In this issue:
Candlestick Signals - Making Trend Analysis Easy
Contributed by Stephen Bigalow
Trend analysis can be very simple when utilizing the inherent benefits built into candlestick analysis. The visual aspects produced by candlestick signals and patterns dramatically improve an investor’s ability to correctly assess the direction of the general markets.The Buy and Hold investment philosophy has not worked very successfully over the past two decades. Why? Because most money managers work off of a very simple premise. Buy a good strong company and hold it for long-term. You will do well. Unfortunately, they disregard one of the basics truths of price movement in the markets. Prices do not move based upon fundamentals. Prices move based upon the perception of fundamentals. There are many clear examples why fundamental analysis is not a primary factor for analyzing market trends. For example, at the end of 2007 analysts were recommending stocks such as US Steel Corp. at $180 a share because it was a fundamentally strong company. That analysis does very little for an investor when the price falls to $20 a share by the beginning of 2009. It is not the fundamentals of companies that move stock prices up or down. It is the investor sentiment pertaining to a stock that dictates whether it moves up or down. Candlestick analysis provides a very clear indication of what investor sentiment is doing in the markets. Japanese rice traders used the same information found on a standard bar chart. The difference is that they put more weight on the open and closing prices versus the high and the low of a time period. As illustrated in the US dollar chart, candlestick signals produce reversal signals that create a high probability that a new trend has occurred.
The one basic factor built into Japanese candlesticks signals is that they are formed by the cumulative knowledge of all the investor input, the buying and selling, of a trading entity during a specific time period. No matter what you hear elsewhere about the direction of the market, candlestick signals tell you ‘exactly’ what investor sentiment is doing. Candlestick analysis allows investors to project market reversals with a relatively high degree of accuracy. This can be done when utilizing the 12 major candlestick signals. One misconception about candlesticks signals is that there are too many of them to learn. In reality, of the 50 or 60 candlestick signals, there are only about 12 signals that will occur a vast majority of the time. The Doji, the Bullish and Bearish Engulfing signal, the Hanging Man, Shooting Star, Hammer, the Bullish and Bearish Harami, the Dark Cloud, the Piercing pattern, and the Kicker signal. Although they may not sound sophisticated, the Japanese rice traders named these signals to make them easy to recognize as well as to understand. Knowing what the signals represent will dramatically improve your analysis of trend reversals and movements.
Japanese Candlestick signals incorporate an extensive amount of information not found in other trading methodologies. Hundreds of years of observations not only allowed Japanese rice traders to successfully identify accurate reversal patterns, they could also describe the investor sentiment that formed the signals. This knowledge is a very accurate tool for projecting the next move in price. It is simplified for all investors, whether a novice or a professional investor, to greatly enhance returns.
Identifying long established, statistically proven reversal patterns, as well as knowing how they were produced, provides a very powerful investment tool. Buy low, sell high. Amazingly simple! This should lead to a simple question. Who was buying when everybody was panic selling and who was selling when investors were running prices through the roof? Fortunately, these questions have been asked for centuries. Visual observations recognize the existence of fear and greed. Japanese rice traders recognized reoccurring patterns that depicted the reversals in trends, utilizing the price movements preceeding a major trend reversal.
A candlestick signal formation has one major aspect that makes it more powerful than all other technical analysis. The signal is the result of the change in investor sentiment. This statement will be repeated for effect. The signal is the result of the change in investor sentiment. Not the anticipation of a possible change! The actual result is the change of trend direction. Having this as an investment tool can dramatically change an investors ability to maximize profits while reducing risk exposure. It allows the average man or woman investor to invest with the same temperament as the professional trader.
Buy at the bottom, sell at the top. Pretty easy, right? Yet where does one grab the falling knife? When is high too high? Candlestick signals alleviate that problem. A candlestick ’buy’ signal, appearing after an extensive decline in a stock price reveals compelling information. ( All trading entities can be effectively analyzed with candlesticks. The term “stock” will represent all trading entities.) . This information inherently benefits investors, making for comfortable trading decisions.The basic function of investing is to make money. However, few investors develop a trading program that put the probabilities in their favor. If searching for the “Golden Goose” of investment programs, the criteria would be simple; well researched, proven track record, and easy-to-identify reversal points.All three of these elements are incorporated into Candlestick signals. Hundred of years of rice trading resulted in the identification high probability profitable trades. Make one assumption. The signals would not be around today if it were not for one convincing result. PROFITS! Candlestick signals exist today because of hundred of years of actual profitable trades. Not computer back testing. Not questionable results. Profits produced from utilizing the signals are the only reason we are witnessing these signals today. Reversal signals were identified by rice traders using very simple charting techniques. You can take advantage of these clear profitable signals?
