Morning star

$VION; A perfect trade using the Morning Star Pattern

Posted by Investing Freak on August 28, 2009
General / Comments Off on $VION; A perfect trade using the Morning Star Pattern

Today I had a chance to experience those special conditions that cause a day trade to turn into great profits.
The stock chosen was VION. It was down 45% for the day on no news. (It is a Pharmaceutical so I thought some bad drug news came out).

As I watched the price slide down like a waterfall I saw a reversal form. This reversal in candlestick patterns is called the Morning Star.
The patterns is a bottom reversal signal. It is most effective following an obvious downtrend (in this case from 6.50 to 2.20)

According to Candlestick Trading Forum:
The Longer the black candle and the white candle, the more forceful the reversal.

The Pattern psychology for this specific pattern says that when the price goes down fast sellers get panicky. They keep selling off and as they are doing that bulls begin to step in.

Now that I have explained the pattern I used time to explain the entry and exit signals.
Entry 1: 100 shares at 2.90
This was an initial entry to test the playing field.
Entry 2: 100 shares at 3.50
I was looking for price to close above 3.25 for 2 consecutive candles to buy into strength. 3.25 if you can spot it is a resistance from earlier candlesticks.
Exit 1:     100 shares  at 4.01
4 is a round number so that makes it psychological for people to dump shares
Exit 2:     100 shares at 4.53
Looking at the far left 4.53 is around where the 2nd large red candle begins. and if you look up further more candles tend to end around 4.75.
Initially I had the limit sell order at 4.74 but I then decided not to push my luck.

Conclusion: After concluding the trade I watched the price go at high as 4.90 then in one big swing it crashed back down to 4.
Overall it was a great risk reward ratio and a well thought out trade.  Morning star followed by an initial entry to test strength of the pattern and if it goes your way add another position which will allow you to scale out.  Now this did take 2 day trades out so if you have under $25k account you will only have 3 trades in 5 days so it’s really not ideal to do every day.

Here is the image to illustrate all the text in this post. (Click to Enlarge)

vion-aug28-trade

 

Hope you enjoyed it and while I do understand this is not a stock pick because it is already gone I hope it serves as a teaching tool to how simple trading can be at times.
-K

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