Introduction
Strat trading, a methodology pioneered by Rob Smith, offers a unique approach to stock trading. Unlike traditional trading methods that often rely on complex indicators and algorithms, strat trading emphasizes the importance of candlestick patterns and price action. This guide will provide a comprehensive overview of strat trading, its core components, actionable signals, and how to effectively implement it in your trading strategy.
What is Strat Trading?
Strat trading is a trading method developed by Rob Smith that focuses on interpreting candlestick patterns and price action to make informed trading decisions. It involves analyzing the behavior of candles over various time frames to identify potential market movements and actionable signals.
Key Features of Strat Trading
Candlestick Patterns
Understanding the anatomy of candlesticks is crucial in strat trading. Each candlestick provides information about the market's open, high, low, and close prices during a specific time frame.
Actionable Signals
Strat trading utilizes specific candlestick formations, known as actionable signals, to indicate potential entry and exit points in the market.
Time Frame Continuity
Analyzing multiple time frames simultaneously helps traders determine the overall market direction and make more informed decisions.
Broadening Formations
These formations help identify market volatility and potential reversals by examining higher highs and lower lows over a given period.
Candlestick Overview
Candlesticks are the foundation of strat trading. They consist of five key parts: the top wick (high), bottom wick (low), open, close, and color. The color of the candlestick indicates whether the price increased (green/hollow) or decreased (red/filled) during the given time frame.
Wicks
Top Wick (High): The highest price during the time frame.
Bottom Wick (Low): The lowest price during the time frame.
Fill
Open: The price at the start of the time frame.
Close: The price at the end of the time frame.
Color: Indicates price movement; green if the price went up, red if it went down.
STRAT Part 1 - Candles and Pricing Action
1 Candle (Inside Bar)
An inside bar occurs when the current candle falls completely within the prior candle, indicating balance and equilibrium in the market. It's a sign that neither buyers nor sellers are in control, and the market is consolidating.
2 Candle (Directional Bar)
A directional bar occurs when the current candle takes out one side of the prior candle. A 2 down candle means it took out the previous candle's low, while a 2 up candle took out the previous candle's high. This indicates directional movement and potential continuation.
3 Candle (Outside Bar)
An outside bar occurs when the current candle takes out both sides of the prior candle, indicating increased volatility and potential price discovery.
STRAT Part 2 - Other Factors
Time Frame Continuity
This concept involves analyzing price direction across multiple time frames. Full Time Frame Continuity (FTFC) is achieved when all time frames point in the same direction, indicating a strong trend.
Broadening Formations
Broadening formations, or compound 3 bars, are characterized by lower lows and higher highs. They indicate increasing price volatility and are often followed by significant price movements.
STRAT Part 3 - Actionable Signals
Hammer
A hammer candle has little to no top wick and a long bottom wick, indicating potential upward movement. The action is to enter a trade when the next candle breaks above the top of the hammer.
Shooter (Shooting Star)
A shooter candle has little to no bottom wick and a long top wick, indicating potential downward movement. The action is to enter a trade when the next candle breaks below the bottom of the shooter.
Inside Bar
An inside bar, or 1 candle, signifies consolidation. The action is to trade in the direction of the breakout once the consolidation period ends.
STRAT Part 4 - Miscellaneous Concepts
Pivot Machine Gun (PMG)
PMG occurs when a series of candles take out previous highs or lows rapidly, causing a momentum shift. This is a signal for potential trend continuation.
Triangle They Out (TTO)
TTO describes a corrective pullback within a larger timeframe, often forming a wedge or triangle pattern. This is typically followed by a breakout.
Cheat Sheets and Tools
Cheat Sheets
Strat trading cheat sheets provide visual references for different candlestick patterns and actionable signals.
Tools
Trading Platforms: TD Ameritrade Thinkorswim, TradingView
Scripts: Various strat trading scripts are available to help automate and visualize trading strategies.
Conclusion
Strat trading offers a unique and effective approach to stock trading by focusing on candlestick patterns and price action. By understanding the core components of strat trading, including actionable signals, time frame continuity, and broadening formations, traders can make more informed decisions and improve their trading strategies. While it may require some learning and practice, strat trading provides valuable insights into market behavior and potential trading opportunities.
Key Takeaways
Strat trading emphasizes candlestick patterns and price action.
Actionable signals provide clear entry and exit points.
Time frame continuity helps identify strong market trends.
Broadening formations indicate increasing price volatility.
Strat trading can be automated using available scripts.
Suitable for traders willing to learn and practice the methodology.
FAQs
What is strat trading?
Strat trading is a methodology developed by Rob Smith that focuses on analyzing candlestick patterns and price action to make trading decisions.
Who created strat trading?
Rob Smith (@RobInTheBlack) is the creator of strat trading.
What are actionable signals in strat trading?
Actionable signals are specific candlestick formations that indicate potential entry or exit points in the market, such as hammers, shooters, and inside bars.
How does time frame continuity work in strat trading?
Time frame continuity involves analyzing price direction across multiple time frames to determine the overall market trend.
What are broadening formations?
Broadening formations are patterns characterized by higher highs and lower lows, indicating increasing price volatility.
Can strat trading be automated?
Yes, strat trading can be automated using scripts available on platforms like TradingView and TD Ameritrade Thinkorswim.
Is strat trading suitable for beginners?
Strat trading can be suitable for beginners who are willing to learn about candlestick patterns and price action analysis.
Where can I find more information about strat trading?
You can find more information about strat trading on social media, YouTube channels, and various trading forums.
Comments