Trend analysis becomes much easier, as illustrated in the NASDAQ chart. The Doji, followed by a gap down, provides strong probabilities of a downtrend. The Bullish Engulfing signal, when stochastics are in the oversold condition, provide high probabilities of an uptrend. The non-signal after the first downtrend implies the possibility of some buying coming into the market but not any decisive trend reversal. As seen, the next two months consisted of indecisive waffling in a trend channel. As in any investment program, the underlying motive is to find characteristics that place the probabilities greatly in the investors favor. Logic implies that when you witness a Japanese candlestick “buy” signal in an oversold condition, you should have an extremely high probability that a bullish trade will be profitable. Oversold conditions can be defined as to when stochastics are in the area of 20 or below. Being able to add other conditions such as moving averages, Fibonnacci numbers, trendlines and trading channels, to a Japanese candlesticks signal in oversold condition only enhances the probability of making a correct trade. Putting all these observations together provides a compelling platform for market timing strategies.Utilizing the information from high probability patterns also allows investors to make a relatively accurate assessment of the market direction. Beginning in August of 2011, bullish Harami's indicated the end of the downtrend. The following eight weeks revealed an indecisive trading pattern called the Dumpling Top. The inherent trading forces build up in a dumpling top indicate a hard downtrend is about to follow. This can be seen in the dumpling top form in the Dow during the summer of 2008. Conversely, when a strong pattern is breached to the upside, the force of the upside move has to be substantial to offset the potential force to the downside. As witnessed, the breach of the upside rounding top trajectory would imply a very forceful breakout.
Having this analysis capability in your [censored]nal allows the candlestick investor to have their portfolio positioned in the correct direction when a move occurs. Understanding the psychology of how the signals are formed provides investors with better foresight in where to have positions placed. The signals in the last week of January created the opportunity to add short positions to the portfolio whereas the signals in the first week of February produced high probability signals that would have covered the short positions and added long positions.
This is not rocket science. This is simple investment philosophy’s put into a visual graphic. The 400 years of actual investment results from Japanese rice traders have provided high probability signal results. The candlestick signals illustrate the investor sentiment, mostly defined as fear and greed. Human emotion, when it comes to investing funds, will always have the same ingredients. The candlestick signals are simply the graphic depiction of investor sentiment. Candlestick signals were not discovered and tested by computer back testing simulations. Candlestick signals are the result of centuries of analyzing what human emotions effect a price trend. The occurrence of the signals, over and over, at specific points in a trend-reversaI, provides a statistically proven trading platform. If you understand how they are formed, you’ll understand what makes prices move.
About Stephen BigalowStephen W. Bigalow is author of “Profitable Candlestick Investing, Pinpointing Market Turns to Maximize Profits”, “High Profit Candlestick Patterns” and “Candlestick Profits, Eliminating Emotions” is also principal of the CandlestickForum, the leading website on the Internet for providing information and educational material about Japanese Candlestick investing. Over 28 years of extensive study and utilization of candlestick analysis has produced an array of easy-to-learn educational material about Candlesticks. As one of the leading Candlestick experts in the nation, Mr. Bigalow, through consulting with major trading firms, has developed multiple successful trading programs from the day-trader to the long-term hold investor.
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Have you ever wanted to know what all of the letters in the Time & Sales feature of QuoteCenter mean?
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About Kevin Nelson
Kevin Nelson is the founder of Breakaway Training Solutions, Inc. He has spent the last 17 years becoming an expert on MetaStock software and a serious student of technical analysis while working for MetaStock. Prior to joining MetaStock in 1993, Kevin was a stockbroker for a well-known NYSE firm. In his role as Sales Manager at MetaStock, Kevin interacted extensively with MetaStock customers via phone, webinars, and public appearances. His experiences while working at MetaStock have enabled him to gain a keen understanding of the needs of technical analysts worldwide. While with MetaStock, Mr. Nelson was a featured presenter for four years. During this time, he traveled the U.S. introducing the MetaStock program to thousands of people and teaching them how to use its many features. His easy-to-understand approach is considered by many to be the best in the industry. ©Breakaway Training Solutions, Inc. 2011
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