Green Flag

Your One True Signal

For Fast Profits

$
By
Stephen Bigalow

Copyright 2015 by Stephen W. Bigalow

All right reserved. No part of this book may be reproduced, scanned or distributed
In any printed or electronic form without permission.

Green Flag
Your One True Signal For Fast Profits
A lot has been written through the years regarding Candlestick patterns
especially the Doji pattern. Of all the Candlestick patterns, the Doji pattern
appears the most often. The Doji represents indecision on the part of
traders and it occurs when the open (or the first trade of the day) and the
close (or the last trade of the day) are almost the same price.

The word almost must be emphasized because the open and the close dont
have to be exact. In fact, its rare that the prices are exactly the same.
When a stock or an index has been declining and reaches an oversold
condition, its quite common for these declines to come to an end with the
appearance of a Doji. At a market bottom, because a Doji pattern indicates
indecision, it must be confirmed on the following bar by positive price
action. If this positive price action results in an open above the high of the
Doji bar, it creates a price gap. We refer to this formation as the Green Flag
Doji Gap pattern.
So Easy to Spot
A 2-Year Old Can Do It!

My Green Flag signal is a very

simple 2-step process. It starts
with the appearance of a Doji
pattern when a stock is in an
oversold condition. If the open
the next day is above the high
of the Doji bar, step 2 is
complete and my Green Flag
is confirmed.

Its funny. When I watch Steves live

webinars my 2-year old son wants to
watch too. And when Steve points out a
doji followed by a gap, in the excited way
that he does, my son repeats it back.
Doji Gap! Doji Gap! he says.
Its so cute, I think Ill train him to be my
little trading buddy.
Karthik R., CPA in New York, NY

Here are some actual trades:

(Fig. 1)

In mid-October 2014, the stock of United Health Group (symbol UNH)

suffered a loss of around 10% from the September high. On October 15th,
UNH ended the day with what we refer to as a long-legged Doji. That
morning, aggressive selling on the part of traders caused the stock to open
lower and trade much lower than the previous day. As the price traded
below 81.00, cautious buyers stepped in and began to buy. As the buying
continued, UNH was able to trade from below 81.00 all the way back up to
the previous days close. But late in the day, sellers reappeared moving the
stock lower into the close creating the long-legged Doji pattern.

The T-Line in the chart above is based on an 8-period exponential

moving average and is used as a confirming indicator.
(Fig. 2)

October 16th was a rewarding day for those initial UNH buyers as the stock
opened well above the high of the Doji day leaving a very sizeable price gap.
At a price of 85.39, the Doji pattern is confirmed by a close above the open
as well as a close above the T-Line.

Two weeks later, our trade is doing quite well.

As long as UNH finishes each day by closing above the T-Line, theres no
reason to close out the trade. In the chart below, we can see that the T-Line
does a very effective job as a trailing stop. As the price moves higher, the
value of the T-Line moves higher locking in more of our profits.

(Fig. 3)

Finally, on November 7th, as the stock closes below the T-Line our trade
comes to an end at a price of 93.61.

Lets take a look at the choices for our trade:

We could have bought the stock at a price of $85.39 per share
and we could have sold it for $93.61 for a gain of $8.22 per
share before commission. Our profit in the stock would have
been just under 10%. A conservative investment of $597.73
would have allowed us to purchase 7 shares of the stock.
Or, we could have purchased a Call option. To get the trade
started, just before the close on Oct. 16th, because the stock was
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trading at 85.39, the 85 strike price is our best choice. As for the
expiration month, because the Green Flag pattern is so effective,
4 to 6 weeks is usually enough time for a low risk trade. The
November 22nd 85 Call was trading at 2.83. At the end of the trade,
on Nov. 7th the option was valued at more than 11.00 representing
a gain of roughly 290%. Two options could have been purchased
for $566.00 before commission.
Or finally, we could have purchased a Debit Spread by buying the
November 22nd 85 Call and selling the November 22nd 90 Call. Just
before the close on Oct. 16th, the value of this spread was 2.03. On
Nov. 7th, the value of this spread was just under 5.00 representing a
gain of roughly 145%. Three of these spreads could have been
purchased for $609.00 before commission.

