About Dummy Spots
24 Jan 2006
First, credit where credit is due. As far as I can tell, the original use of the term dummy spots was by “Chairman Mao” on the wonderfully informative maoxian site. He went to great effort to post countless examples in his Trading for Dummies series, and if you study each chart (and you should), he does a very effective job of drilling into your head the necessity of cold, deliberate trading and strict adherence to your own rules.
Definition of Dummy Spots
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In stock trading, a bar or candle having certain characteristics which make it an obvious low-risk entry point into a trade (”so obvious that a dummy could spot it” or “a spot where even a dummy could make money”).
The classic dummy spot is a narrow-range, low-volume inside bar whose break allows you to enter in the direction of the prevailing trend. Sound confusing? It’s actually very simple. See below.
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Short for dummy spotlights often seen on 50s cars
Here’s a beautiful example from just yesterday. One that I completely missed out on, by the way. 
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The overall market was rising.
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GM had gapped up on the open by 15 cents (gaps are good, they attract attention), and had wandered sideways/down on fizzling volume.
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The range on the 10:20 EST “inside bar” was from a low of 20.27 to a high of 20.32, just 5 cents.
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The 10:30 inside bar had a range of 20.24 to 20.31, a lower high, so no trade quite yet.
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Then the 10:40 bar broke the high of the 10:30 dummy spot , triggering a trade. Entry would have been just above the high of the 10:30 bar at 20.32, with a stop at the low of the same bar, or 20.24.
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This entry provides a total potential loss of 8 cents. On a 1000-share trade, that would be a total risk of only $80.
The chart tells the rest of the story. With decent money management, you could have gotten a minimum of $21 out of the stock in just a few hours, and potentially much more. Even if you sold at $21 at 1pm, you’d have made $680 from an $80 risk in under 3 hours. Or, if you’re a Big Fish with a larger account, that would be $6800 on an $800 risk in 3 hrs. Not a bad return.
The narrow-range bar provides a natural point for setting a tight stop, and entering in the direction of the trend places you on the side of probability. The ideal trade setup. From there, your position sizing and money management rules take over.
More About Dummy Spots
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Dummy Spots occur in all time frames, from one-minute bars to daily or even weekly bars. Most traders tend to use 5-minute to 60-minute bars, as those show the best daytrade setups. The 5-min bars can give more false signals, and not much time for evaluation; you often have to trade within a matter of seconds. I’ll occasionally use the 5’s, but only in very specific situations. I usualy stick to 10, 15 and 30-minute bars. They give fewer false signals, and are much easier on the nerves. Every evening I look for possible swing-trade setups using daily bars.
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Dummy Spots occur many times every day. The difficulty in catching them is not unlike hunting- you have to be at the right place at the right time, know exactly what you’re watching for, and be ready to pull the trigger when the time comes.
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There are other bar types I consider to be Dummy Spots depending on the context in which they occur. For example, a hammer (for you Japanese candlestick fans) on a 5-minute chart descending into yesterday’s close within 45 minutes of a gap-up opening is often a Dummy Spot. Picky? You bet.
What about all those other trading methods?
There are countless methods to determine entries into a trade. Most people think that’s the secret to trading, so they go from method to method and rapidly begin losing money. They think something must be wrong with the method (”I’ll never use that MACD signal again, dammit, look how much money it lost me”) and spend years trying to find the magical method that is always right. The need to be right is behind a large number of our trading errors.
Successful traders are not sucessful so much because of the method they use, but because they’ve mastered the art of taking a loss. They tend to settle on a method which, for lack of a better term, matches their style. That method may only be “right” half the time, but that’s plenty for a skilled trader to come out positive overall with good money management.
So there you have it- “Dummy Spots” is just a name for a specific kind of trading setup. That’s why I chose it for a domain name, but since I’ve had the site up, I’ve heard many other interpretations: “the spot for dummies,” “trades that a dummy (me) spotted,” alternative to “stock spots,” etc.
Welcome, and cheers.