Stock Market HistoryTo paraphrase the American philosopher, George Santayana, "Those who do not learn from [stock market history] are doomed to repeat it." Although the philosopher was talking about life and history in general his words are an apt reminder of the need to use technical analysis tools such as Candlestick pattern formations to anticipate and profit from the patterns that stock prices trace across Candlestick charts. The insight that market prices repeat themselves goes back hundreds of years to when Japan was ruled by Samurai. Rice traders recognized that market trends, a market rally, or a market reversal were all predictable. The sum total of buying and selling of a commodity such as rice, or, in todayfs world, stocks, corn futures, oil futures, options, and more, falls into patterns. By knowing and effectively trading these stock market patterns stock traders can prosper. Investors and traders who "do not learn from" stock market history are typically "doomed to repeat it."
Stock market history can be read in the broad scope and in minute by minute intervals. For example, as the Dot Com Bubble was approaching years ago commentators repeatedly, and for months, pointed to the increasing volatility of the stock market as a sign that the "bubble" was about to burst. Those who understood stock market history were able to either sell stock, and get out of the market, or use trading tools such as buying puts on many of the stocks in their portfolio in order to protect their positions. When the bubble burst many startup companies went out of business and, even the profitable dot com's took a hit. Knowing stock market history and acting when price patterns and other situations repeat themselves can be profitable. Those who bailed out of the stock market before stock market crashes can reenter the market with their cash and have a field day picking stocks with a low price to earnings ratio, with significant intrinsic stock value, and those with a strong margin of safety, each at a bargain stock price.
An investor with a good appreciation of when a market rally is about to reverse will still need to use stock market history to help him pick the most opportune time for selling stock or buying puts. He does this using technical analysis. Candlestick analysis can help the trader to sort out the day by day, hour by hour, and minute by minute price swings of a given stock. Whenever a fundamental change affects a stock price the necessary fundamental analysis takes place immediately and the market adjusts the stock's price. Further fundamental analysis is not useful as the fundamentals have now been assimilated into the information that dictates buying and selling prices. However, there is always a period of stock market inefficiency during which prices will move up and down. The market will commonly move towards a consensus before moving on. It is especially during these periods of market adjustment that the wise trader using Candlestick pattern formations can profit from the predictable price volatility seen in these situations.
Market Direction: There is one important element that is overlooked when utilizing candlestick analysis. The concept of probabilities! The visual aspects of candlestick analysis greatly enhances an investors capabilities for identifying traits that have high probability results. This can be seen in the results from the Candlestick Forum's picks. Candlestick analysis is a complete divergence away from the conventional wisdom's of Wall Street. Trying to study or analyze the fundamentals of specific companies has very little to do with the outcome of a price movement. It is investor perceptions of those fundamentals that move stock prices or commodity prices.
The analysis of the candlestick formations incorporates the cumulative knowledge of everybody buying or selling a trading entity during a specific time frame. A company with the best fundamentals may not have any significant price move if investor sentiment does not perceive the basic fundamentals of that company. The worst company in the world can skyrocket if investor sentiment perceives that stock as a potentially profitable trade. To correctly analyze which stocks are going to move the best based upon fundamentals is a shot in the dark. Candlestick analysis provides a very clear depiction of what everybody's research has done as far as a move to action. Investor sentiment creates reoccurring patterns based upon what they feel is a potential profitable situation.
While the Dow and the NASDAQ have had a relatively slow steady uptrend, candlestick signals and patterns have produced huge gains during the same timeframe. This was due to nothing more than identifying where an investor sentiment would create a strong breakout. This is very simple logic. If investor sentiment works in the reoccurring process, from year-to-year, decade to decade, century to century, then it is relatively easy to identify pattern setups that will create a very strong price move. This assessment becomes extremely valuable for day traders as well as when traders and long-term investors. The daytrader can make a very good living by being prepared for potential breakouts. As demonstrated in the recent pics, prices are apt to move in a projected manner provided the overall market trend does not show any severe change of investor sentiment.
Stephen Bigalow has developed a portfolio management program that dramatically reduces the emotions of investing. The program also creates a probabilities of being in positions that have the potential large price moves. The past few weeks of trading has definite examples of chart patterns creating the probability of being in the right place at the right time.
January 6 HDY positive 14 1/2%
January 10 ZAGG positive 7.3%
January 11 NAK positive 6.5%
January 12 NAK positive another 12.75%
January 13 CCME positive 11%.
Having a large gain in individual stocks obviously improves a portfolio's returns fairly rapidly. Add the gains of other positions in the portfolio, with the probabilities usually producing positive results in the majority of the portfolio's positions, an investor should make strong and consistent profits. The daytrader will easily find one position that is producing extremely strong returns almost on a daily basis. The big price moves are usually predicated with signals and patterns that indicate a breakout is about to occur.
Chat session tonight at 8 PM ET - we will discuss the different pattern setups that make for strong day trading results.
The Candlestick Forum Team