Effective Stock Market Trading System - Candlesticks!
Most investors do not have a stock market trading system. Unfortunately, that is usually a natural evolution of learning how to invest. We become educated, we develop a career, we earn money and then we have to figure out how to invest our money. There is no educational institution that will show us how to invest or even set up a stock market trading system. We usually learn by the seat of our pants. But the age of computer is changing all that. The Internet has provided the information for investors to make their own investment decisions. This is much different than how investment information was disseminated a mere decade ago. With the development of computer software, the dynamics of the investment arena has changed dramatically. An investor can develop their own stock market trading system. They have all the information that is available to every investment professional in the world right at their fingertips. Candlestick charts provide this information at a quick glance.
Candlestick analysis is just now coming into its own because of computers. Here is a stock market trading system, although a few centuries old, that is benefiting from today’s computer technology. It can be assumed that the correct trade ratio for candlesticks has to be relatively good or we would not be witnessing them today. However, they were developed without the benefit of a multitude of investment parameters that can be found on computer systems today. In the following months you will be exposed to some of the techniques from modern-day computer research that when applied to candlestick signals enhances the probabilities of being in the correct trade all that much more. This is the best of both worlds. Taking a stock market trading system that has worked for centuries and being able to tweak it constantly with improvements that are showing up every day through computer research. The Doji, forming at the 50 day moving average, is one of those patterns that has been found to greatly improve returns.
Market Direction - As mentioned in last week's newsletter, the Long-legged Doji, forming right on the 50 day moving average, would and did become the pivotal point for the next major move in the market. The Doji forming a 50 day moving average as an important alert for a substantial move in a current trend. ( Further explanation can be seen later in this newsletter ). Friday was a bullish day. The NASDAQ had a good strong bullish Candlestick signal, a bullish day that came more than halfway up into the last large dark candle of Wednesday, after a gap down inverted hammer. The Dow had the same strong reaction. The Dow did have a good bullish day, a Bullish Harami. The question then becomes whether this is a full-fledged reversal or merely a bounce back up. However, even a bounce should be substantial enough to make some profits on the long side. The 50 day moving average now becomes a resistance target.
Common sense dictates that you try to invest in the direction of the trend on the market. Why try to swim against the current? However, keep in mind that the candlestick signals are the cumulative knowledge of everybody that was buying and selling that day in whatever trading entity or index. That point becomes quite clear in our recommendation of SUPG this week. During a time when the markets were selling off dramatically, the chart of SUPR revealed an extremely strong Candlestick buy signal. The Doji, followed by a gap-up and a strong bullish day, illustrates that the buying was coming into this stock in spite of the fact of the markets were being sold off heavily. The advantage of the candlestick signals is that it tells you exactly what the investors are doing. It can be assumed that something had to motivate the buyers to buy aggressively in SUPR when they knew the rest the market was being sold.
The Doji and Moving Averages - The advantage for today's investors is being able to apply modern computer developed investment techniques with the ancient candlestick signals. The combination produces extremely high probability, high profit results. These techniques are easy to learn and very easy to use because of their visual aspects.
The Doji is one of the major Candlestick signals A Doji occurring at an important moving average can produce a high profit trade. A Doji represents indecision. It is formed when the open and the close are at or very close to the same level during a specific time frame, daily signals will be used for these illustrations. The Japanese traders say no matter where a Doji occurs the investor should take heed. They are significant reversal signals at a top of a trend and significant reversal signals at a bottom of a trend confirmed with buying the next day. They also become important indicators at the end of a flat trading range. It is not unusual to see major moves occur after a flat trading period and a Doji being the indicator just prior to the major move.
This becomes more prominent when a Doji occurs at a relevant moving average. Extensive studies on moving averages, by David Elliott of www.wallstreetteachers.com, have shown that the 50 day moving average and the 200 day moving average are extremely important averages to watch. Moving averages become a very powerful tool when used with candlesticks. but not in the same context that most people use moving averages, with crossovers, etc. Utilizing moving averages, as support and resistance levels, in conjunction with candlestick signals, now creates a very accurate trading format.
Note in the Dow chart, how a doji in very close proximity to the 50 day moving average becomes a significant signal prior to a major move. November 21 2003, a Doji formed just prior to a major move in the market. This occurring with the stochastics in the oversold area made this a very strong indication that the next move was going to the up. The magnitude of that move could not be projected other than the fact that we were seeing a strong Candlestick buy signal bouncing up off the 50 day moving average.
The Doji was also a prominent factor on March 8, 2004. Notice a series of doji's bobbing along the 50 day moving average that had come up to that level. March 8th revealed a long legged doji. If a doji represents indecision, then three days of doji's represents more indecision. A long leg a doji amplifies that fact. The next day, March 9th, forming a dark candle that came down through the 50 day moving average becomes a clear illustration that investors have made up their mind after this period of indecision. As can clearly be seen, the move was major in the downward direction after the long leg a doji at the 50 day moving average.
Understanding the psychology that forms a Candlestick signal makes it very easy to analyze which direction a trend will move. Notice the Doji's that formed on the 50 day moving average on the Telik Inc. chart at the end of February. Again, a series of three Doji's showing major indecision. Having the knowledge that the trend is going through a period of indecision alerts us to look for which way investors decide which way trend should go. The Bullish Engulfing pattern on March 1 revealed the investor's decision, they were going to take it up from there. 
Using the moving averages in this manner is not the conventional method on how to use moving averages. However, applying the Candlestick signals to the moving averages is producing compelling results. The Doji is one of the eight major signals that work effectively with the moving averages. This is not rocket science. The Candlestick signals are merely the investor psychology put into a graphic depiction. No formulas, no calculations, no deep rooted investment analysis, just simple interpretation of what the investor psychology is at important reversal points.
Candlestick signal and the moving averages can be used during any time period. These indicators correlated with the stochastics become very strong trading tools. They can be used for long term investing, a combination of the daily, weekly, and monthly charts or day trading, using the one minute, five-minute, and 15 minute chart combinations. No matter what the time frame, investor sentiment is going to be depicted for that time period with a Candlestick formation.