Marlyn’s Three Methods

One of the things I learned many years ago when I was studying candlesticks is the rule of threes. Moves in the stock market have a tendency to happen in threes – three tops, three bottoms, three gaps up, three gaps down, three methods and so on. The rule of thumb is buy, buy, sell, and rest.

The first day the speculators come to the market place and buy. The second day the volume from the first day is noticed and the brokers join the speculators and continue to buy up. On the third day the retail trade figures it out and the speculators and brokers offload their inventory onto them. By the end of the 3rd day the speculators are out of the market. The morning of the 4th day dawns clear and then a storm develops - this is when the retail traders can’t find buyers at higher or even equivalent prices and begin to panic sell.

For swing trading I like buying distressed stocks off large volume (buying the dips as they call it) - then I either close the trade on the third day or first thing in the morning on the fourth. If the trade appears to be running I might leave it on but with a tight stop on the fourth day because I’m not giving up too much profit against the coming panic. Occasionally I’ll get a runner but I’m expecting them to drop so I’m ready to sell in an instant.

A filter such as “MACD Histogram is Negative” is ideal for this kind of approach because the negative histogram reflects a distressed stock. By staying with the top volume of the filter output I’m generally getting in at the end of the blow-off bottom which is normally accompanied by large volume. It also serves as a convenient set-up to a potential trending stock because almost all trending stocks start with a negative histogram.

You might keep some of these ideas in mind in your own trading.