Candlestick signals have two powerful implications. Candlestick analysis has demonstrated proven its ability to detect trend reversals with a high degree of accuracy. Today's investor has the benefit of centuries of research and analysis from the Japanese rice traders. This analysis has led to the illustration of formations proving to be high probability reversals of a trend. The Japanese rice traders also added a very powerful benefit. They provide the description of the investor sentiment that caused a reversal signal. This produces an extremely powerful and functional investment perspective. It provides the same investment perspective as a highly seasoned trader.
Another major attribute of candlestick signals not only is illustrating formations that represent a change of investor sentiment but also where the signals occur allow for a much more accurate reading of a price trend. For example, one of the major candlestick reversal signals is a shooting star. This sell signal occurs at the top of a trend. It is a clear demonstration of the bulls losing steam and the bears taking control. This becomes a very high probability reversal signal when a trend is in the overbought conditions.
Chart 1After the appearance of a shooting star, a lower open is the confirmation needed to show the bears have taken control. This is when profit should be taken and/or short positions should be established. The signal becomes more compelling when just touching a resistance level or moving too far away from trend support indicators. Candlestick signals are fractal. They work equally well on a 1, 5, or 30 minute chart as they do on a daily, weekly, or monthly chart. Understanding the characteristics of a shooting star signal makes for highly profitable daytrading. For the swing trader or long-term investor, the shooting star signal is a clear illustration that an uptrend is over, at least for the short term.
Chart 2
Chart 3Understanding the characteristics of a shooting star signal also allow for a much more clear reading of the market trends. As illustrated in the Dow chart, candlestick analysis can be applied to the recent price trend to produce a viable trade strategy. As seen in the Dow chart, an uptrend had been in progress, staying consistently above the T line and the 20 day simple moving average. As long as those two conditions were maintained, the uptrend could comfortably be assessed. However, a small shooting star occurred on March 1, followed by a Doji, then a hanging man, did not alter the uptrend because there was not a close below the T line or the 20 day moving average. The large breakdown after the hanging man illustrated a new dynamic in investor sentiment.
Chart 4The last three days of trading brought the Dow back up through the T line and the 20 day moving average. This would be considered bullish had not the final trading day resulted in another shooting star signal. This produces the potential warning for a failed bounce. It is not uncommon for a sustained uptrend to see a sell signal but then try to bounce back up. The bounce of the trend is going to have one of two expected results:
Either the Dow is going to move to new highs upon breaking out above the previous high of two weeks ago, or a failure to reach a new high is more than likely going to start a downtrend. Utilizing candlestick signals at times gives a high probability expectation of the direction of the market/price trend. At other times, it provides a directional forecast based upon how prices open during the following time frame. In the case of the Dow chart, a positive open followed by continued bullish trading would keep the uptrend scenario in place. A lower open on the following trading day after the shooting star signal would be a good indication the uptrend balance had failed. The candlestick investor would immediately close out long positions that had weak charts and/or start shorting positions to put in the portfolio. MetaStock software has simple scanning techniques identifying the best trades for the next trend in less than twenty minutes each day.
Candlestick analysis is merely common sense investment practices put into a graphic depiction. The signals themselves have investor sentiment built into them that can be extrapolated into what should occur over the next few trading time frames. The accumulation of candlestick signals can result in a candlestick pattern. Patterns, just like candlestick signals, are the reoccurring thought processes from investors. Specific patterns have expected results, of which most include extremely strong price moves. Take the time to learn how to use candlestick analysis correctly and you will dramatically improve your investment perspectives for the rest of your trading career. Candlestick signals incorporating common sense investment perspectives, overlaid onto an existing relatively successful trading programs will dramatically improve the results.
Happy Trading,
Stephen Bigalow
About the Author
Stephen 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
www.candlestickforum.com, the leading website provider of information and educational material about Japanese Candlestick investing on the internet. 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.