Below is a question, but before you answer it, go back and take another look
at the three choices listed above.
Of the three choices, which trade would have offered the most reward
while carrying the least amount of risk?
Before answering, here are a few more things to consider:

If wed have purchased the stock, our profit before commission would have
been $57.54. But if the trade had not worked out and UNH had declined, our
stop would have been the low of the Doji bar (or 80.72). Based on an entry
of 85.39 and an exit of 80.72, our maximum risk before commission would
have been $4.67 per share or roughly 5.5%.
Our second choice would have been to purchase two Call options for $566.
Had we made this choice, our profit before commission would have been
roughly $1,600. Our stop would have remained the same. Wed have closed
our trade when the stock reached a price of 80.72. In the case of options,
its very difficult to estimate what the value of the Calls might have been had
the stock traded down to 80.72, but a good guess would be a loss of $350 to
$400.
When purchasing Call or Put options, a good rule is to limit your
loss to 50% of your cost of purchasing the options. In this case,

our exit would have been a price of 80.72 on the stock or a

50% loss of $283 on our option position, whichever comes first.

Had we taken the third choice and purchased three Debit Spread contracts
for $609, our profit would have been just under $900. Again, our trade
would have been closed when the price of the stock reached 80.72 or if the
value of the Debit Spread contracts reached a 50% loss of $304.50.

Now, back to our question. Which trade would have offered the most reward
while carrying the least amount of risk?
Theres actually no best answer to this question. There are many
variables, and each persons risk profile is different from everyone
else.
For inexperienced or very conservative traders, the best answer is
choice #1, the purchase of stock.
However, for individuals who choose to purchase options, we prefer
choice #3 over choice #2. In our opinion, a properly structured Debit
Spread is much less risky than the outright purchase of Call and Put
options.

Here are the rules for the Doji pattern:

1. The open and the close are near (or very near) the same price.
2. The length of the shadow should not be excessively long,
especially at the end of a bullish trend.
3. A Doji Gap occurs if the stock or index is in an oversold condition
and the next day the open is above the high of the Doji.

The software code below is for the TC-2000 data service:

ABS(O-C)<=(H-L)*0.1
And AVGV90>2000
And C>25
And STOC12.3<20
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The first line identifies the Doji pattern.

The second line requires that at least 200,000 shares of stock
has been traded (on average) for the last 90 days. TC2000
uses units of 100 for volume. Thus 2000 represents 200,000
shares.
The third line will require the price to be above 25. This is done
for the purpose of being able to trade options on the stocks
that are found.
The fourth line requires that the stock be in an oversold
condition with the Stochastic below 20.
This code is saved and given the name Doji.

For the TC2000 search criteria, we prefer these settings:

Doji True
Optionable Stocks True
This search criteria is saved and given the name Bigalow Doji.

If youre a user of the TC2000 service, the software code above will allow
you to search thousands of stocks for a Doji pattern that completed today.
For actual trading, youll need to make sure that the buy signal has been
confirmed the next day by a close above the open.
If the open on the confirmation day is above the high of the Doji, it creates
a Green Flag Doji Gap. We prefer to wait until the close of the Doji Gap bar
to make sure the close is above the open.
___________________________________

The software code for Think-Or-Swim and TradeStation can be found in the
Appendix.
___________________________________

The first trading day of 2015 came on a Friday. Because many traders were
still enjoying the holiday combined with the fact that it was a Friday, many
stocks finished the day with indecision patterns.

(Fig. 4)

One such stock was Merck (symbol MRK). The mild December selloff left
MRK in an oversold condition and the stock ended the day closing very much
near the open creating the typical Doji pattern.

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On Monday January 5th, buyers pushed MRK higher resulting in a gap above
the high of the previous trading day. This very simple one-two combination
of a Doji day followed by a gap open above the high of the Doji bar is what
makes my Green Flag pattern.

