minute candles -- you'll have a candle that goes from 9:30 to 10:00, then 10:00 to 11:00, and so on until the end of the day.
"So you have seven candles representing a day, but that first candle only represents 30 minutes of trading. So you're comparing apples to oranges. You have one orange on the open, then you have six apples."
In order to make things more precise, Shannon did a little math.
"The market is open 390 minutes a day," he said. "If you divide that by 65, you'll see that we have six equal candles. So if you're putting moving averages on there or any indicator, you're comparing apples to apples -- not putting extra emphasis on 30 minutes and not overweighting it when it doesn't deserve to have that extra weight."
Shannon doesn't think that there's any special magic in looking at the actual patterns of candlesticks. In fact, he favored bar charts for more than a decade. But as he started doing a subscription service, he found that investors liked candles.
"Candle versus bar, I don't think there's any real difference," said Shannon. "You look at what's comfortable for you. As a swing trader, the main timeframes I'm looking at I want to be aware of what the timeframe trend is on a longer-term timeframe, such as a weekly chart. But that doesn't really play into my decision-making. My decision-making comes down to, and I'll make it kind of general, looking at a daily chart to see what's the primary trend, and then I'll drill down to a timeframe of either 65-minute or 30-minute candles."
Not every loser can be turned into a winner.
"The biggest thing I think that a lot of people have issue with is thinking that the market is always going to come back and that they can buy on the dips each time and not being able to take losers -- taking that small loser before it turns into something bigger," said Shannon.
"We're seeing a little bit of a correction in the market right now; we never know if it's going to be the correction that turns into a bear market. So we have to be cautious when the market starts pulling back and wait for evidence that the buyers are actually showing up again."
Shannon said that he thinks that some traders have created a lot of bad habits thinking that it's just another pullback and that a particular stock will come back.
"And then they start getting into the cycle of trying to justify holding a loser position," Shannon added. "And then [they] add to it and they're really just compounding the problem rather than dealing with the problem right away as soon as it pops up and taking a reasonable stop loss."
Check out the video below for a recap of Brian Shannon's guest spot on Benzinga's #PreMarket Prep show:
Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.
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