Many day traders compare and contrast the bar chart versus the candlestick chart. The candlestick chart and the bar chart both contain the market’s open, high, low and close for the day, however the candlestick chart contains a “real body.” The real body represents the range between the open and the close of that day’s trading and when the real body is white, it means that the close was higher than the open. On the contrary, when the candlestick’s real body is black, it means that the close was lower than the open that trading day. While bar stock charts show virtually the same information as candlestick charts, the Japanese candlestick charts are much more visually appealing and informative than the two dimensional bar chart.
Additionally when comparing these chart types, you will notice that candlestick charts contain what are called “shadows.” The shadows appear just above and below the real body and they represent the high and low prices of the trading day. When charting using candlestick analysis, a short upper shadow on a white real body means that the close was near the high for the day. On the other hand, when there is a short upper shadow on a black real body means that the open that day was closer to the high of the day. When analyzing candlestick patterns the real body can either be long or short, black or white, and the shadows can be short or they can be long. Many stock traders consider these shadows to look like wicks of a candle.
When stock trading, it is pretty obvious that both bar charts and candlestick charts are much better than simple line charts. The line chart does have it advantages however. Line charts plot the closing price of each day and it weeds outs market noise. Many find it easier as well to identify support and resistance levels using line stockcharts. However, the advantages to using candlestick charts far outweigh these few advantages. When using candlestick stock charts, you are better able to set your stops and you can determine how wide the daily trading range is. Again, you can see highs and lows each day.
Candlestick charts again, are the more desirable method for trading stock for day traders and also swing traders. The level of information that the candlestick charts provide far outweighs that of bar and line charts on a very basic level. Continue to learn about the different candlestick pattern formations as well as the candlestick charting techniques and see your bottom line improve!
Market Direction: After a price move has produced good profits, when does it become time to sell? Candlestick signals provide a distinct advantage for analyzing whether a trend is just waffling or has reversed. Why do most investors 'not' take big profits? The fear factor! The fear, that after of their price has moved positively and produced a big profit, the price will reverse and immediately take back those profits. Applying a few simple rules with candlestick signals allows an investor to get through the whipsaw action that may occur during a trend.
The combination of a candlestick signal and a close below the tee line is a very important element for showing an uptrend has reversed. Without that combination, there is an extremely high degree of probability an uptrend has not reached a reversal level. That is true whether analyzing the market indexes or individual stock prices. The strength of the recent rally has incorporated profit taking into each trading day. This greatly diminishes the possibility of a severe profit-taking reversal.
Utilizing the knowledge of the candlestick signal/tee line combination allows an investor to sit through a severely volatile uptrend. Price trends, such as one seen in the HK chart, reveal a number of days that would have made it very gut wrenching. One obvious aspect has been witnessed ever since the indecisive reversal signals started the uptrend in early March. The price, even though it reversed after a sell signal, never closed below the tee line.
Having the ability to analyze whether a price trend is continuing or about ready to reverse also allows the candlestick investor to participate in price patterns. The benefit of price patterns is usually the result of a very big price move. The Fry Pan Bottom pattern has become a very predominant pattern in the past few weeks. The Candlestick Forum recommendation of LDK was based upon a Fry Pan bottom forming and the expectation of a strong breakout. Buying at the $5.70 level on Tuesday made for a very easy profit taking strategy on Wednesday.
The price moved up to the first potential target, the 50 day moving average. This created a 40% gain on Wednesday itself. A very simple trading strategy, after a huge price move, is to take half the position off. There is nothing wrong with putting half the profits in the account as cash and continuing to hold the other half of the position. If the price moves higher from this level, you will be holding a position that is much higher risk. However, you will be only in a half of a position. When the price moves higher, you will still be making a profit. After hitting the first potential major resistance level, and you did not take any profits while watching the price drop off severely from that level, you would greatly question your own mental capabilities. At least selling half a position at that level, followed by selling the other half position as the price was dropping allows you to rationalize that you got most of the profit from that trend. This is one of the methods of diminishing the emotional aspects of investing.
The Dumpling Top, which is the opposite of a Fry Pan Bottom pattern, provided good profits from being short the market this past fall. Look for Steve Bigalow's article about the Dumpling Top in Aprils issue of SFO Magazine. For a free subscription of the magazine go to www.sfomag.com.
There have been extremely good profits made over the past few weeks. As with all emotional reactions, once a price trend turns, investors do not want to be left behind. Candlestick analysis allows for the evaluation of what stocks are going to get extremely strong buying on the initial reversal reaction and then the following reactions.
Chat session tonight at 8 p.m. ET - Learn how to maintain positions after you have produce big profits, not letting yourself cut your profits to short. This will be important information for those interested in trading options utilizing candlestick's. The next few Thursday night training sessions will involve option trading strategies. Click here for instructions.
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