(Fig. 5)

But as we can see in the chart above, by the end of the day, sellers took
control and the stock finished the day very much near the open resulting in
a second Doji pattern.
An important part of this gap up day was the fact that the close was above
the T-Line. Although the indecision remained, the Green Flag pattern
combined with a close above the T-Line was a positive event for the stock at
a price of $58.04 per share.

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(Fig. 6)

Because the Doji pattern indicates indecision, the appearance of multiple

Doji patterns indicates even more indecision.
The indecision is finally resolved and MRK makes a very impressive move to
the upside.

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As the trade continued to develop, within a few days, the stock reaches an
overbought condition as the Stochastic Indicator moves up through 80.

(Fig. 7)

Finally, on January 21st, a new Doji topping pattern is confirmed by a

negative candle with the close below the open and our trade comes to
an end at a price of $62.16 per share.
Lets take a look at our trade:
We could have purchased 8 shares of the stock for $58.04 per
share for a total investment of $464. We could have sold those
shares 16 days later for $62.16 for a profit of $4.12 a share
(or roughly 7%). The gain on our $464 investment would have
been $32.96 before commission.
A better trade would have been to purchase Call options. With
the stock trading at $58.04, the 57.50 strike price would be the
best choice. Choosing the February 20th expiration would give
our trade enough time to develop. At a price of $220 per option
we could have purchased two Call options for $440. On Jan. 21st
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the options were valued at $500 each. Our investment of $440

would have resulted in a profit of $560 before commission.
Another choice that would have carried slightly less risk would have
been a Call Debit Spread. We could have bought the Feb. 20th 57.50
Call option and sold the Feb. 20th 60 Call option. On Jan.5th, the value
of the Debit Spread was 1.22. Four spread contracts could have been
purchased for $488. At the exit, the Debit Spread was valued at 2.12
per spread contract for a total gain of $360 (or roughly 73%).

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During very indecisive times, a stock can experience a series of several Doji
patterns in a matter of a few days.

(Fig. 8)

In the chart above of Pfeizer, intense selling caused the stock to be in an

oversold condition for much of the month of October. The selling, however,
came to an end as cautious buyers began to support the stock between
$27.50 and $28.00 a share.

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(Fig. 9)

On October 21st, the indecision appears to be resolved as the stock opens

above the highs of the last two Doji bars. The Green Flag Doji Gap pattern
is confirmed by a close above both the open and the T-Line.

When a stock opens above the high of the previous

bar, it illustrates the potential power of the upside
price move.

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After a confirmed Doji Gap formation, its not uncommon for the price to
move cautiously higher as more buyers begin to accumulate shares of the
stock.

(Fig. 10)

Its important to remember that when a stock or index is in an oversold

condition, end of day closes that are above the T-Line are a very good
indication that the trend has changed from down to up.

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On October 23rd, early morning buying once again created an open that
was above the highs of the previous two days. Upside gaps such as this,
illustrates strong interest on the part of buyers.

(Fig. 11)

But by the end of the day, the tug-of-war between buyers and sellers
continues resulting in yet another indecisive day.

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Finally, on October 24th, all of the indecision comes to an end as buyers take
complete control, moving the stock higher into the close.

(Fig. 12)

Once an uptrend is solidly in place, Candlestick traders should hold a

position as long as the close is above the T-Line.

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The chart below illustrates the effectiveness of the T-Line when used as a
trailing stop.

(Fig. 13)

On November 24th, our trade comes to an end as the stock closes below the
T-Line.
Lets take a look at how we might have traded this Doji signal:
We could, of course, have simply bought the stock. At a price of
$28.28, we could have purchased 18 shares of stock for an
investment of $509.04. Four weeks later, our trade could have
been closed at a price of $30.22 for a gain of $1.94 per share
(or roughly 7%).
Another choice would have been to either buy Call options, or a
Call Debit Spread. On Oct. 21st, with the stock trading at 28.28,
the best choice for a strike price would have been the 28 Call.
As for the expiration date, the November monthly options were
set to expire on November 22nd.

