Trading What I See

When you are day trading, anything you can do to make decisions easier or faster is to your advantage. Even when swing trading, as you scan through chart after chart, being able to interpret the information quickly allows you to be more productive.

I received a question the other day about my colorful charts, since most candlesticks have one color for bars that close higher than the open and another color for the reverse. I’ll be away from my trading desk today, and since I’m able to schedule posts that appear at a later time, we’ll take a look at Dunnigan Bars.

William Dunnigan was a market newsletter writer in the 1950’s, and spent much time searching for a mechanical system for trading stocks and commodities. For mechanical trading you must carefully define everything, and for Dunnigan “everything” included different types of bars. In his book One-Way Formula for Trading in Stocks & Commodities he talked about Inside, Outside, Up, and Down bars (but only used the last two for his One-Way system.)

Although I’ve coded my own color bars in programs like Metastock, QuoteTracker, and Ensign, someone saved me the trouble in eSignal by writing an EFS (script) appropriately named Dunnigan_Bars. I just modified the colors to make it easier to read on my black backgrounds.

A green bar has both a higher high and a higher low. A red bar is the reverse, with a lower high and a lower low. These are what Dunnigan used in his system. But I’m at least as interested in the other types.

The magenta bar is an inside bar. Notice how it points out the small pullback in this nice downmove. Sometimes that’s the only opportunity for a pullback entry in a fast, sustained move. And the blue outside bars often appear at reversal points, where they turn blue just as the bar starts in the opposite direction.

If you use exceeding the previous bar’s extreme for an entry (as I sometimes do), you can tell the instant it happens without looking at the price scale. The bar will change color, often from magenta to red (or green) as in this downmove.

Like candlesticks, they don’t actually add information to the chart, but they make it tremendously easier to see what is there. You’ll see them on most of my posts.