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Saturday, August 9, 2008
Candlestick
Many have heard of candlestick charting but really don't understand the benefits candlestick charting can provide the trader. many traders still haven't taken the proper steps to incorporate candlestick charting into their trading.
Candlesticks are nothing new. Their signals have been around for hundreds of years as they where used by Japanese commodity traders centuries ago. They don't involve complicated formulas or extensive calculating processes to master the system. Candlestick charting is so simple in fact that I believe the simplicity is the reason most traders give candlestick trading nothing more than a passing glimpse. Most technical analysis strategies today are so complicated that it has all but taken the price patterns out of the equation. Well, price patterns are the root of technical analysis and determining the psychology behind them. Candlesticks do this without the need for fancy indicators or complicated systems
Candlestick charting was developed by Japanese rice traders over four centuries ago and could quite possibly be the oldest form of technical analysis. Since technical analysis is not only predicting probable price moves but also assessing market psychology, candlestick charting is probably the best tool to give the trader these answers in the shortest amount of time. Once a trader becomes familiar with candlestick charting, he or she can get a quick and highly visual signal because of the story candlesticks tell. Strict adherers to candlestick methodology take positions based on very short term patterns given by candlestick tradition. While candlestick charting is relatively unknown, and therefore unpracticed by the common investor, their use among active traders is growing. The greatest benefit candlestick charts provide the technical analyst is the ease of use and interpretation. The same price action, quickly seen using candlestick charts, may go unnoticed while scrolling through bar charts.
While analysis of chart patterns takes experience and some practice, so too will candlesticks. However, after learning the basic signals, candlesticks can provide the novice trader a shorter learning curve and also shorten the learning curve to chart reading in general.
While analysis of chart patterns takes experience and some practice, so too will candlesticks. However, after learning the basic signals, candlesticks can provide the novice trader a shorter learning curve and also shorten the learning curve to chart reading in general.
Candlestick charts use the same price data as bar charts (open, high, low, close). However, candlestick charts are drawn in a much more visually identifiable way typically resembling a candle with wicks on both ends. The high and low are described as shadows and plotted as a single line.
The box is the candlestick body and this is also the difference between open and close price. If the box/body is filled then it means the close price was lower than the open price. When the body is empty then this means the close price is higher than open price (thus it was an up-day). The thin lines on top and in the bottom of the candlestick represent the high and low prices during that period. These thin lines are called shadows.
Most traders who truly investigate candlestick trading and put forth an honest effort into learning the bullish and bearish signals candlestick charting provide will really see a difference in their trading success. Candlestick signals provide extremely accurate results. Whether in stocks, commodities or any other chartable investment vehicle, the results are impressive.Buy low and sell high is the mantra on Wall St. but most traders fail at this goal because they don't know how to find the low. Buy low and sell lower is what many investors have found to be the case in their trading. But it doesn't have to be that way! Once mastered, candlestick charting will provide the trader the ability to find stocks that are at a bottom or very near to it.Japanese candlestick charting doesn't take months to master. With practice the patterns can be memorized in a few short weeks and the trader will begin to see these patterns reveal themselves on the charts soon afterward. The most enjoyable aspect of candlestick trading is the patterns begin to stick out like a sore thumb on a stock chart and the trader no longer has to spend as much time analyzing a single stock. The time spent on a single chart is much less so more charts can be studied in a shorter amount of time.
The major signals in candlestick theory are reversal signals. Some of these signals are considered so strong by serious candlestick practitioners they will enter a trade based on its signal alone, without the need for conformation. Since I rarely see the price of a stock "turn on a dime", I usually keep an eye on the stock and enter a trade when the price retests support or resistance.
While I've incorporated candlestick charting into my trading strategies for quite some time, I have learned that there are a few technical criteria that will enhance the candlestick reversal signal. Some of these criteria include:
• Heavy volume on the reversal day – I look for volume to be greater than one and a half times normal volume.
• Greater than average price movement on the reversal day –look for the price to exceed its normal daily price range and appear longer on the chart than most daily candles.
• Stock price that is heavily overbought or oversold –look for the price to accelerate away, but in the same direction as the current trend.
• Signal forms on technical support –look for the reversal signal to reveal itself on a trend line, moving average or horizontal support.
While candlestick charting is enjoying a following that has grown in recent years, it should be viewed as just another tool the trader uses to profit in the market, not as a foolproof method of entering or exiting a stock. The signals tell a story of the psychology of the market. Sometimes the signals are only valid for a short period of time, but at key levels of support and resistance the reversal signals given by candlestick patterns can tip the trader off to a healthy price move.