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As mentioned earlier, when choosing an expiration date,

we prefer 4 to 6 weeks. In most cases, 4 weeks will allow
enough time for a trade to develop. But for this trade, our
official exit came one day after the November expiration.
Nevertheless, well continue this example using the November
expiration.
To get this trade started, wed have purchased the Nov. 22nd 28 Call
which was trading at .62 (or $62 per option contract). Eight options
could have been purchased for $496. On November 21st, the 28 Call
option expired at a value of 2.30 (or $230). Our 8 option contracts would
have had a value of $1,840 for a gain of $1,344 (or roughly 370%).
A slightly more conservative trade would have been to purchase a Call
Debit Spread. We could have bought the November 22nd 28 Call and
sold the November 22nd 31 Call for .59 (or $59 per spread contract).
Eight spread contracts could have been purchased for $472. On
November 21st, each Debit Spread had a value of 2.28 (or $228) for a
gain of $169 per spread contract. On an investment of $472, our profit
for this trade would have been $1,352 (or roughly 286%).

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When a stock or Index is making a top and a Doji appears, its extremely
important to wait for a downside confirmation. When theres been an
uptrend followed by an indecision period with the appearance of one or two
Doji patterns, its not unusual for prices to move higher as the last wave of
buyers come in.

(Fig. 14)

In November 2013, as the stock of Yum Brands (symbol YUM) traded higher,
the 12-Period Stochastic began to show signs of being extremely
overbought. After one final move to a price above 78.00, Doji patterns
began to appear.
When two or more Dojis begin to appear, we refer to this as a Series
of Dojis.
As we can see in this chart, the indecision is finally resolved to the downside
as the price of YUM gaps lower confirming the move to lower prices.

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After a decline of just over 8%, cautious buyers begin to support the stocks
at a price of around 72.00.

(Fig. 15)

Several weeks later, as YUM trades back into the 77.00 area, the
tug-of-war between buyers and sellers results once again in yet another
Doji pattern.
With the appearance of a Doji when the Stochastic is indicating an
overbought condition, all thats needed is a downside confirmation
bar to tell us that a low risk trade may be at hand.

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(Fig. 16)

The next day is January 9th 2014 and the stock gaps much lower on the first
trade of the day. This gap to lower prices is the first indication that nervous
sellers are starting to close their positions. By the end of the day, the stock
closes very near the open creating another Doji pattern. That close, by the
way, was also below the T-Line.
At a price of 75.05, if more sellers begin to appear, the first downside
target for YUM will be the recent lows at around 71.00. The next
downside target will be the October lows around 64.00.
Always remember, no matter how good these Doji setups may appear,
theres never a sure thing. The key to successful Candlestick trading
is finding many different low risk opportunities and trading each one
in a conservative manner.

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After a series of black candles, YUM surpasses our first downside target and
moves into the area of our second target.

(Fig. 17)

In a deeply oversold condition and with an earnings report expected in a few

days, our trade is closed with the stock trading at 67.15.

The only practical way to take advantage of a Doji Gap Sell signal
is to purchase a Put option. Trying to short the stock is not only
expensive, its quite dangerous.

At a price of 75.05 in the stock, our best choice would have been the 75 Put
option. Near the end of the day on January 9th, the February 22nd 75 Put
option was trading around 2.60. Two options could have been purchased for
roughly $520 plus commission. On January 31st, near the end of the day, the
75 Put had a value of 8.20. At more than three times the intial cost, this
trade would have gained roughly $1,120 before commission.
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Another choice for this trade was the Feb. 22nd 67.5 72.5 Debit Spread
trading at 1.46. Although Debit Spreads dont usually do quite as well as the
purchase of Put options, they carry less risk. At a closing price of 3.49,
either trade would have more than doubled in value.

Finally, lets take a look at a situation when a Doji pattern appears in a stock
that is not trading at or near recent highs or lows.

(Fig. 18)

In the majority of cases, the best trading opportunities will occur when a
stock or an Index is trading near recent highs (for a sell) or recent lows (for
a buy). But heres an example of a stock getting a Doji pattern while
undergoing a period of price consolidation.
In August 2014, VmWare (symbol VMW) peaked at a price just under $105 a
share. The next 8 weeks, however, were not kind to VMW as the stock
declined by more than 25%. From mid-October through late November, the
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stock struggled higher. On Friday November 28th, the stock ended the day
closing near the days open creating the Doji pattern.

