Profitable Stock Trading Strategy - Using Candlestick Analysis
Many investors want to buy stocks that will go up, however they never develop a profitable stock trading strategy. Part of that strategy is to know when to get in and when they get out. As so cleverly advised by the so-called stock market professionals, you should let your profits run and cut your losses short. But nobody ever instructs you on how to do that. Candlestick analyses, utilizing the candlestick signals, provide a clear format for a profitable stock trading strategy.
Using candlestick signals to enter trades is just step one. The next process is to be able to analyze whether the new trend, starting from the reversal signal, is being confirmed. This usually requires seeing continued buying in the trend. Being able to recognize when the selling has come in, whether after two days or two weeks becomes an important factor in a trend. Use of simple indicators, such as stochastics, provides additional insights and how to evaluate what the new trend strength is going to be.
There are some very simple techniques when using candlestick signals that will help confirm a good entry level. This may be as simple as seeing continued buying immediately after the candlestick "buy” reversal signal. Understanding the simple basics of what is required to confirm a buy signal helps provide simple procedures to put into a stock trading program strategy. These strategies, found in our e-book, "Candlestick Entry and Exit Strategies" become the basis for cutting the losses short and letting the profits run. The information that is built into the candlestick signals makes developing a stop loss strategy very easy to implement. The visual characteristics of the signals allows the candlestick investor to move money out of trades that are not working immediately and roll those funds into chart patterns that have a high probability to produce profits.
Market Direction - The signals that were formed in the Dow this past week, two doji's early in the week, followed by a sell-off could have signified the potential pullback to the 50 day moving average. As seen advised earlier this week in our morning comments, it was time to take some profits. However, the latter part of the week revealed buying. This indicated that the trend would most likely continue to trading and a flat trading range, a trading range that has been established for approximately the past month. The NASDAQ revealed the same type of pattern. In both indexes, the stochastics, after heading down for a few days, started flattening out and curling back up.
[When the markets trade flat and the direction is in question, this becomes a period when having longs and shorts is a good strategy. As seen in the Dow chart, it is demonstrating no clear trading direction.]
The buying occurring at the lower end of the recent trading range was a good indication that there was not any severe selling coming into this market. Stating that obvious fact, as of now this flat trading period in the Dow and nothing yet to show any severe selling in the NASDAQ's slow uptrend should keep the portfolios relatively to the long side. Relatively to the long side means that 70% or so of the portfolio dollars should be long, approximate 30% should be to the short side.
Having a mixture of a long and shorts in the portfolio is part of a profitable stock trading strategy. It is obvious that when a market is over sold and starts producing candlestick ?buy? signals, it is time to start adding the long positions. When a market is in the overbought and starts showing some candlestick "sell" signals, it is time to be taking profits in the longs and start moving to short positions. However, the reversal of a portfolio should not be an instantaneous procedure. As the markets start approaching the overbought area, a good profitable stock trading strategy is to close out a long position or two and add a short position or two. As the markets continue to show more toppy signals, more long positions can be closed out and more short positions added.
This becomes an easy process when analyzing the candlestick signals. As we see in the current market conditions, it is becoming obvious that the Dow is in a completely flat trading range while the NASDAQ is it a very slow uptrend. During these times, a mixture of long and short positions is the proper strategy. This has two functions. If the basic premise of candlestick signals is a clear indication of what individual trends are doing, then during a flat period of trading there will be long positions that work and short positions that work. Secondly, if the flat period of trading it is merely a congestion or consolidation period during an uptrend, when the new leg up in the uptrend starts, having a few short positions to close out is not as cumbersome as being all short or conversely if the markets breakdown from that flat area, liquidating the remaining longs and adding to the short positions when not be a major process.
Currently the Dow is not indicated any direction. The NASDAQ is in a slight uptrend. However, it would become apparent that new dynamics have come into the markets if trading goes below the support area in the Dow and the NASDAQ. Once a trading range has been identified, the trading strategy can be modified to take the trading range into account. Simple logic then becomes watching for a break out of that trading range one way or the other.
The US dollar revealed buying signals that resulted in buying strength that broke through a downtrend channel. Knowing the dollar may be getting stronger extrapolates into some of the other currencies getting weaker.
Crude oil prices, which have been a factor in equity prices, have moved down to the target that was projected once it did a Blue Ice Failure at the 50 day moving average. On Friday, crude oil prices for the January contract closed right on the 200 day moving average. This level now becomes an important support area, being able to easily analyze what the stock markets might do based on crude oil prices at this point. Bullish trading in crude oil on Monday should reveal that the 200 day moving average could become a support level, creating some weakness in the equity markets. On the other hand, a weaker open would reveal the 200 day moving average was not going to support prices, now providing the potential for crude oil prices to drop further.
[ Once a moving average has been broken, as seen at the 50 day moving average in early November, it will usually be tested again. If the test fails, then the 200 day moving average will usually be tested. This is a common chart pattern. The advantage of candlestick signals is that they reveal what will happen at those important moving averages. This not only gives you an immediate insight as to what is happening at that level, it provides the opportunity to position yourself with good confidence. There are trend moves that perform with a statistically high recurrence. Using the candlestick signals and those chart patterns to your advantage can produce some extremely good consistent profits.]
That of course, would add new strength to the equity markets. Being able to identify patterns using the moving averages becomes a valuable asset for projecting a trend to the next target. The new one hour video training CD on "Candlestick Signals with Moving Averages" clearly demonstrates how to find high profit trades when combining candlestick signals at important moving averages.
The moving averages become a clear target when projecting where a trend might run out of steam based on the stochastics as well as the signals. An illustration is clearly seen in the February Lean Hog chart. Note how the moving average acted as the BUY points in early and late October. The bearish engulfing signal at the first of December provided our sell recommendation. From that level, it could be projected that the 50 day moving average could be the target.
[Note how the buying started right at the 50 day moving average, first day piercing signal, second in a doji followed by a gap up the next day. When you see signals occur on Major moving averages, that they comes that much more convincing that a trend is being bought at the most appropriate time.]
Currently, the stochastics indicate that there could be a few more days to the downside before seeing candlestick buy signal's potentially forming at the 50 day moving average support area. That is the first reasonable target. However, that also allows the candlestick investor to see whether buy signals are forming at that level. If not, you continue to stay short until a strong buy signal does occur.
The candlestick signals give you the format to analyze what is occurring in investor sentiment at other important technical levels. 99% of the time you will witness one of the 12 major signals forming at important technical levels. Having this visual advantage permits the candlestick investor to put on or close out trades at the most optimal times.