(Fig. 19)

On Monday December 1st, with the stock in an overbought condition, VMW

gapped lower creating the Doji Gap pattern. The negative candle that was
created by a close below the open was a warning to traders that the
downtrend may be about to resume.

Although a trade could have been initiated near the end of the
day, conservative traders may want to wait for a close below
the T-Line.

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(Fig. 20)

With the Doji Gap pattern in place, the close below the T-Line is finally
realized on December 2nd as sellers pushed prices lower.

On December 2nd, the value of the January 85 Put option was 3.15.

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(Fig. 21)

As the stock traded lower and reached an oversold condition, our trade is
closed on December 17th at a value in the Put option of 6.70.

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Appendix
Notes about using the Think-Or-Swim platform
Candlestick patterns are already a part of the Think-Or-Swim platform.
Although these built-in patterns do an excellent job of identifying many of
the Candlestick patterns, the code below will identify the patterns that are
illustrated in this booklet.
Software code for the Think-Or-Swim platform
This code is for the Doji pattern:
Def Stoc = StochasticSlow(12, 1);
Def MinVolume = Average(Volume, 90);
Plot DojiPattern = AbsValue(Open - Close) <= (High Low) * .1
And Close > 25 And Stoc < 20 And MinVolume > 200000;
DojiPattern.SetPaintingStrategy(PaintingStrategy.BOOLEAN_ARROW_UP);
DojiPattern.SetDefaultColor(Color.Light_GRAY);

The first line calculates the Stochastic values.

The second line calculates the average number of shares of stock
that have been traded for the last 90 days.
The third line puts it all together and identifies the occurrence of the
Doji pattern.
The fourth and fifth lines control how the Doji pattern is identified on
the price chart.
*** The StochasticSlow function uses a built-in smoothing factor of 3.
Therefore, what might be coded for other platforms as (12, 3, 1) or
(12, 1, 1) for the Think-Or-Swim platform, its simply (12, 1).

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Software code for the TradeStation Easy Language platform

This code is for the Doji pattern:
Vars: oFastK(0), oSlowK(0), oFastD(0), oSlowD(0);

Value1 = Stochastic(High, Low, Close, 12, 3, 3, 1, oFastK, oSlowK,

oFastD, oSlowD);

If AbsValue(Open - Close) <= Range * .1 Then

If Average(Volume, 90) > 200000 Then
If Close > 25 Then
If oSlowK < 20 Then
Plot1(Low, "Doji");

The first line declares the variables that will be used in the code.
The second line calculates the Stochastic values.
The third line identifies the Doji pattern.
The fourth line requires that at least 200,000 shares of stock
have been traded (on average) for the last 90 days.
The fifth line will require the price to be above 25. This is done
for the purpose of being able to trade options on the stocks
that are found.
The sixth line requires that the stock be in an oversold
condition with the Stochastic below 20. Be sure to reference
oSlowK.
The last line identifies the bar as a Doji.
Before saving the code, its important to tell TradeStation how
the Doji will appear on a price chart. This is done under the
Properties selection under Chart Style. Make sure the Type is
set to Point. Also, there are 7 choices for Weight, choose at least
#4 or larger.
This code is saved and verified given the name Bigalow Doji.

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If this software code is used in RadarScreen, it will allow you to search

various portfolios of stocks for a Doji pattern that completed today. For
actual trading, youll need to make sure that the buy signal has been
confirmed the next day by a close above the open. Conservative traders
should also wait for a close above the T-Line.
When this indicator is used in RadarScreen, youll need to tell RadarScreen
to load additional data. This is done by highlighting the RadarScreen
window and clicking on the indicator Bigalow Doji. With the indicator
column highlighted, click Format, choose Analysis Technique, then choose
Bigalow Doji for All Symbols. Under the General tab click the check box
for Load additional data .. and enter 25 as the additional bars to load.
RadarScreen allows for searching various time frames, be sure to choose
Daily as the Interval.

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